UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the transition period from                  to                   

Commission File Number: 001-32268

Kite Realty Group Trust

30 S. Meridian Street, Suite 1100
Indianapolis, Indiana 46204
Telephone: (317) 577-5600

(Address, including zip code and telephone number, including area code, of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý

The number of Common Shares outstanding as of November 8, 2004 was 19,148,267 ($.01 par value)

Cautionary Note About Forward-Looking Statements

This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by Kite Realty Group Trust (the “Registrant” or the “Company”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Kite Property Group is the predecessor of Kite Realty Group Trust.  Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated.  Future events and actual results, performance, transactions or achievements, financial or otherwise, may differ materially from the results, performance, transactions or achievements expressed or implied by the forward-looking statements.  Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to:

•                  national and local economic conditions;

•                  the ability of tenants to pay rent;

•                  the competitive environment in which the Company operates;

•                  financing risks;

•                  acquisition, disposition, development and joint venture risks;

•                  potential environmental and other liabilities;

•                  other factors affecting the real estate industry generally; and

•                  other risks identified in this Quarterly Report on Form 10-Q and, from time to time, in other reports the Company files with the Securities and Exchange Commission (the “SEC”) or in other documents that it publicly disseminates.

The Company undertakes no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

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Kite Realty Group Trust and

Kite Property Group (the Predecessor)
Notes to Consolidated and Combined Financial Statements
September 30, 2004
(Unaudited)

Note 1.  Organization

Kite Realty Group Trust (the “Company” or “REIT”) was organized in Maryland on March 29, 2004 to succeed to the development, acquisition, construction and real estate businesses of Kite Property Group.  Kite Property Group, which consisted of the properties, entities and interests contributed to the Company or its subsidiaries by its founders, is the predecessor of Kite Realty Group Trust.  The Company began operations on August 16, 2004 when it completed its initial public offering (“IPO”) and concurrently consummated certain other formation transactions.  The IPO consisted of the sale of 16,300,000 shares of common stock sold to the public at $13.00 per share, resulting in net proceeds to the Company of $191.3 million.  The net proceeds were contributed in exchange for a 67.4% controlling interest in Kite Realty Group, L.P., the “Operating Partnership”.  A total of 833,267 shares were issued to the Principals of Kite Property Group in exchange for their interests of certain properties and service companies.  Also, a total of 15,000 restricted shares were awarded to the members of the Company’s Board of Trustees.  On September 14, 2004, the underwriters exercised their over-allotment option to purchase an additional 2,000,000 common shares at $13.00 per share, resulting in additional net proceeds of $24.2 million.  In total, 19,148,267 shares were issued in connection with the Company’s formation and IPO.  In addition, a total of 8,281,882 units of the Operating Partnership were issued to the Principals and third parties in exchange for their interests in certain properties.

Concurrent with the Company’s formation, the Company utilized the net proceeds from the IPO to repay mortgage indebtedness ($99 million), to repay a credit facility provided by affiliates of Lehman Brothers ($48 million), to acquire five properties that were under contract ($59 million), to acquire joint venture and outside minority interests in nine properties ($13 million) and to repay existing indebtedness due to the Principals ($9 million).

As a result of the public offering and related formation transactions, the Company, through the Operating Partnership, is engaged in the ownership, operation, management, leasing, acquisition, expansion and development of neighborhood and community shopping centers and certain commercial real estate properties, of which 41 of the 43 entities were consolidated as of September 30, 2004.  The Company also provides real estate facilities management, construction, development and other advisory services to third parties through its taxable REIT subsidiaries.

Note 2.  Basis of Presentation

The accompanying financial statements of Kite Realty Group Trust are presented on a consolidated basis and include all of the accounts of the Company, the Operating Partnership and the subsidiaries of the Operating Partnership.  The exchange of entities or interests held by the Principals for common shares of the REIT and limited partnership interests in the Operating Partnership was accounted for as a reorganization of entities under common control and, accordingly, related assets and liabilities were reflected at their historical cost basis.  The acquisition of the minority and joint venture interests in the properties has been accounted for as a purchase.

The accompanying financial statements of Kite Property Group are presented on a combined historical cost basis because of the affiliated ownership and common management and because the assets and liabilities were the subject of a business combination with the Operating Partnership and the REIT, which was completed on August 16, 2004. The Principals have operations that were not contributed to the Operating Partnership and, therefore, the accompanying financial statements of the Predecessor are not intended to represent the financial position and results of operations of the Principals.

In management’s opinion, the consolidated and combined financial statements include all the assets, liabilities, revenues and expenses associated with the operations of the entities or interests therein transferred to the Operating Partnership or the REIT.  All significant intercompany balances and transactions have been eliminated.

