The accompanying notes are an integral part of these consolidated financial statements.
The Operating Partnership was formed on August 16, 2004, when the Parent Company contributed properties and the net proceeds from an initial public offering of shares of its common stock to the Operating Partnership. The Parent Company was organized in Maryland in 2004 to succeed in the development, acquisition, construction and real estate businesses of its predecessor. We believe the Company qualifies as a real estate investment trust (a “REIT”(“REIT”) under provisions of the Internal Revenue Code of 1986, as amended.
The Parent Company is the sole general partner of the Operating Partnership, and as of September 30, 2017March 31, 2023 owned approximately 97.7%98.6% of the common partnership interests in the Operating Partnership (“General Partner Units”). The remaining 2.3%1.4% of the common partnership interests (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”) were owned by the limited partners. As the sole general partner of the Operating Partnership, the Parent Company has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership. The Parent Company and the Operating Partnership are operated as one enterprise. The management of the Parent Company consists of the same members as the management of the Operating Partnership. As the sole general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have any significant assets other than its investment in the Operating Partnership.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reported period. Actual results could differ from these estimates. The results of operations for the interim periods are not necessarily indicative of the results that may be expected on an annual basis.
The accompanying financial statements are presented on a consolidated basis and include all accounts of the Parent Company, the Operating Partnership, the taxable REIT subsidiarysubsidiaries (“TRSs”) of the Operating Partnership, subsidiaries of the Operating Partnership that are controlled and any variable interest entities (“VIEs”) in which the Operating Partnership is the primary beneficiary. In general, a VIE is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) has equity investors that do not provide sufficient financial resources for the entity to support its activities, (b) does not have equity investors with voting rights or (c) has equity investors whose votes are disproportionate from their economics and substantially all of the activities are conducted on behalf of the investor with disproportionately fewer voting rights.
The Operating Partnership is considered a VIE as the limited partners do not hold kick-out rights or substantive participating rights. The Parent Company consolidates the Operating Partnership as it is the primary beneficiary in accordance with the VIE model.
Company does qualify as a REIT. The Operating Partnership intends to continue to make distributions to the Parent Company in amounts sufficient to assist the Parent Company in adhering to REIT requirements and maintaining its REIT status.
Limited Partner Units are redeemable noncontrolling interests in the Operating Partnership. We classify redeemable noncontrolling interests in the Operating Partnership in the accompanying consolidated balance sheets outside of permanent equity because we may be required to pay cash to holders of Limited Partner Units upon redemption of their interests in the Operating Partnership or deliver registered shares upon their conversion. The carrying amount of the redeemable noncontrolling interests in the Operating Partnership is reflected at the greater of historical book value or redemption value with a corresponding adjustment to additional paid-in capital. At September 30, 2017As of March 31, 2023 and December 31, 2016,2022, the redemption value of the redeemable noncontrolling interests in the Operating Partnership exceeded the historical book value, and the balance wasbalances were accordingly adjusted to redemption value.
We allocate net operating results of the Operating Partnership after noncontrolling interests in the consolidated properties based on the partners’ respective weighted average ownership interest. We adjust the redeemable noncontrolling interests in the Operating Partnership at the end of each reporting period to reflect their interests in the Operating Partnership or redemption value. This adjustment is reflected in our shareholders’ and Parent Company'sCompany’s equity. For the three and nine months ended September 30, 2017March 31, 2023 and 2016,2022, the weighted average interests of the Parent Company and the limited partners in the Operating Partnership were as follows:
Concurrent with the Parent Company’s initial public offering and related formation transactions, certain individuals received Limited Partner Units of the Operating Partnership in exchange for their interests in certain properties. The limited partners have the right to redeem Limited Partner Units for cash or, at the Parent Company'sCompany’s election, common shares of the Parent Company in an amount equal to the market value of an equivalent number of common shares of the Parent Company at the time of redemption. Such common shares must be registered, which is not fully in the Parent Company’s control. Therefore, the limited partners’ interest is not reflected in permanent equity. The Parent Company also has the right to redeem the Limited Partner Units directly from the limited partner in exchange for either cash in the amount specified above or a number of its common shares equal to the number of Limited Partner Units being redeemed.
Prior to the merger with Inland Diversified Real Estate Trust, Inc. ("(“Inland Diversified"Diversified”) in 2014, Inland Diversified formed joint ventures with the previous owners of certain properties and issued Class B units in three joint ventures that indirectly own those properties. TheAs of March 31, 2022, the Class B units related to twoone of these three joint ventures remainthat owned Crossing at Killingly Commons, our multi-tenant retail property in Dayville, Connecticut, was outstanding subsequent to the merger with Inland Diversified and are accounted for as
Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
|
| | | | | | | | |
| | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 |
| Amortization of debt issuance costs | | $ | 2,014 |
| | $ | 3,744 |
|
Unsecured Revolving Credit Facility
In July 2022, the Operating Partnership, as borrower, and Unsecured Term Loans
We havethe Company entered into the Second Amendment (the “Second Amendment”) to the Sixth Amended and Restated Credit Agreement, dated as of July 8, 2021 (as amended, the “Credit Agreement”) with a syndicate of financial institutions to provide for an unsecured revolving credit facility aggregating $1.1 billion (the "Credit Facility"“Revolving Facility”) withand a seven-year $300.0 million unsecured term loan (the “$300M Term Loan”). Under the Second Amendment, the Operating Partnership has the option, subject to certain customary conditions, to increase the Revolving Facility and/or incur additional term loans in an aggregate amount for all such increases and additional loans of up to $600.0 million, for a total commitmentfacility amount of $500up to $2.0 billion. The Revolving Facility has a scheduled maturity date of January 8, 2026, which maturity date may be extended for up to two additional periods of six months at the Operating Partnership’s option, subject to certain conditions.
Borrowings under the Revolving Facility bear interest at a rate per annum equal to SOFR plus a margin based on the Operating Partnership’s leverage ratio or credit rating, respectively, plus a facility fee based on the Operating Partnership’s leverage ratio or credit rating, respectively. The SOFR rate is also subject to an additional 0.10% spread adjustment as specified in the Second Amendment. The Revolving Facility is currently priced on the leverage-based pricing grid. In accordance with the Credit Agreement, the credit spread set forth in the leverage grid resets quarterly based on the Company’s leverage, as calculated at the previous quarter end. The Company may irrevocably elect to convert to the ratings-based pricing grid at any time. As of March 31, 2023, making such an election would have resulted in a lower interest rate; however, the Company had not made the election to convert to the ratings-based pricing grid. The Credit Agreement includes a sustainability metric based on targeted greenhouse gas emission reductions, which results in a reduction of the otherwise applicable interest rate margin by one basis point upon achievement of targets set forth therein.
