Kite Realty misses out on REIT revival

Kite Realty Group Trust has stuck pretty closely to the REIT recession playbook: Renegotiate debt, sell new shares, cut
dividends, and set the development engine to idle.

Like its peers, the Indianapolis-based owner and developer
of shopping centers hopes to position itself to capitalize on the downturn by snapping up distressed properties from companies
with weaker balance sheets.

The company raised $88 million by selling almost 30 million new shares in May, after
selling 5 million shares to net $50 million in October 2008. It also cut its dividend from 15 cents to 6 cents a share for
annual savings of more than $8 million. And it is on track to save $100 million by reducing the scope of developments in its
pipeline and focusing more on ground leasing and land sales.

But as the shares of most publicly traded real estate
investment trusts have bounced back sharply from the lows in March, Kite’s shares have lagged. The shares recently traded
at $2.75, down 37 percent year to date, compared with a 28-percent drop for the Dow Jones REIT index. They’ve been trading
for below the most recent offering price of $3.20 and well below the earlier offering of about $10 per share, while most other
REIT secondary offerings already are in the money.

Kite’s much larger local peers performed even better
than the index. Shares in Simon Property Group Inc., the nation’s largest mall owner, are virtually unchanged in 2009
after rebounding about 100 percent from March. Duke Realty Corp. traded at $8.50 recently, down only 18 percent for 2009,
after falling under $5 in March.

Kite Realty Group CEO John A. Kite calls the company’s shares “extremely undervalued.”

A
variety of factors could be blamed for Kite’s relative underperformance: The shares trade for less than the $5
threshold required by many institutional investors; fewer short sellers meant less of a chance for upward momentum from a
short squeeze; and the company’s stock offering was more dilutive than those of most REITs (Kite’s most recent
offering roughly doubled its outstanding share count).

Kite officials are focused on a two-part plan—No.
1, to strengthen the company’s balance sheet; No. 2, to be opportunistic—and aren’t all that worried about
how the fickle market values its shares, Kite CEO John A. Kite said in an interview.

“It takes time for
the market to understand and see how things are going, particularly when you’re a company of our size,” Kite said.
“We’ve got to talk a little bit louder.”

He points to the $130 million Kite now has available
in cash and under a credit line; the company’s cash alone makes up about one-third of its roughly $95 million market
value. He described the company’s shares as “extremely undervalued.”

Kite plans to use the
proceeds of its stock sale to pay down a $200 million line of credit, which would give it some breathing room on debt payments
of $39 million due in 2009 and $67 million in 2010. The company has a total of $700 million in debt on its portfolio of more
than 50 properties with more than 10 million square feet of space.

Stephanie Krewson, an analyst with Philadelphia-based
Janney Montgomery Scott, wrote in a note to investors that Kite now has ample equity, has removed any danger of breaching
debt covenants, and is in a position to grow earnings.

“As a result of its successful recapitalization,
we believe Kite should now garner broader investor interest and begin to trade more in line with its larger-cap shopping center
REIT peers,” said Krewson, who has a “buy” rating and a $5.25 target on the company’s shares.

Michael Bilerman, a REIT analyst with New York-based Citigroup Global Markets, agrees the company’s progress
to refinance some of its properties and raise additional liquidity are positives.

But in a May report, the firm
classifies Kite shares as a “speculative risk” along with the rest of the REIT sector, because of continuing liquidity
and credit concerns.

Kite “is particularly vulnerable to volatility of earnings due to their small size,”
Bilerman wrote. “Also, because developments are a key driver of growth, any delays or cancellations could hurt KRG.”

Other risks to Kite are its concentration in low-growth Indiana and the future of Glendale Town Center after prior
failures. Kite has added a Target store and transformed the property from an enclosed mall into an open-air center. Bilerman
has a hold rating on the stock with a $3.50 target.

Analysts for St. Petersburg, Fla.-based Raymond James &
Associates Inc. believe the company will be successful in refinancing its near-term debt, but the firm doesn’t see any
catalysts to drive the shares higher soon.

A May report points to falling funds from operations, a common measure
of REITs, as a concern. But the Raymond James report also points out Kite shares are trading at a 20-percent discount to their
net asset value per share of about $4.

Tom McGowan, Kite’s chief operating officer, said the “pause”
in new development gives the company a chance to “look inward and concentrate on core portfolio”—which is
about 90-percent leased.

“As the economy changes, we feel we have the infrastructure and experience as
a company to be ready to capitalize on opportunities,” he said.