The Company allocates net operating results of the Operating Partnership based on the partners’ respective weighted average ownership interest.  The Company’s weighted average interest in the Operating Partnership for the period from August 16, 2004 through September 30, 2004 was 68.3%.  The Company’s interest in the Operating Partnership as of September 30, 2004 was 69.8%.  The Company adjusts the limited partners’ interests in the Operating Partnership at the end of each period to reflect their interest in the Operating Partnership.  This adjustment is reflected in the Company’s owners’ equity.  For the period from August 16, 2004 through September 30, 2004, the limited partners’ interest in the Operating Partnership was 31.7% and as of September 30, 2004, their interest was 30.2%.

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(1)          Net of debt assumed of $1.4 million.

(2)          Net of debt assumed of $27.5 million.

(3)          Net of debt assumed of $17.8 million.

(4)          Net of debt assumed of $4.5 million.

(5)          This acquisition was initially financed with debt, which was repaid with proceeds from the Company’s IPO.

The following table summarizes, on an unaudited pro forma basis, the combined results of operations for the three-month and nine-month periods ended September 30, 2004 and 2003, respectively, as if the Company’s IPO and property acquisitions occurred on January 1, 2003:

(1) Pro Forma net income for the three- and nine-months ended September 30, 2004 excludes one-time costs of approximately $1.7 million incurred in connection with the IPO.  In addition, the three- and nine-month periods ended September 30, 2003 include a gain on the sale of land by one of the Company’s joint venture entities, the Company’s share of which was approximately $1.0 million.

The Company has also entered into a binding acquisition agreement to acquire a Marsh Supermarket in Fishers, Indiana (a suburb of Indianapolis, Indiana) for a total purchase price of $5.0 million.

Note 7.  Mortgage Loans and Line of Credit

In connection with the IPO and related formation transactions, the Company assumed mortgage and other indebtedness of approximately $51.2 million.  The Company used net proceeds from the IPO to (i) prepay outstanding indebtedness secured by 13 properties ($99 million), (ii) acquire five properties that were under contract ($59 million), (iii) repay the credit facility provided by affiliates of Lehman Brothers ($48 million), and (iv) acquire interests in nine properties from joint venture and minority interest partners ($13 million); and repay existing indebtedness due to principals in connection with the formation transactions ($9 million).

Mortgage and other indebtedness consist of the following at September 30, 2004 and December 31, 2003 (in thousands):

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Indebtedness, including weighted average maturities and weighted average interest rates for the Company and its Predecessor at September 30, 2004 and December 31, 2003 are summarized below (in thousands):

Mortgage and construction loans are secured by certain real estate, are generally due in monthly installments of interest and principal and mature over various terms through 2018.  Variable interest rates on mortgage and construction loans are based on either LIBOR plus a spread in a range of 135 to 250 basis points or Prime plus 0 to 100 basis points.  Fixed interest rates on mortgage loans range from 5.15% to 14.00%.  The 14% loan is in the amount of $2.6 million and represents a mezzanine loan on the Traders Point property. Excluding this loan, the range of interest rates on fixed rate loans is 5.15% to 8.85%.

On August 31, 2004, the Company and the Operating Partnership entered into a three-year, $150 million secured revolving credit agreement with Lehman Commercial Paper, Inc. and Wachovia Bank, N.A..  Borrowings under this facility bear interest at a floating rate of LIBOR plus 135 to 150 basis points, depending on the Company’s leverage ratio and are secured by certain of the Company’s properties.  The amount that the Company may borrow under this facility is dependent on it maintaining a minimum “borrowing base” of properties.  As of September 30, 2004, approximately $40 million was available for draw under the facility of which approximately $5.5 million was outstanding, with the potential of a total of $60 million upon completion of underwriting in process.  Up to an additional 13 properties are available to be added to the borrowing base as additional funds are required.  This facility will be used principally to fund growth opportunities including acquisitions and development activities.

Our ability to borrow under this new credit facility will be subject to our ongoing compliance with a number of financial and other covenants, including with respect to:

•                  our amount of leverage;

•                  a minimum interest coverage ratio;

•                  our minimum tangible net worth;

•                  a minimum fixed charge coverage ratio;

•                  the collateral pool properties generating sufficient net operating income to maintain a certain fixed charge ratio; and

•                  the collateral pool properties maintaining a minimum aggregate occupancy rate.

Under the facility, we are permitted to make distributions to our shareholders of up to 90% of our funds from operations provided that no event of default exists.  If an event of default exists, we may only make distributions sufficient to maintain our REIT status.  On November 12, 2004, the lenders provided to us a letter confirming that the restrictive covenants did not apply to our dividend paid to shareholders on October 15, 2004.

The credit facility also includes a short-term borrowing line of $20 million available for same day borrowings.  Borrowings under the short-term line may be outstanding for no more than five days.  The Company may extend the facility for one year, provided that no events of default exist and subject to an extension fee of $300,000.