The following table summarizes the key terms of the Revolving Facility as of March 31, 2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Leverage-Based Pricing | | Investment Grade Pricing | | |
| Credit Agreement | | Maturity Date | | Extension Option | | Extension Fee | | Credit Spread | | Facility Fee | | Credit Spread | | Facility Fee | | SOFR Adjustment |
| $1,100,000 unsecured revolving line of credit | | 1/8/2026 | | 2 six-month | | 0.075% | | 1.05%–1.50% | | 0.15%–0.30% | | 0.725%–1.40% | | 0.125%–0.30% | | 0.10% |
The Operating Partnership’s ability to borrow under the Credit Agreement is subject to ongoing compliance by the Operating Partnership and its subsidiaries with various restrictive covenants, including with respect to liens, transactions with affiliates, dividends, mergers and asset sales. In addition, the Credit Agreement requires that the Operating Partnership satisfy certain financial covenants, including (i) a maximum leverage ratio; (ii) a minimum fixed charge coverage ratio; (iii) a maximum secured indebtedness ratio; (iv) a maximum unsecured leverage ratio; and (v) a minimum unencumbered interest coverage ratio. As of March 31, 2023, we were in compliance with all such covenants.
As of March 31, 2023, we had letters of credit outstanding totaling $0.3 million, against which no amounts were advanced as of March 31, 2023.
Unsecured Term Loans
As of March 31, 2023, the Operating Partnership has the following unsecured term loans: (i) a $120.0 million unsecured term loan due July 2024 (the “$120M Term Loan”), (ii) a $250.0 million unsecured term loan due October 2025 (the “$250M Term Loan”), (iii) a $150.0 million unsecured term loan due July 2026 (the “$150M Term Loan”), and (iv) the $300M Term Loan that matures in July 2020 (inclusive2029, each of two six-month extension options),which bears interest at a $200 millionrate of SOFR plus a credit spread. The $120M Term Loan, $150M Term Loan and $300M Term Loan are each priced on a ratings-based pricing grid while the $250M Term Loan is priced on a leverage-based pricing grid. The agreements related to the $150M Term Loan and $300M Term Loan include a sustainability metric based on targeted greenhouse gas emission reductions, which results in a reduction of the otherwise applicable interest rate margin by one basis point upon achievement of targets set forth in each agreement.
The following table summarizes the key terms of the unsecured term loan maturingloans as of March 31, 2023 (dollars in July 2021("thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unsecured Term Loans | | Maturity Date | | Leverage-Based Pricing
Credit Spread | | Investment Grade Pricing
Credit Spread | | SOFR Adjustment |
| $120,000 unsecured term loan due 2024 | | 7/17/2024 | | 1.20% – 1.70% | | 0.80% – 1.65% | | 0.10% |
| $250,000 unsecured term loan due 2025 | | 10/24/2025(1) | | 2.00% – 2.55% | | 2.00% – 2.50% | | 0.10% |
| $150,000 unsecured term loan due 2026 | | 7/17/2026 | | 1.20% – 1.70% | | 0.75% – 1.60% | | 0.10% |
| $300,000 unsecured term loan due 2029 | | 7/29/2029 | | N/A | | 1.15% – 2.20% | | 0.10% |
(1)The maturity date may be extended for up to three additional periods of one year each at the Operating Partnership’s option, subject to certain conditions.
Under the agreement related to the $120M Term Loan")Loan and a $200the $150M Term Loan, the Operating Partnership has the option to increase each of the term loans to $250.0 million seven-year unsecuredupon the Operating Partnership’s request, subject to certain conditions, including obtaining commitments from any one or more lenders, whether or not currently party to the term loan maturingagreement, to provide such increased amounts. The Operating Partnership is permitted to prepay each of the $120M Term Loan and $150M Term Loan, in October 2022.
whole or in part, at any time without being subject to a prepayment fee.
The Operating Partnership has the option to increase the borrowing availability of the Credit Facility to $1 billion and the option to increase the$250M Term Loan to provide for an additional $200$300.0 million, in each case subject to certain conditions, including obtaining commitments from any one or more lenders.
As of September 30, 2017, $41.1 million was outstanding under the Credit Facility. Additionally, we had letters of credit outstanding which totaled $5.3 million, against which no amounts were advanced as of September 30, 2017.
The amount that we may borrow under our Credit Facility is limited by the value of the assets in our unencumbered asset pool. As of September 30, 2017, the value of the assets in our unencumbered asset pool, calculated pursuantlenders, whether or not currently party to the Credit Facilityterm loan agreement, was $1.4 billion. Taking into account outstanding borrowings onto provide such increased amounts. The Operating Partnership is permitted to prepay the line of credit, term loans, unsecured notes and letters of credit, we had $394.1 million available under our Credit Facility for future borrowings as of September 30, 2017.
Our ability to borrow under the Credit Facility is$250M Term Loan in whole or in part, at any time, subject to our compliance with various restrictive and financial covenants, including with respect to liens, indebtedness, investments, dividends, mergers and asset sales. As of September 30, 2017, we were in compliance with all such covenants.
Senior Unsecured Notes
a prepayment fee if prepaid on or before October 25, 2023.
The Operating Partnership has $550 million of senioris permitted to prepay the $300M Term Loan in whole or in part, at any time, subject to a prepayment fee if prepaid on or before July 29, 2024.
The unsecured notes maturing at various dates through September 2027 (the "Notes"). The Notesterm loan agreements contain a number of customaryrepresentations, financial and restrictive covenants. Asother affirmative and negative covenants and events of September 30, 2017, we weredefault that are substantially similar to those contained in compliance with all such covenants.
Other Debt Activity
For the nine months ended September 30, 2017, we had total new borrowings of $69.7 million and total repayments of $118.8 million. In addition to the items mentioned above, the remaining components of this activity were as follows:
We retired the $6.7 million loan secured by our Pleasant Hill Commons operating property through a draw on our Credit Facility;
We borrowed $63.0 million on the Credit Agreement. The unsecured term loan agreements all rank pari passu with the Operating Partnership’s Revolving Facility to fund development activities, redevelopment activities, and tenant improvement costs;other unsecured indebtedness of the Operating Partnership.
We usedDebt Issuance Costs
Debt issuance costs are amortized over the $76.1 million net proceeds fromterms of the salerespective loan agreements. The following amounts of four operating properties to pay downamortization of debt issuance costs are included as a component of “Interest expense” in the Credit Facility;accompanying consolidated statements of operations and comprehensive income (in thousands):
We repaid $32.3 million on the Credit Facility using cash flows generated from operations; and
We made scheduled principal payments on indebtedness totaling $3.7 million.
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Amortization of debt issuance costs | $ | 888 | | | $ | 650 | |
Fair Value of Fixed and Variable Rate Debt
As of September 30, 2017,March 31, 2023, the estimated fair value of our fixed rate debt was $1.2$1.8 billion compared to the book value of $1.1$2.0 billion. The fair value was estimated using Level 2 and 3 inputs with cash flows discounted at current borrowing rates for similar instruments, which ranged from 3.78%5.97% to 6.78%7.81%. As of September 30, 2017,March 31, 2023, the estimated fair value of variable rate debt was $555.6$947.8 million compared to the book value of $554.9$973.1 million. The fair value was estimated using Level 2 and 3 inputs with cash flows discounted at current borrowing rates for similar instruments, which ranged from 2.53%5.85% to 3.48%.
