BofA: 3 Possible Reasons For Tough Kite Realty Guidance

The shopping center REIT Kite Realty Group Trust KRG posted fourth-quarter results Thursday that prompted Bank of America Merrill Lynch to downgrade the stock.

The Analyst

Bank of America's Craig Schmidt downgraded Kite Realty's stock rating from Buy to Neutral with a price target lowered from $20.50 to $18.

The Thesis

Kite Realty's funds from operations figure in the fourth quarter of $2.04 was in-line with expectations, but the company's 2018 guidance FFO range of $1.98 to $2.04 fell short of the $2.08 Schmidt was expecting and also fell short of the $2.07 consensus estimate, he said.

The midpoint of management's range would imply a 1.5-percent decline in FFO/share compared to 2017. Same-store net operating income was also projected to fall from 2017's level.

Kite Realty's 2018 guidance was surprising, but three underlying factors might explain the slowdown in growth, the analyst said:

• An unexpected office tenant move-out.
• Rent reductions from Toys R Us stores.
• Higher cap rates on pending dispositions versus prior expectations.

Kite Realty's current dividend yield above 8 percent appears to be "secure" and was even raised by 5 percent on Thursday, Schmidt said. This demonstrates management's confidence in the long-term business outlook, and any headwinds are likely temporary setbacks, he said. 

Price Action

Shares of Kite Realty Group were trading lower by 6.68 percent at the time of publication Friday.

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