Note 8.  Shareholders’ Equity

On September 23, 2004, the Board of Trustees declared a dividend distribution of $.09375 per common share for the period commencing upon the completion of the Company’s IPO on August 16, 2004 and ending September 30, 2004.  Simultaneously, the Board of Trustees declared a distribution of $.09375 per operating partnership unit for the same period.  Both distributions were paid on October 15, 2004.

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On July 23, 2004, the Company’s Board of Trustees approved the 2004 Equity Incentive Plan.  A total of 2,000,000 shares have been reserved under this plan.  On August 16, 2004, options to purchase a total of 871,950 shares were granted at an option price of $13.00 per share.  The options vest over a period of five years and expire 10 years from the grant date.  Compensation expense is determined based on the fair market value of the options and is recognized over the vesting period.  The value of the options was $1.00 per share.

On August 16, 2004, 15,000 restricted shares were awarded to the members of our Board of Trustees.  These shares vest over a period of 4 years.  The Company recognizes compensation expense related to restricted share awards on a straight-line basis over the respective vesting periods.

Note 9.  Segment Data

The Company and its Predecessor’s operations are aligned into two business segments: (i) real estate operation and development and (ii) construction and advisory services.  Combined segment data of the Company and its Predecessor for the nine months ended September 30, 2004 and 2003 are as follows:

Note 10.  Commitments and Contingencies

The Company is not subject to any material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company other than routine litigation, claims and administrative proceedings arising in the ordinary course of business.  Management believes that such routine litigation, claims and administrative proceedings will not have a material adverse impact on the Company’s consolidated financial position or consolidated results of operations.

Note 11.  Subsequent Events

On November 3, 2004, we received notification from one of our tenants at Glendale Mall of its intent to exercise its option to terminate its lease of approximately 28,000 square feet with us.  In accordance with the terms of the lease, we received a termination fee of $300,000 and will continue to receive scheduled monthly lease payments of approximately $13,000 through January 2005.

Subsequent to September 30, 2004, the Company has entered into agreements to purchase two shopping centers for an estimated aggregate purchase price of approximately $37.5 million, including debt which may be assumed of approximately $6.5 million.  These agreements are subject to certain terms and conditions, including the Company’s completion of satisfactory due diligence.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in connection with the accompanying historical financial statements and related notes thereto.  In this discussion, unless the context suggests otherwise, references to “our company,” “we,” “us” and “our” mean Kite Realty Group Trust and its subsidiaries and the Predecessor.  Kite Property Group is the Predecessor to Kite Realty Group Trust.

Overview

We are a full-service, vertically integrated real estate company focused primarily on the development, construction, acquisition, ownership and operation of high quality neighborhood and community shopping centers in selected growth markets in the United States. We also provide real estate facility management, construction, development and other advisory services to third parties.

Kite Realty Group Trust commenced operations on August 16, 2004.  Prior to that date, the entities that owned the properties and service companies that we acquired as part of our formation transactions were under the common control of Al Kite, John Kite and Paul Kite (the “Principals”).  For the purpose of comparing our operating performance to the same periods of the prior year, we have combined the Company’s results for the period from August 16, 1004 through September 30, 2004 with the Predecessor’s results for the quarterly and year-to-date periods through August 15, 2004.

As of September 30, 2004, we owned interests in a portfolio of 27 operating retail properties totaling approximately 4.1 million square feet of gross leasable area (including non-owned anchor space) and 10 retail properties under development that are expected to contain approximately 1.4 million square feet of gross leasable area (including non-owned anchor space). As of September 30, 2004, we also owned interests in four operating commercial properties totaling approximately 548,000 square feet of net rentable area, a related parking garage and one 115,000 square foot commercial property under development. In addition, at that date we owned interests in nine parcels of land at or near our properties that may be used for future development of retail or commercial properties.

We derive revenues primarily from rents and reimbursement payments received from tenants under existing leases at each of our properties. We also derive revenues from providing management, leasing, real estate development, construction and real estate advisory services through subsidiaries of our taxable REIT subsidiaries. Our operating results therefore depend materially on the ability of our tenants to make required payments and overall real estate market conditions.

In the future, we intend to focus on internal growth and pursuing targeted development and acquisitions of neighborhood and community shopping centers. We expect to incur additional debt in connection with any future development or acquisitions of real estate.

Results of Operations

Acquisition and Development Activities

The comparability of results of operations is significantly affected by our development and acquisition activities in 2004 and 2003 and the effects of the formation transactions related to our initial public offering.  At September 30, 2004, we owned interests in 32 operating properties (consisting of 27 retail properties, 4 commercial operating properties and a related parking garage) and had 11 properties under development. Of the 43 total properties held at September 30, 2004, two operating properties (Spring Mill Medical and The Centre) were owned through joint ventures and accounted for under the equity method.