Note 5. Derivative Instruments, Hedging Activities and Other Comprehensive Income
In order to manage potential future variable interest rate risk, we enter into interest rate derivative agreements from time to time. All such agreements are designated as cash flow hedges. We do not use interest rate derivative agreements for trading or speculative purposes. The agreements with each of our derivative counterparties provide that, in the event of default on any of our indebtedness, we could also be declared in default on our derivative obligations.
As of September 30, 2017, we were party to various cash flow derivative agreements with notional amounts totaling $460.5 million. These derivative agreements effectively fix the interest rate underlying certain variable rate debt instruments over expiration dates through 2021. Utilizing a weighted average interest rate spread over LIBOR on all variable rate debt resulted in fixing the weighted average interest rate at 3.12%6.80%.
These interest rate derivative agreements are the only assets or liabilities that we record at fair value on a recurring basis. The valuation of these assets and liabilities is determined using widely accepted techniques including discounted cash flow analysis. These techniques consider the contractual terms of the derivatives (including the period to maturity) and use observable market-based inputs such as interest rate curves and implied volatilities. We also incorporate credit valuation adjustments into the fair value measurements to reflect nonperformance risk on both our part and that of the respective counterparties.
We determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, although the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. As of September 30, 2017 and December 31, 2016, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined the credit valuation adjustments were not significant to the overall valuation of our derivatives. As a result, we determined our derivative valuations were classified within Level 2 of the fair value hierarchy.
As of September 30, 2017, the estimated fair value of our interest rate derivatives represented a net asset of $0.1 million, including accrued interest of $0.2 million. As of September 30, 2017, $1.3 million was reflected in prepaid and other assets and $1.2 million was reflected in accounts payable and accrued expenses on the accompanying consolidated balance sheets. At December 31, 2016, the estimated fair value of our interest rate hedges was a net liability of $2.2 million, including accrued interest of $0.4 million. As of December 31, 2016, $0.9 million was reflected in prepaid and other assets and $3.1 million was reflected in accounts payable and accrued expenses on the accompanying consolidated balance sheets.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to earnings over time as the hedged items are recognized in earnings. Approximately $2.1 million and $3.5 million was reclassified as a reduction to earnings during the nine months ended September 30, 2017 and 2016, respectively. As the interest payments on our hedges are made over the next 12 months, we estimate the increase to interest expense to be $0.3 million, assuming the current LIBOR curve.
Unrealized gains and losses on our interest rate derivative agreements are the only components of the change in accumulated other comprehensive loss.
Note 6. Shareholders’ EquityNOTE 8. DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND OTHER COMPREHENSIVE INCOME
In order to manage potential future variable interest rate risk, we enter into interest rate derivative agreements from time to time. We do not use interest rate derivative agreements for trading or speculative purposes. The agreements with each of our derivative counterparties provide that in the event of default on any of our indebtedness, we could also be declared in default on our derivative obligations.
The following table summarizes the terms and fair values of the Company’s derivative financial instruments that were designated and qualified as part of a hedging relationship as of March 31, 2023 and December 31, 2022 (dollars in thousands):
Distribution Payments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Fair Value Assets (Liabilities)(1) |
| Type of Hedge | | Number of Instruments | | Aggregate Notional | | Reference Rate | | Interest Rate | | Effective Date | | Maturity Date | | March 31, 2023 | | December 31, 2022 |
| Cash Flow | | Four | | $ | 250,000 | | | SOFR | | 2.99 | % | | 12/1/2022 | | 10/24/2025 | | $ | 4,831 | | | $ | 7,134 | |
| Cash Flow | | Two | | 100,000 | | | SOFR | | 2.66 | % | | 8/1/2022 | | 8/1/2025 | | 2,655 | | | 3,616 | |
| Cash Flow | | Two | | 200,000 | | | SOFR | | 2.72 | % | | 8/3/2022 | | 11/22/2023 | | 2,625 | | | 3,663 | |
| Cash Flow | | Three | | 120,000 | | | SOFR | | 1.58 | % | | 8/15/2022 | | 7/17/2024 | | 4,315 | | | 5,461 | |
| Cash Flow | | Three | | 150,000 | | | SOFR | | 1.68 | % | | 8/15/2022 | | 7/17/2026 | | 8,743 | | | 10,896 | |
| | | | $ | 820,000 | | | | | | | | | | | $ | 23,169 | | | $ | 30,770 | |
| | | | | | | | | | | | | | | | |
Fair Value(2) | | Two | | $ | 155,000 | | | LIBOR | | LIBOR + 3.70% | | 4/23/2021 | | 9/10/2025 | | $ | (12,045) | | | $ | (14,177) | |
| | | | | | | | | | | | | | | | |
Forward-Starting Cash Flow | | Two | | $ | 200,000 | | | SOFR | | 2.37 | % | | 11/22/2023 | | 8/1/2025 | | $ | 3,528 | | | $ | 4,370 | |
(1)Derivatives in an asset position are included within “Prepaid and other assets” and derivatives in a liability position are included within “Accounts payable and accrued expenses” in the accompanying consolidated balance sheets.
(2)The derivative agreements swap a blended fixed rate of 4.52% for a blended floating rate of LIBOR plus 3.70%.
In October 2022, we terminated two forward-starting interest rate swaps with notional amounts totaling $150.0 million and a maturity date of June 1, 2032 and received $30.9 million upon termination. This settlement is included as a component of “Accumulated other comprehensive income” in the accompanying consolidated balance sheets and is being reclassified to earnings over time as the hedged items are recognized in earnings. During the three months ended March 31, 2023, we accelerated the reclassification of $1.5 million in accumulated other comprehensive income as a reduction to interest expense as a result of a portion of the hedged forecasted transaction becoming probable not to occur. We currently expect that the debt issuance will occur during 2023.
These interest rate derivative agreements are the only assets or liabilities that we record at fair value on a recurring basis. The valuation of these assets and liabilities is determined using widely accepted techniques including discounted cash flow analysis. These techniques consider the contractual terms of the derivatives (including the period to maturity) and use observable market-based inputs such as interest rate curves and implied volatilities. We also incorporate credit valuation adjustments into the fair value measurements to reflect nonperformance risk on both our part and that of the respective counterparties.
We determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, although the credit valuation adjustments associated with our derivatives use Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. As of March 31, 2023 and December 31, 2022, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined the credit valuation adjustments were not significant to the overall valuation of our derivatives. As a result, we determined our derivative valuations were classified within Level 2 of the fair value hierarchy.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to earnings over time as the hedged items are recognized in earnings. Approximately $4.2 million was reclassified as an increase to earnings during the three months ended March 31, 2023 and approximately $4.1 million was reclassified as a decrease to earnings during the three months ended March 31, 2022. As interest payments on our derivatives are made over the next 12 months, we estimate the decrease to interest expense to be approximately $25.1 million, assuming the current SOFR and LIBOR curves.
Unrealized gains and losses on our interest rate derivative agreements are the only components of the change in accumulated other comprehensive income.
NOTE 9. SHAREHOLDERS’ EQUITY
Distributions
Our Board of Trustees declared a cash distribution of $0.3025$0.24 per common share and Common Unit for the thirdfirst quarter of 20172023. This distribution was paid on April 14, 2023 to common shareholders and Common Unit holders of record as of October 6, 2017.April 7, 2023.
For the three months ended March 31, 2022, we declared a cash distribution of $0.20 per common share and Common Unit.
At-The-Market Offering Program
In February 2021, the Company and the Operating Partnership entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with each of BofA Securities, Inc., Citigroup Global Markets Inc., KeyBanc Capital Markets Inc. and Raymond James & Associates, Inc., pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $150.0 million of its common shares of beneficial interest, $0.01 par value per share, under an at-the-market offering program (the “ATM Program”). In November 2021, the Company and the Operating Partnership amended the Equity Distribution Agreement to reflect their filing of a shelf registration statement on November 16, 2021 with the SEC. The distribution was paid on October 13, 2017.
Note 7. Deferred Costs and Intangibles,Operating Partnership intends to use the net
Deferred costs consist primarily of acquired lease intangible assets, broker fees and capitalized salaries and related benefits incurred in connection with lease originations. Deferred leasing costs, lease intangibles and similar costs are amortized on a straight-line basis over the terms of the related leases. At September 30, 2017 and December 31, 2016, deferred costs consisted of the following:
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Acquired lease intangible assets | $ | 111,528 |
| | $ | 125,144 |
|
| Deferred leasing costs and other | 67,674 |
| | 63,810 |
|
| | 179,202 |
| | 188,954 |
|
| Less—accumulated amortization | (63,579 | ) | | (59,690 | ) |
| Total | $ | 115,623 |
| | $ | 129,264 |
|
Amortization of deferred leasing costs, leasing intangibles proceeds, if any, to repay borrowings under its Revolving Facility and other is included in depreciationindebtedness and amortization expense infor working capital and other general corporate purposes. The Operating Partnership may also use the accompanying consolidated statementsnet proceeds for acquisitions of operations. operating properties and the development or redevelopment of properties, although there are currently no understandings, commitments or agreements to do so. As of March 31, 2023, the Company has not sold anycommon shares under the ATM Program.
Share Repurchase Program
The amortizationCompany has an existing share repurchase program under which it may repurchase, from time to time, up to a maximum of above$300.0 million of its common shares (the “Share Repurchase Program”). The Company intends to fund any future repurchases under the Share Repurchase Program with cash on hand or availability under the Revolving Facility, subject to any applicable restrictions. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market lease intangibles is included as a reductionconditions, regulatory requirements and other factors. In February 2023, the Company extended the Share Repurchase Program for an additional year so it will now terminate on February 28, 2024, if not terminated or extended prior to revenue. The amountsthat date. As of such amortization included inMarch 31, 2023, the accompanying consolidated statements of operations are as follows:Company has not repurchased any shares under the Share Repurchase Program.
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2017 | | 2016 |
| Amortization of deferred leasing costs, lease intangibles and other | $ | 17,785 |
| | $ | 19,177 |
|
| Amortization of above market lease intangibles | 3,139 |
| | 4,803 |
|
Note 8. Deferred Revenue, Intangibles, Net and Other LiabilitiesNOTE 10. EARNINGS PER SHARE OR UNIT
Deferred revenue and other liabilities consistBasic earnings per share or unit is calculated based on the weighted average number of common shares or units outstanding during the period. Diluted earnings per share or unit is calculated based on the weighted average number of common shares or units outstanding during the period combined with the incremental average common shares or units that would have been outstanding assuming the conversion of all potentially dilutive common shares or units into common shares or units as of the unamortized fair valueearliest date possible.
Potentially dilutive securities include (i) outstanding options to acquire common shares; (ii) Limited Partner Units, which may be exchanged for either cash or common shares at the Parent Company’s option and under certain circumstances; (iii) appreciation-only Long-Term Incentive Plan (“AO LTIP”) units; and (iv) deferred common share units, which may be credited to the personal accounts of below market lease liabilities recordednon-employee trustees in connection with purchase accounting, retainage payableslieu of compensation paid in cash or the issuance of common shares to such trustees. Limited Partner Units have been omitted from the Parent Company’s denominator for development and redevelopment projects, and tenant rent payments received in advancethe purpose of computing diluted earnings per share since the month in which they are due. The amortizationeffect of below market lease liabilities is recognized as revenue over the remaining life of the leases (including option periods for leases with below market renewal options) through 2046. Tenant rent payments received in advance are recognized as revenueincluding those amounts in the period to which they apply, which is typically the month following their receipt.
At September 30, 2017 and December 31, 2016, deferred revenue, intangibles, net and other liabilities consisted of the following:
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Unamortized below market lease liabilities | $ | 85,162 |
| | $ | 95,360 |
|
| Retainage payables and other | 6,283 |
| | 5,437 |
|
| Tenant rent payments received in advance | 9,621 |
| | 11,405 |
|
| Total | $ | 101,066 |
| | $ | 112,202 |
|
The amortization of below market lease intangibles is included as a component of minimum rent in the accompanying consolidated statements and was $5.7denominator would have no dilutive impact. Weighted average Limited Partner Units outstanding were 3.0 million and $10.62.4 million for the ninethree months ended September 30, 2017March 31, 2023 and 2016,2022, respectively.
Due to the net loss allocable to common shareholders and Common Unit holders for the three months ended March 31, 2022, no securities had a dilutive impact for this period.
Note 9. Commitments and Contingencies
NOTE 11. COMMITMENTS AND CONTINGENCIES
Other Commitments and Contingencies
We are obligated under various completion guarantees with certain lenders and lease agreements with tenants to complete all or portions of a development project and tenant-specific space currently under construction. We believe we currently have sufficient financing in place to fund these projects and expect to do so primarily through free cash flow or borrowings on the Revolving Facility.
In 2017, we provided a repayment guaranty on a $33.8 million construction loan associated with the development of the Embassy Suites at the University of Notre Dame, consistent with our 35% ownership interest. Our portion of the repayment guaranty is limited to $5.9 million and the guaranty’s term is through July 1, 2024, the maturity date of the construction loan. As of March 31, 2023, the outstanding loan balance was $33.3 million, of which our share was $11.7 million. The loan is secured by the hotel.
In 2021, we provided repayment and completion guaranties on loans totaling $66.2 million associated with the development of The Corner mixed-use project in the Indianapolis MSA. As of March 31, 2023, the outstanding balance of the loans was $37.2 million, of which our share was $18.6 million.
As of March 31, 2023, we had outstanding letters of credit totaling $0.3 million with no amounts advanced against these instruments.
Legal Proceedings
We are not subject to any material litigation nor, to management’s knowledge, is any material litigation currently threatened against us. We are parties to routine litigation, claims, and administrative proceedings arising in the ordinary course of business. Management believes that such matters will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows taken as a whole.