We acquired and placed in service the following properties during the nine months ended September 30, 2004:

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In addition, the following properties became operational during the nine months ended September 30, 2004:

Glendale Mall was consolidated on March 31, 2004 in accordance with the provisions of FASB Interpretation No. 46.  Previously, it had been accounted for under the equity method.  In connection with our initial public offering, we acquired the remaining joint venture and outside partner interests in a total of nine properties, including Glendale Mall.  As a result, these properties are now consolidated in the accompanying financial statements.

At September 30, 2003, we owned interests in 16 operating properties (consisting of 12 retail properties, three commercial properties and a related parking garage) and 10 properties under development. Of the 26 total properties held at September 30, 2003, nine operating properties were owned through joint ventures and were accounted for under the equity method.  On March 13, 2003, we acquired and placed in service Ridge Plaza Shopping Center; on June 10, 2003, we acquired and placed in service King’s Lake Shopping Center; and on July 8, 2003, we acquired and placed in service Shops at Eagle Creek.

Comparison of the Three Months Ended September 30, 2004 to the Three Months Ended September 30, 2003

Rental income (including tenant reimbursements) increased from $3.1 million in 2003 to $8.6 million in 2004, an increase of $5.5 million or 177%. Approximately $3.4 million of this increase was attributable to properties acquired in 2003 and 2004 or opened in 2004, approximately $1.1 million was due to the consolidation of Glendale Mall as of March 31, 2004 and approximately $0.6 million was attributable to the consolidation of properties following our acquisition of the joint venture partners’ interests in connection with our initial public offering and related formation transactions.  Approximately $0.3 million of the increase was attributable to consolidated properties operating for all of the third quarter of 2004 and 2003, primarily due to increased occupancy of the Thirty South property and approximately $0.1 million was due to the conversion of the source of revenue at our parking facility from a fee-based structure to a lease during the third quarter of 2004.

Other property related revenue primarily consists of parking revenues, lease settlement income and gains on land sales. This category decreased from $0.3 million in 2003 to $0.2 million in 2004, a decline of $0.1 million or 33%. This decrease was due to the conversion of the source of revenue at our parking facility from a fee-based structure to a lease during the third quarter of 2004.  Accordingly, this revenue is now classified as rental income.

Construction and service fee revenue decreased from $3.9 million in 2003 to $3.1 million in 2004, a decrease of $0.8 million or 21%.  Approximately $0.3 million of this decrease was due to a decline in advisory fees.  The remainder of the decrease was due to a decline in construction contracts with third-party customers.  The majority of construction activity in 2004 has been concentrated on consolidated properties.  We anticipate the construction activity for the remainder of 2004 will be largely focused on consolidated properties, which revenue is eliminated when the results of operations of the Company and its subsidiaries are consolidated.

Property operating expenses increased from $1.1 million in 2003 to $2.3 million in 2004, an increase of $1.2 million or 109%. Approximately $0.6 million of this increase was attributable to properties acquired in 2003 or opened in 2004 and $0.6 million was due to the consolidation of Glendale Mall as of March 31, 2004.

Real estate taxes increased from $0.4 million in 2003 to $1.0 million in 2004, an increase of $0.6 million or 150%. Approximately $0.4 million of this increase was attributable to properties acquired in 2003 and 2004 or opened in 2004 and approximately $0.2 million was due to the consolidation of the Glendale Mall property as of March 31, 2004.

Cost of construction and services decreased from $3.2 million in 2003 to $2.9 million in 2004, a decrease of $0.3 million or 9%.  This decrease was due to a decline in construction contracts with third-party customers.  The majority of construction activity in 2004 has been concentrated on consolidated properties.  This activity is eliminated when the results of operations of the Company and its subsidiaries are consolidated.

General, administrative and other expense increased from $0.3 million in 2003 to $0.9 million in 2004, an increase of $0.6 million or 200%.  Approximately $0.4 million of this increase is attributable to incremental costs of operating as a public company. The remainder of the increase is largely due to the increase in our employee base between years in anticipation of our planned growth. We do not anticipate that our employee base will decline over the next twelve months.

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Depreciation and amortization increased from $0.9 million in 2003 to $2.8 million in 2004, an increase of $1.9 million or 211%. Approximately $1.1 million of the increase was attributable to properties acquired in 2003 or opened in 2004, $0.6 million was due to the consolidation of the Glendale Mall property as of March 31, 2004 and approximately $0.1 million was due to the consolidation of properties following our acquisition of the joint venture partners’ interests in connection with our initial public offering and related formation transactions.