We are obligated under various completion guarantees with certain lenders and lease agreements with tenantsNOTE 12. SUBSEQUENT EVENTS
Subsequent to complete all or portionsMarch 31, 2023, we originated a 10-year $95.1 million mortgage payable at a fixed interest rate of 5.36% secured by the multifamily rental portion of the development and redevelopment projects. We believe we currently have sufficient financingexpansion project at One Loudoun Downtown – Pads G & H.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in place to fund these projects and expect to do so primarily through borrowings on the Credit Facility.
As of September 30, 2017, we had outstanding letters of credit totaling $5.3 million. At that date, there were no amounts advanced against these instruments.
Note 10. Disposals of Operating Properties and Related Recording of Impairment Charge
During the three months ended September 30, 2017, we did not sell any of our operating properties.
During the three months ended June 30, 2017, we sold our Clay Marketplace operating property in Birmingham, Alabama, our Shops at Village Walk operating property in Fort Myers, Florida, and our Wheatland Towne Crossing operating property in Dallas, Texas, for aggregate gross proceeds of $54.6 million and a net gain of $6.3 million.
During the three months ended March 31, 2017, we sold our Cove Center operating property in Stuart, Florida for gross proceeds of $23.1 million and a net gain of $8.9 million.
In connectionconjunction with the preparation and review of the March 31, 2017accompanying historical financial statements we evaluated an operating property for impairment dueand related notes thereto. In this discussion, unless the context suggests otherwise, references to the shortening of the intended holding period. We concluded the estimated undiscounted cash flows over the expected holding period did not exceed the carrying value of the asset. The“our Company, estimated the fair value of the property to be $26.0 million using Level 3 inputs within the fair value hierarchy, primarily using the market approach. We compared the fair value measurement to the carrying value, which resulted in the recording of a non-cash impairment charge of $7.4 million for the three months ended March 31, 2017.” “we,” “us,” and “our” mean Kite Realty Group Trust and its direct and indirect subsidiaries, including Kite Realty Group, L.P.
Item 2.
Cautionary Note About Forward-Looking Statements
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by us, 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. 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, financial or otherwise, 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, business, banking, real estate and other market conditions, particularly in light ofconnection with low or negative growth in the U.S. economy as well as economic uncertainty caused by fluctuations(including a potential economic slowdown or recession, rising interest rates, inflation, unemployment, or limited growth in the prices of oil and other energy sources;consumer income or spending);
•financing risks, including the availability of, and costs associated with, sources of liquidity;
•our ability to refinance, or extend the maturity dates of, our indebtedness;
•the level and volatility of interest rates;
•the financial stability of tenants, including their ability to pay rent and the risk of tenant bankruptcies;tenants;
•the competitive environment in which we operate;operate, including potential oversupplies of and reduction in demand for rental space;
•acquisition, disposition, development and joint venture risks;
•property ownership and management risks;risks, including the relative illiquidity of real estate investments, and expenses, vacancies or the inability to rent space on favorable terms or at all;
•our ability to maintain our status as a real estate investment trust (“REIT”) for U.S. federal income tax purposes;
•potential environmental and other liabilities;
•impairment in the value of real estate property we own;
•the attractiveness of our properties to tenants, the actual and perceived impact of online retail and the perception that such retail hase-commerce on the value of shopping center assets;assets and changing demographics and customer traffic patterns;
•business continuity disruptions and a deterioration in our tenants’ ability to operate in affected areas or delays in the supply of products or services to us or our tenants from vendors that are needed to operate efficiently, causing costs to rise sharply and inventory to fall;
•risks related to theour current geographical concentration of properties in Texas, Florida, Maryland, New York, and North Carolina;
•civil unrest, acts of violence, terrorism or war, acts of God, climate change, epidemics, pandemics (including the ongoing pandemic of the novel coronavirus (“COVID-19”)), natural disasters and severe weather conditions, including such events that may result in underinsured or uninsured losses or other increased costs and expenses;
•changes in laws and government regulations including governmental orders affecting the use of our properties or the ability of our tenants to operate, and the costs of complying with such changed laws and government regulations;
•possible short-term or long-term changes in Florida, Indianaconsumer behavior due to COVID-19 and Texas;the fear of future pandemics;
•our ability to satisfy environmental, social or governance standards set by various constituencies;
•insurance costs and coverage;
•risks associated with cybersecurity attacks and the loss of confidential information and other business disruptions;
•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 we file with the Securities and Exchange Commission (the “SEC”) or in other documents that we publicly disseminate, including, in particular, the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
2022.
We undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.
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 direct and indirect subsidiaries, including Kite Realty Group, L.P.
Our Business and Properties
Kite Realty Group Trust is a publicly-held real estate investment trust which,publicly held REIT that, through its majority-owned subsidiary, Kite Realty Group, L.P., owns interests in various operating subsidiaries and joint ventures engaged in the ownership, operation, acquisition, development, and redevelopment of high-quality, neighborhood and communityopen-air shopping centers and mixed-use assets that are primarily grocery-anchored and located in high-growth Sun Belt and select strategic gateway markets in the United States. We derive revenuesour revenue primarily from activities associated with the collection of contractual rents and reimbursement payments from tenants under existing lease agreements at each of our properties. OurTherefore, our operating results therefore depend materially on, among other things, the ability of our tenants to make required lease payments, the health and resilience of the United StatesU.S. retail sector, interest rate volatility, stability in the banking sector, job growth, the real estate market and overall economic and real estate market conditions.
At September 30, 2017,As of March 31, 2023, we owned interests in 117181 operating and redevelopmentretail properties totaling approximately 23.128.5 million square feet, excluding one operating retail property classified as held for sale, and one office property with 0.3 million square feet. Of the 181 operating retail properties, 11 contain an office component. We also owned twothree development projects under construction as of this date.
Inflation
At September 30, 2016, we owned interests in 120Prior to 2021, inflation was relatively low and had a minimal impact on our operating and redevelopmentfinancial performance; however, inflation has increased significantly in recent months and may continue to be elevated or increase further. Most of our leases contain provisions designed to mitigate the adverse impact of inflation, including stated rent increases and requirements for tenants to pay a share of operating expenses, including common area maintenance, real estate taxes, insurance or other operating expenses related to the maintenance of our properties, totaling approximately 23.5 million square feet. Wewith escalation clauses in certain leases. Most of our leases also owned one development project under constructioninclude clauses that allow us to collect additional rent based on a percentage of tenants’ gross sales over stated thresholds, which sales generally increase as of this date.
Current Quarter Activities
Development and Redevelopment
Weprices rise. In addition, we believe that the rental rates in many of our leases are below current market rates for comparable space and that upon renewal, such rates may be increased to be in line with current rates, which may offset certain inflationary expense pressures. Due to the current high inflation environment, the U.S. Federal Reserve has aggressively raised short-term interest rates to slow the economy down, which has caused our borrowing costs to rise. We continually evaluatingevaluate our exposure to interest rate fluctuations and enter into interest rate protection agreements to mitigate the impact of changes in interest rates on our variable rate debt. However, because we cannot predict with any level of certainty what future actions the U.S. Federal Reserve will take to combat the high inflationary environment, we cannot estimate the ultimate impact it will have on our operating propertiesand financial performance.
Historically, economic indicators such as GDP growth, consumer confidence and employment have been correlated with demand for developmentcertain of our tenants’ products and redevelopment opportunities enhances shareholder value as pursuing such opportunities may makeservices. If an economic recession returns, it could increase the properties more attractive to new tenants and it improves long-term values and economic returns. We initiated and advanced a number of developmentour tenants that are unable to meet their lease obligations to us and redevelopment activities duringcould limit the third quarter of 2017, including the following:
Holly Springs Towne Center – Phase II Expansion near Raleigh, North Carolina – Phase II of this development is anchored by Bed Bath & Beyond, DSW, and Carmike Theatres. We transitioned Phase II to the operating portfolio in the second quarter of 2016. Subsequently, we began construction on an expansion of Phase II. We have a signed leasedemand for 23,000 square feet with O2 Fitness for this expansion, and we expect to deliver the space in the fourth quarter of 2017.our properties from new tenants.
Eddy Street Commons – Phase II in South Bend, Indiana – Phase II of Eddy Street Commons is a mixed-use development at the University of Notre Dame that will include a retail component, apartments, townhomes, and a community center. The total projected costs for the project are currently $89.2 million. We are in the final stages of entering into a ground sublease with a multi-family developer who will fund the majority of these costs, leaving our share of the projected costs at $8.5 million. The Company has also begun construction of a full-service hotel in Phase I of Eddy Street Commons, which we project will cost $46.0 million to construct. We are in the final stages of negotiating to form and retain a minority interest in an unconsolidated joint venture that will complete and own this hotel. Funding for both Eddy Street Commons projects will include a total of $22.1 million in net tax increment financing proceeds.
Under Construction Redevelopment, Reposition, and Repurpose (“3-R”) Projects. Our 3-R initiative, which includes a total of 13 projects under construction or active evaluation for modification, continued to progress in the third quarter of 2017. There are a total of eight projects currently under construction, which have an estimated combined annualized return of approximately 8% to 9%, with aggregate costs for these projects expected to range from $72.5 million to $79.0 million.
The following significant activities occurred on the 3-R projects during the third quarter of 2017:
| |
◦ | Burnt Store Promenade in Punta Gorda, Florida – We completed construction on a new expanded Publix Supermarket, which opened in July 2017. We expect the remaining shop tenants to open in fourth quarter of 2017 and the first half of 2018. We expect total costs for this project to range between $9 million to $10 million, with an estimated annualized return of approximately 10.5% to 11.5%.
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◦ | Centennial Center in Las Vegas, Nevada – We commenced construction on this project in the third quarter of 2017. This project will include repositioning two retail buildings totaling 14,000 square feet, as well as construction of a new Panera Bread outlot. The project will also include building enhancements and improved access to the main entry point. We expect total costs for this project to range between $4 million to $5 million, with an estimated annualized return of approximately 10.0% to 11.0%.
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LeasingOperating Activity
During the thirdfirst quarter of 2017,2023, we executed 86 new and renewal leases on 144 individual spaces totaling 432,814831,231 square feet.feet (13.0% cash leasing spread on 94 comparable leases). New leases were signed on 3944 individual spaces for 92,089225,651 square feet of gross leasable area ("GLA"(“GLA”) (38.0% cash leasing spread on 17 comparable leases), while renewal leases were signed on 47100 individual spaces for 340,725605,580 square feet of GLA.
ForGLA (10.0% cash leasing spread on 77 comparable leases). Excluding option renewals, the blended cash spreads for comparable new and non-option renewal leases whichwere 21.1%. Comparable new and renewal leases are defined as those for which the space was occupied by a tenant within the last 12 months, we achieved a blended rent spread of 11.1% while incurring $7.06 per square foot of incremental capital improvement costs. The average rent for the 18 new comparable leases signed in the third quarter of 2017 was $28.04 per square foot compared to average expiring rent of $23.58 per square foot. The average rent for the 47 renewal leases signed in the third quarter of 2017 was $17.99 per square foot compared to average expiring rent of $16.40 per square foot.months.
Results of Operations
The comparability of results of operations for the ninethree months ended September 30, 2017March 31, 2023 and 20162022 is affected by our development, redevelopment, and operating property acquisition and disposition activities during these periods. Therefore, we believe it is most useful to review the comparisons of our results of operations for these periods in conjunction with the discussion of our activities during those periods, which is set forth below.
Property Dispositions
Since January 1, 2016, we sold the following operating properties:
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| | | | | | | |
Property Name | | MSA | | Disposition Date | | Owned GLA |
Shops at Otty | | Portland, OR | | June 2016 | | 9,845 |
|
Publix at St. Cloud | | St. Cloud, FL | | December 2016 | | 78,820 |
|
Cove Center | | Stuart, FL | | March 2017 | | 155,063 |
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Clay Marketplace | | Birmingham, AL | | June 2017 | | 63,107 |
|
The Shops at Village Walk | | Fort Myers, FL | | June 2017 | | 78,533 |
|
Wheatland Towne Crossing | | Dallas, TX | | June 2017 | | 194,727 |
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Development Activities
Acquisitions
The following development properties became operational from January 1, 2016 through September 30, 2017:
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| | | | | | | |
Property Name | | MSA | | Transition to Operating Portfolio | | Owned GLA |
Tamiami Crossing | | Naples, FL | | June 2016 | | 121,705 |
|
Holly Springs Towne Center – Phase II | | Raleigh, NC | | June 2016 | | 122,009 |
|
Parkside Town Commons – Phase II | | Raleigh, NC | | June 2017 | | 291,682 |
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Redevelopment Activities
The followingoperating properties were under active redevelopmentacquired at various times during the period from January 1, 20162022 through September 30, 2017:
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| | | | | | | | | | | | | | | | | | | |
| Property Name | | MSAMetropolitan
Statistical Area (MSA) | | Acquisition Date | | GLA |
| Pebble Marketplace | | Las Vegas, NV | | February 16, 2022 | | 85,796 | |
| MacArthur Crossing two-tenant building | | Dallas, TX | | April 13, 2022 | | 56,077 | |
| Palms Plaza | | Miami, FL | | July 15, 2022 | | 68,976 | |
Dispositions
The following operating properties were sold during the period from January 1, 2022 through March 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
| Property Name | | MSA | | Disposition Date | | GLA |
Plaza Del Lago(1) | | Chicago, IL | | June 16, 2022 | | 100,016 | |
Lincoln Plaza – Lowe’s(2) | | Worcester, MA | | October 27, 2022 | | — | |
(1)Plaza Del Lago also contains 8,800 square feet of residential space comprised of 18 multifamily rental units.
(2)We sold the ground lease interest in one tenant at an existing multi-tenant operating retail property. The total number of properties in our portfolio was not affected by this transaction.