Interest expense increased from $1.0 million in 2003 to $2.6 million in 2004, an increase of $1.6 million, or 160%. Approximately $0.5 million of the increase was attributable to properties acquired in 2003 or opened in 2004, approximately $0.5 million was attributable to incremental financing costs in connection with our initial public offering and related formation transactions, approximately $0.2 million was due to the consolidation of the Glendale Mall property as of March 31, 2004, approximately $0.2 million was due to the consolidation of properties following our acquisition of the joint venture partners’ interests in connection with our initial public offering and related formation transactions and approximately $0.1 million was due to borrowings on our line of credit used to finance the acquisition of the Centre at Panola.

A bridge loan exit fee of $1.7 million was incurred in connection with our initial public offering and related formation transaction.

Minority interest was a loss of $0.3 million in 2004 and income of $38,000 in 2003.  In connection with our initial public offering and related formation transactions, certain outside minority interests were acquired.  These interests are consolidated from the date of their acquisition.

Equity in earnings of unconsolidated subsidiaries was $1.1 million in 2003 and $0.2 in 2004, a decrease of $0.9 million or 82%.  The decrease is primarily due a gain on the sale of land in 2003, our share of which was $1.0 million.

Comparison of Operating Results for the Nine Months Ended September 30, 2004 to the Nine Months ended September 30, 2003

Rental income (including tenant reimbursements) increased from $7.7 million in 2003 to $17.9 million in 2004, an increase of $10.2 million or 132%. Approximately $6.4 million of this increase was attributable to properties acquired in 2003 or opened in 2004, approximately $2.2 million was due to the consolidation of Glendale Mall as of March 31, 2004, approximately $0.9 million was attributable to consolidated properties operating for all of the third quarter of 2004 and 2003, primarily due to increased occupancy of the Thirty South property and approximately $0.6 million was attributable to the consolidation of properties following our acquisition of the joint venture partners’ interests in connection with our initial public offering and related formation transactions.

Other property related revenue primarily consists of parking revenues, lease settlement income and gains on land sales. This category increased from $1.0 million in 2003 to $1.4 million in 2004, an increase of $0.4 million or 40%.  This increase was due to a gain on the sale of a land parcel in 2004.

Construction revenue and service fees decreased from $9.7 million in 2003 to $7.1 million in 2004, a decrease of $2.6 million or 27%.  Approximately $0.4 million of this decrease was attributable to a decline in advisory fees and the remainder was due to a decline in construction contracts with third-party customers.  The majority of construction activity in 2004 has been concentrated on consolidated properties, which revenue is eliminated when the results of operations are consolidated when the results of operations of the Company and its subsidiaries are consolidated.  We anticipate the construction activity for the remainder of 2004 will be largely focused on consolidated properties.

Property operating expenses increased from $2.7 million in 2003 to $5.3 million in 2004, an increase of $2.6 million or 96%. Approximately $1.3 million of this increase was due to the consolidation of the Glendale Mall property as of March 31, 2004, $1.1 million was attributable to properties acquired in 2003 and 2004 or opened in 2004, $0.1 million was attributable to consolidated properties operating for all of the first nine months of 2004 and 2003 and $0.1 million was due to the consolidation of properties following our acquisition of the joint venture partners’ interests in connection with our initial public offering and related formation transactions.

Real estate taxes increased from $0.9 million in 2003 to $2.2 million in 2004, an increase of $1.3 million or 144%. Approximately $0.8 million of this increase was attributable to properties acquired in 2003 or opened in 2004, $0.3 million was due to the consolidation of the Glendale Mall property as of March 31, 2004 and $0.2 million was attributable to consolidated properties operating for all of the first nine months of 2004 and 2003.

Cost of construction and services decreased from $8.3 million in 2003 to $6.3 million in 2004, a decrease of $2.0 million or 24%.  This decrease was due to a decline in construction contracts with third-party customers.  The majority of construction activity in 2004 is concentrated on consolidated properties.  This activity is eliminated when the results of operations of the Company and its subsidiaries are consolidated.

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General, administrative and other expense increased from $1.1 million in 2003 to $2.1 million in 2004, an increase of $1.0 million or 91%. Approximately $0.4 million of this increase is attributable to incremental costs of operating as a public company. The remainder of the increase is largely due to the increase in our employee base between years in anticipation of our planned growth.  We do not anticipate that our employee base will decline over the next twelve months.

Depreciation and amortization increased from $2.1 million in 2003 to $5.3 million in 2004, an increase of $3.2 million or 152%. Approximately $1.9 million of the increase was attributable to properties acquired in 2003 and 2004 or opened in 2004, approximately $1.0 million was due to the consolidation of the Glendale Mall property as of March 31, 2004 and $0.1 million was due to the consolidation of properties following our acquisition of the joint venture partners’ interests in connection with our initial public offering and related formation transactions.

Interest expense increased from $3.0 million in 2003 to $6.1 million in 2004, an increase of $3.1 million, or 103%. Approximately $1.0 million of the increase was attributable to properties acquired in 2003 and 2004 or opened in 2004, approximately $0.9 million was attributable to incremental financing costs in connection with our initial public offering and related formation transactions, approximately $0.5 million was due to the consolidation of the Glendale Mall property as of March 31, 2004, $0.3 million was attributable to consolidated properties operating for all of the first nine months of 2004 and 2003 and approximately $0.2 million was due to the consolidation of properties following our acquisition of the joint venture partners’ interests in connection with our initial public offering and related formation transactions.  The increase for the consolidated properties is primarily due to additional borrowings at our Stoney Creek Commons property.

A bridge loan exit fee of $1.7 million was incurred in 2004 in connection with our initial public offering and related formation transaction.

Minority interest was a loss of $0.2 million in 2004 and $7,000 in 2003.  In connection with our initial public offering and related formation transactions, certain outside minority interests were acquired.  These interests are consolidated from the date of their acquisition.

Equity in earnings of unconsolidated subsidiaries was $0.7 million in 2003 and $0.2 million in 2004, a decrease of $0.5 million or 71%.  This increase is attributable to a gain on the sale of land in 2003, our share of which was approximately $1.0 million, offset by a net loss experienced by our Glendale Mall property, our share of which was $0.4 million.  The loss in 2003 was primarily attributable to an increase in unrecovered operating expenses and the provision for doubtful accounts.

Liquidity and Capital Resources

As a result of the completion of the initial public offering and other formation transactions, Kite Realty Group Trust has a substantially different capital structure than its predecessor, Kite Property Group. We used approximately $99 million of proceeds from the offering to prepay outstanding indebtedness secured by 13 of our properties, approximately $48 million to repay our credit facility, $59 million to acquire five properties; $13 million to acquire interests in nine properties from our joint venture and minority interest partners; and to repay existing indebtedness due to the Principals ($9 million).

On August 31, 2004, we entered into a three-year, $150 million secured revolving credit facility with Wachovia Bank, N.A., an affiliate of Wachovia Capital Markets, LLC, one of the underwriters of our initial public offering, and Lehman Commercial Paper Inc., an affiliate of Lehman Brothers Inc., another of the underwriters of our initial public offering.  Borrowings under the facility will bear interest at a floating rate of LIBOR plus 135 to 150 basis points, depending on our leverage ratio, and will be secured by certain of our properties.  The amount that we may borrow under the facility will depend on our maintaining a minimum “borrowing base” of properties.  As of September 30, 2004, approximately $40 million was available for draw under the facility, of which approximately $5.5 million was outstanding, with the potential for a total of approximately $60 million upon completion of underwriting in process.  Up to an additional 13 unencumbered properties are available to be added to the borrowing base as additional funds are required.  We intend to use this new credit facility principally to fund growth opportunities.

Our ability to borrow under this new credit facility will be subject to our ongoing compliance with a number of financial and other covenants, including with respect to:

•                  our amount of leverage;

•                  a minimum interest coverage ratio;

•                  our minimum tangible net worth;

•                  a minimum fixed charge coverage ratio;

•                  the collateral pool properties generating sufficient net operating income to maintain a certain fixed charge ratio; and

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•                  the collateral pool properties maintaining a minimum aggregate occupancy rate.

Under the facility, we are permitted to make distributions to our shareholders of up to 90% of our funds from operations provided that no event of default exists.  If an event of default exists, we may only make distributions sufficient to maintain our REIT status.  On November 12, 2004, the lenders provided to us a letter confirming that the restrictive covenants did not apply to our dividend paid to shareholders on October 15, 2004.

The credit facility also includes a short-term borrowing line of $20 million available for same day borrowings.  Borrowings under the short-term line may be outstanding for no more than five days.  We may extend the facility for one year, provided that no events of default exist and subject to an extension fee of $300,000.

We derive the majority of our revenue from tenants who lease space from us at our properties. Therefore, our ability to generate cash from operations is dependent on the rents that we are able to charge and collect from our tenants. While we believe that the nature of the properties in which we typically invest—primarily neighborhood and community shopping centers—provides a relatively stable revenue flow in uncertain economic times, general economic downturns or downturns in the markets in which we own properties may still adversely affect the ability of our tenants to meet their lease obligations. In that event, our cash flow from operations would be materially affected.

The nature of our business, coupled with the requirements for qualifying for REIT status and to avoid paying tax on our income, necessitate that we distribute a substantial majority of our income on an annual basis which will cause us to have substantial liquidity needs over both the short term and the long term. Our short-term liquidity needs consist primarily of funds necessary to pay operating expenses associated with our operating properties, interest expense and scheduled principal payments on our debt, expected dividend payments (including distributions to persons who hold units in our operating partnership) and recurring capital expenditures. When we lease space to new tenants, or renew leases for existing tenants, we also incur expenditures for tenant improvements and leasing commissions. This amount, as well as the amount of recurring capital expenditures that we incur, will vary from year to year. For 2004, we expect to incur approximately $1.9 million of costs for tenant improvements, leasing commissions and recurring capital expenditures, including amounts incurred in 2004 by our predecessor. We expect to meet our short-term liquidity needs through cash generated from operations and, to the extent necessary, borrowings under the revolving credit facility.