Development and Redevelopment Projects
The following properties were under active development or redevelopment at various times during the period from January 1, 2022 through March 31, 2023 and removed from our operating portfolio:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Project Name | | MSA | | Transition to Development or Redevelopment1(1) | | Transition to Operations
Operating Portfolio | | Owned GLA |
Courthouse Shadows2
| | Naples, FL | | June 2013 | | Pending | | 124,802 |
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Hamilton Crossing Centre2(2)(3) | | Indianapolis, IN | | June 2014 | | Pending | | 92,283 |
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City Center2
| | White Plains, NY | | December 2015 | | Pending | | 360,880 |
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Fishers Station2
| | Indianapolis, IN | | December 2015 | | Pending | | 175,229 |
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Beechwood Promenade2
| | Athens, GA | | December 2015 | | Pending | | 348,815 |
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The Corner2
| | Indianapolis, IN | | December 2015 | | Pending | | 26,500 |
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Rampart Commons2
| | Las Vegas, NV | | March 2016 | | Pending | | 79,455 |
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Northdale Promenade3
| | Tampa, FL | | March 2016 | | June 2017 | | 173,862 |
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Burnt Store2
| | Punta Gorda, FL | | June 2016 | | Pending | | 95,795 |
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____________________The Corner(2) | | Indianapolis, IN | | December 2015 | | Pending | | 24,000 | |
1Eddy Street Commons – Phase III | Transition date represents the date the property was transferred from our operating portfolio into redevelopment status. | South Bend, IN | | September 2020 | | March 2022 | | 18,600 | |
2The Landing at Tradition – Phase II | This property has been identified as a redevelopment property and is not included in the operating portfolio or the same property pool. | Port St. Lucie, FL | | September 2021 | | Pending | | 39,900 | |
3Carillon MOB | This property was transitioned to the operating portfolio in the second quarter of 2017; however, it remains excluded from the same property pool because it has not been in the operating portfolio four full quarters after the property was transitioned to operations. | Washington, D.C. | | October 2021 | | Pending | | 126,000 | |
| Circle East | | Baltimore, MD | | October 2021 | | September 2022 | | 82,000 | |
One Loudoun Downtown – Residential and Pads G&H Commercial | | Washington, D.C. | | October 2021 | | Residential: June 2022
Commercial: December 2022 | | 67,000 | |
| Shoppes at Quarterfield | | Baltimore, MD | | October 2021 | | June 2022 | | 58,000 | |
| Edwards Multiplex – Ontario | | Los Angeles, CA | | March 2023 | | Pending | | 124,614 | |
(1)Transition date represents the date the property was transferred from our operating portfolio into redevelopment status. For legacy Retail Properties of America, Inc. (“RPAI”) projects, the transition date represents the later of the date of the closing of the merger (October 2021) and the date the project was transferred into redevelopment status.
(2)This property has been identified as a redevelopment property and is not included in the operating portfolio or the same property pool. The redevelopment projects at Hamilton Crossing Centre and The Corner will include the creation of a mixed-used development.
(3)A portion of the Hamilton Crossing Centre redevelopment was sold in January 2022.
Comparison of Operating Results for the Three Months Ended September 30, 2017March 31, 2023 to the Three Months Ended September 30, 2016March 31, 2022
The following table reflects income statement line items fromchanges in the components of our consolidated statements of operations for the three months ended September 30, 2017March 31, 2023 and 2016. 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | Change |
| Revenue: | | | | | |
| Rental income | $ | 203,063 | | | $ | 190,892 | | | $ | 12,171 | |
| Other property-related revenue | 1,916 | | | 1,190 | | | 726 | |
| Fee income | 1,771 | | | 2,309 | | | (538) | |
| Total revenue | 206,750 | | | 194,391 | | | 12,359 | |
| | | | | |
| Expenses: | | | | | |
| Property operating | 27,314 | | | 25,928 | | | 1,386 | |
| Real estate taxes | 27,183 | | | 26,859 | | | 324 | |
| General, administrative and other | 13,384 | | | 13,309 | | | 75 | |
| Merger and acquisition costs | — | | | 925 | | | (925) | |
| Depreciation and amortization | 108,071 | | | 121,504 | | | (13,433) | |
| | | | | |
| Total expenses | 175,952 | | | 188,525 | | | (12,573) | |
| | | | | |
| Gain on sales of operating properties, net | — | | | 3,168 | | | (3,168) | |
| | | | | |
| Operating income | 30,798 | | | 9,034 | | | 21,764 | |
| Other (expense) income: | | | | | |
| Interest expense | (25,425) | | | (25,514) | | | 89 | |
| Income tax benefit of taxable REIT subsidiary | 29 | | | 71 | | | (42) | |
| | | | | |
| Equity in loss of unconsolidated subsidiaries | (244) | | | (314) | | | 70 | |
| Other income (expense), net | 403 | | | (103) | | | 506 | |
| Net income (loss) | 5,561 | | | (16,826) | | | 22,387 | |
| Net (income) loss attributable to noncontrolling interests | (170) | | | 22 | | | (192) | |
| Net income (loss) attributable to common shareholders | $ | 5,391 | | | $ | (16,804) | | | $ | 22,195 | |
| | | | | | | | | | | | | | | | | |
| Property operating expense to total revenue ratio | 13.2 | % | | 13.3 | % | | |
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| | | | | | | | | | | |
| ($ in thousands) | 2017 | | 2016 | | Net change 2016 to 2017 |
| Revenue: | | | | | |
| Rental income (including tenant reimbursements) | $ | 85,242 |
| | $ | 87,049 |
| | $ | (1,807 | ) |
| Other property related revenue | 1,896 |
| | 2,073 |
| | (177 | ) |
| Total revenue | 87,138 |
| | 89,122 |
| | (1,984 | ) |
| Expenses: | | | | | |
| Property operating | 11,859 |
| | 11,916 |
| | (57 | ) |
| Real estate taxes | 10,826 |
| | 10,690 |
| | 136 |
|
| General, administrative, and other | 5,431 |
| | 5,081 |
| | 350 |
|
| Depreciation and amortization | 42,793 |
| | 45,543 |
| | (2,750 | ) |
| Total expenses | 70,909 |
| | 73,230 |
| | (2,321 | ) |
| Operating income | 16,229 |
| | 15,892 |
| | 337 |
|
| Interest expense | (16,372 | ) | | (17,139 | ) | | 767 |
|
| Income tax benefit (expense) of taxable REIT subsidiary | 33 |
| | (15 | ) | | 48 |
|
| Other expense, net | (94 | ) | | — |
| | (94 | ) |
| Consolidated net loss | (204 | ) | | (1,262 | ) | | 1,058 |
|
| Net income attributable to noncontrolling interests | (418 | ) | | (420 | ) | | 2 |
|
| Net loss attributable to Kite Realty Group Trust common shareholders | $ | (622 | ) | | $ | (1,682 | ) | | $ | 1,060 |
|
| | | | | | |
| Property operating expense to total revenue ratio | 13.6 | % | | 13.4 | % | | |
Rental income (including tenant reimbursements) decreased $1.8increased $12.2 million, or 2.1%6.4%, due to the following:following (in thousands):
|
| | | |
| ($ in thousands) | Net change 2016 to 2017 |
| Properties sold during 2016 and 2017 | $ | (2,468 | ) |
| Properties under redevelopment during 2016 and/or 2017 | (1,207 | ) |
| Properties fully operational during 2016 and 2017 and other | 1,868 |
|
| Total | $ | (1,807 | ) |
| | | | | |
| Net change three months ended March 31, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (960) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 4,163 | |
| Properties fully operational during 2022 and 2023 and other | 8,968 | |
| Total | $ | 12,171 | |
The net increase of $1.9$9.0 million in rental income for properties that were fully operational during 20162022 and 2017 is primarily attributable to an increase in rental rates and an increase in occupancy, which leads to more tenants paying rent and higher expense reimbursements. The increase in rental revenue2023 is primarily due to multiple anchorincreases in the following: (i) base minimum rent of $6.3 million, (ii) tenant reimbursements of $2.9 million due to higher recoverable common area maintenance expenses and small shop tenants opening as we completed orreal estate taxes, and (iii) overage rent of $1.0 million due to improved tenant performance. These variances were partially completed various redevelopment and repositioning projects includingoffset by an expanded Publix Supermarket at Burnt Store Promenade, Trader Joe's at Centennial Gateway, Party City at Market Street Village, Marshalls at Bolton Plaza, Ulta Salon at Pine Ridge Crossing, Tuesday Morning at Northdale Promenade, Petco at Hitchcock Plaza, Petsmart at Tarpon Bay Plaza, Buy Buy Baby at Cool Springs Market, Five Below at Shops at Moore and new small shop buildings at Castleton Crossing and Portofino Shopping Center.