Our long-term liquidity needs consist primarily of funds necessary to pay for development of new properties, redevelopment of existing properties, non-recurring capital expenditures, acquisitions of properties and payment of indebtedness at maturity. We currently have 11 development projects underway that are expected to cost approximately $109 million, of which approximately $66 million had been incurred as of September 30, 2004. In addition, we are actively pursuing the acquisition of other properties, which will require additional capital. We do not expect that we will have sufficient funds on hand to meet these long-term cash requirements. We will have to satisfy these needs through either additional borrowings, sales of common or preferred shares and/or cash generated through property dispositions and joint venture transactions.

We believe that we will have access to these sources of capital to fund our long-term liquidity requirements, but, as a new public company, we cannot assure that this will be the case. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us.

Cash Flows

Comparison of the Nine Months Ended September 30, 2004 to the Nine Months Ended September 30, 2003

Cash provided by operating activities was $13.1 million for the nine months ended September 30, 2004, an increase of $9.4 million over 2003. The increase in 2004 is primarily due to cash provided by increases in accounts payable and accrued expenses of $14.2 million in 2004 compared to $6.9 million in 2003.  During 2003 and 2004, we acquired 15 shopping centers that contributed a total of $3.2 million to our cash flows in the nine months ended September 30, 2004. Also during 2003 and 2004, five properties became operational, which contributed $0.7 million to our cash flows during the nine months ended September 30, 2004. We expect that cash provided from operations will provide a significant portion of our short-term liquidity requirements.

Cash used in investing activities was $176.9 million for the nine months ended September 30, 2004, an increase of $97.9 million from 2003.  During 2004, we acquired twelve properties for a purchase price of approximately $110 million and we acquired the remaining joint venture and outside minority interests for approximately $13 million.  In addition, we invested approximately $55.1 million in our development properties.  We expect that future growth through acquisitions will be financed using additional borrowings, the sale of common or preferred shares and/or cash generated through property dispositions and joint venture transactions.

Cash provided by financing activities was $164.8 million in 2004, an increase of $90.0 million from 2003. We received proceeds from our initial public offering of approximately $215.5 million, net of issuance costs.  These net proceeds were used to prepay outstanding indebtedness secured by 13 properties of approximately $99 million, acquire five properties that were under contract for $59 million,

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repay the credit facility provided by affiliates of Lehman Brothers of $48 million and acquire the remaining joint venture and outside minority interests in nine properties.  Loan proceeds increased from $71.0 million in 2003 to $123.6 million in 2004.  These proceeds were primarily used to finance acquisition and development activity. We made net distributions of $9.2 million in 2004 compared to net contributions of $9.2 million in 2003.

Funds From Operations

Funds from Operations (“FFO”), is a widely used performance measure for real estate companies and is provided here as a supplemental measure of operating performance. We calculate FFO in accordance with the best practices described in the April 2002 National Policy Bulletin of the National Association of Real Estate Investment Trusts (NAREIT), which we refer to as the White Paper. The White Paper defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

Given the nature of our business as a real estate owner and operator, we believe that FFO is helpful to investors as a starting point in measuring our operational performance because it excludes various items included in net income that do not relate to or are not indicative of our operating performance such as gains (or losses) from sales of property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance, is not an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, and is not indicative of funds available to fund our cash needs, including our ability to make distributions. Our computation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definitions differently than we do.

Our calculation of FFO is as follows:

Three months ended September 30:

Nine months ended September 30:

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*  Amounts represent the minority and joint venture partners’ interests acquired in connection with the initial public offering and related formation transactions.

(1)  Funds From Operations for the period August 16, 2004 through September 30, 2004 includes costs of approximately $1.7 million related to our initial public offering and related formation transactions.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments depend upon prevailing interest rates.  Market risk refers to the risk of loss from adverse changes in interest rates of debt instruments of similar maturities and terms.

Market Risk Related to Fixed Rate Debt

We had approximately $214.9 million of outstanding consolidated indebtedness as of September 30, 2004, of which approximately $133.6 million or 62% is fixed rate and approximately $81.3 million or 38.0% is variable rate.  Based on this amount, a 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed rate debt of approximately $6.3 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed rate debt of approximately $6.8 million. A 100 basis point increase or decrease in interest rates on our variable rate debt as of September 30, 2004 would increase or decrease our annual interest expense by approximately $0.8 million.

Inflation

Most of our leases contain provisions designed to mitigate the adverse impact of inflation by requiring the tenant to pay its share of operating expenses, including common area maintenance, real estate taxes and insurance. This reduces our exposure to increases in costs and operating expenses resulting from inflation.

Item 4.  Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.  There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

Part II.  Other Information

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

(a)   In connection with our formation transactions and initial public offering (the “IPO”), which closed on August 16, 2004, we issued 833,267 common shares to the Principals of our predecessor in exchange for their interests in certain properties and service companies and awarded a total of 15,000 restricted common shares to new members of our Board of Trustees.  The issuance of such shares was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended (the “Securities Act”).  In addition, our operating partnership, Kite Realty Group, L.P. (the “Operating Partnership”), issued a total of 8,281,882 units to the Principals and third parties in exchange for their interests in certain properties.  The issuance of such units was effected in reliance upon an exemption from registration provided Section 4(2) of the Securities Act.  Units of the Operating Partnership are exchangeable for our common shares on a one-for-one basis beginning on the one-year anniversary of the date of issuance.

(b)   Our initial public offering (the “IPO”) consisted of the sale of 16,300,000 common shares to the public at $13.00 per share, resulting in gross proceeds to us of $211.9 million and net proceeds of $191.3 million, pursuant to a registration statement (SEC File No. 333-114224) that was declared effective on August 10, 2004.  On September 14, 2004, the underwriters exercised their over-allotment option to purchase an additional 2,000,000 common shares at $13.00 per share, resulting in additional gross proceeds of $26.0 million and net proceeds of $24.2 million.  Lehman Brothers and Wachovia Securities acted as lead underwriters for the IPO.  Total underwriting discounts for the IPO, including the exercise of the over-allotment option, were approximately $14.9 million.  Other expenses of the IPO totaled approximately $6.3 million, which included a $1.6 million advisory fee paid to Lehman Brothers and Wachovia Securities.  The net proceeds were contributed in exchange for a 67.4% controlling interest in our operating partnership,

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Kite Realty Group, L.P. (the “Operating Partnership”).  A total of 833,267 shares were issued to the principals of our predecessor (the “Principals”) in exchange for their interests in certain properties and service companies.  Also, a total of 15,000 restricted shares were awarded to the members of the Company’s Board of Trustees.  In total, 19,148,267 shares were issued in connection with the Company’s formation and IPO.  In addition, a total of 8,281,882 units of the Operating Partnership were issued to the Principals and third parties in exchange for their interests in certain properties.

The Operating Partnership utilized the net proceeds from the IPO to repay mortgage indebtedness ($99 million), to repay a credit facility provided by affiliates of Lehman Brothers ($48 million), to acquire five properties that were under contract ($59 million), to acquire joint venture and outside minority interests in nine properties ($13 million) and to repay existing indebtedness due to the Principals ($9 million).

Item 5.  Other Information.

As reported in our Current Report on Form 8-K, filed with the SEC on September 7, 2004, on August 31, 2004, we entered into a three-year, $150 million secured revolving credit facility with Wachovia Bank, N.A., an affiliate of Wachovia Capital Markets, LLC, one of the underwriters of our initial public offering, and Lehman Commercial Paper Inc., an affiliate of Lehman Brothers Inc., another of the underwriters of our initial public offering.  Borrowings under the facility will bear interest at a floating rate of LIBOR plus 135 to 150 basis points, depending on our leverage ratio, and will be secured by certain of our properties.  The amount that we may borrow under the facility will depend on our maintaining a minimum “borrowing base” of properties.  As of September 30, 2004, approximately $40 million was available for draw under the facility, of which approximately $5.5 million was outstanding, with the potential for a total approximately $60 million upon completion of underwriting in process.  Up to an additional 13 unencumbered properties are available to be added to the borrowing base as additional funds are required.  We intend to use this new credit facility principally to fund growth opportunities.

Our ability to borrow under this new credit facility will be subject to our ongoing compliance with a number of financial and other covenants, including with respect to:

•                  our amount of leverage;

•                  a minimum interest coverage ratio;

•                  our minimum tangible net worth;

•                  a minimum fixed charge coverage ratio;

•                  the collateral pool properties generating sufficient net operating income to maintain a certain fixed charge ratio; and

•                  the collateral pool properties maintaining a minimum aggregate occupancy rate.

Under the facility, we are permitted to make distributions to our shareholders of up to 90% of our funds from operations provided that no event of default exists.  If an event of default exists, we may only make distributions sufficient to maintain our REIT status.  On November 12, 2004, the lenders provided to us a letter confirming that the restrictive covenants did not apply to our dividend paid to shareholders on October 15, 2004.

The credit facility also includes a short-term borrowing line of $20 million available for same day borrowings.  Borrowings under the short-term line may be outstanding for no more than five days.  We may extend the facility for one year, provided that no events of default exist and subject to an extension fee of $300,000.

Item 6.  Exhibits

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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