The increase in rental rates is evidenced bybad debt expense of $1.2 million and lower lease termination fees of $0.3 million. The occupancy of the average rentfully operational properties increased from 90.4% for new comparable leases signed in the third quarter of 2017 increasing2022 to $28.04 per square foot compared to average expiring rent of $23.58 per square foot. The average rent92.3% for renewals signed in the third quarter of 2017 was $17.99 per square foot compared to average expiring rent of $16.40 per square foot in that quarter. For our total retail operating portfolio, annualized base rent per square foot improved to $16.01 per square foot as of September 30, 2017, up from $15.42 as of September 30, 2016.2023.
Other property relatedproperty-related revenue primarily consists of parking revenues, overage rent, lease termination income and gains on salesthe sale of undepreciated assets.land and other miscellaneous activity. This revenue decreasedincreased by $0.2$0.7 million primarily due to lower gains on salesas a result of undepreciated assets of $0.4 million and a decrease of $0.2 million in overage rent, partially offset by an increaseinsurance recovery proceeds of $0.3 million received during the three months ended March 31, 2023 and an increase in lease terminationancillary income.
We recorded fee income of $1.8 million and $2.3 million during the three months ended March 31, 2023 and 2022, respectively, from property management and development services provided to third parties and unconsolidated joint ventures. The decrease in fee income is primarily related to a decrease in development fees earned related to the development of a corporate campus for Republic Airways at Hamilton Crossing Centre.
Property operating expenses decreased $0.1increased $1.4 million, or 0.5%5.3%, due to the following:following (in thousands):
|
| | | |
| ($ in thousands) | Net change 2016 to 2017 |
| Properties sold during 2016 and 2017 | $ | (401 | ) |
| Properties under redevelopment during 2016 and/or 2017 | 234 |
|
| Properties fully operational during 2016 and 2017 and other | 110 |
|
| Total | $ | (57 | ) |
| | | | | |
| Net change three months ended March 31, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (53) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 400 | |
| Properties fully operational during 2022 and 2023 and other | 1,039 | |
| Total | $ | 1,386 | |
The net increase of $0.1$1.0 million in property operating expenses for properties that were fully operational during 20162022 and 20172023 is primarily due to a combinationincreases of increases$0.5 million in bad debt expense primarily related to certain tenant bankruptcies, utilityinsurance expense and non-recoverable landscaping expense asand a result of hurricane damages$0.2 million increase in Florida,utilities, partially offset by decreasesa $0.3 million decrease in general building repairrepairs and security expense at certain properties. None of the individual fluctuations were greater than $0.2 million.
maintenance. As a percentage of revenue, property operating expenses increased between periodsdecreased from 13.4%13.3% to 13.6%. The increase was mostly13.2% due to an increase in non-recoverable landscaping expense as a result of hurricane damagesrevenue in Florida.2023.
Real estate taxes increased $0.1$0.3 million, or 1.3%1.2%, due to the following:following (in thousands):
|
| | | |
| ($ in thousands) | Net change 2016 to 2017 |
| Properties sold during 2016 and 2017 | $ | (336 | ) |
| Properties under redevelopment during 2016 and/or 2017 | 36 |
|
| Properties fully operational during 2016 and 2017 and other | 436 |
|
| Total | $ | 136 |
|
| | | | | |
| Net change three months ended March 31, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (443) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 190 | |
| Properties fully operational during 2022 and 2023 and other | 577 | |
| Total | $ | 324 | |
The net $0.4increase of $0.6 million increase in real estate taxes for properties that were fully operational during 20162022 and 20172023 is primarily due to an increaselower real estate tax refunds received in current year2023, partially offset by a decrease in real estate tax assessments at certain operating properties compared toin the same periodportfolio in 2016.2023. The majority of real estate tax expense is recoverable from tenants and such recovery is reflected in tenant reimbursement revenue.
within rental income.
General, administrative and other expenses increased $0.4$0.1 million, or 6.9%0.6%. TheThis increase is primarily due primarily to higher personnelcompensation expense, offset by lower head count than the comparative period.
The Company did not incur any significant merger and acquisition costs related to the merger with RPAI during the three months ended March 31, 2023. The Company incurred $0.9 million of merger and company overhead expenses.acquisition costs during the three months ended March 31, 2022, primarily consisting of professional fees and technology costs.
Depreciation and amortization expense decreased $2.8$13.4 million, or 6.0%11.1%, due to the following:following (in thousands):
|
| | | |
| ($ in thousands) | Net change 2016 to 2017 |
| Properties sold during 2016 and 2017 | $ | (1,293 | ) |
| Properties under redevelopment during 2016 and/or 2017 | (2,077 | ) |
| Properties fully operational during 2016 and 2017 and other | 620 |
|
| Total | $ | (2,750 | ) |
| | | | | |
| Net change three months ended March 31, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (586) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | (1,271) | |
| Properties fully operational during 2022 and 2023 and other | (11,576) | |
| Total | $ | (13,433) | |
The $2.1 million net decrease in depreciation and amortization for properties under redevelopment during 2016 and 2017 is primarily due to a decrease of $1.8 million in accelerated depreciation and amortization from the demolition of a portion of a building at our Burnt Store Promenade redevelopment property in 2016 and a decrease of $1.3 million in accelerated depreciation and amortization on tenant-specific assets caused by tenants vacating prior to their lease expiration in 2017, compared to the same period in 2016. These decreases were offset by an increase of $1.0 million of accelerated depreciation due to the demolition of a building at our Fishers Station redevelopment property in preparation for the construction of the space for the replacement anchor tenant. The net increase of $0.6$11.6 million in depreciation and amortization at properties that were fully operational during 20162022 and 20172023 is primarily due to accelerated depreciation and amortization on tenant-specificcertain assets caused by tenants vacating prior to their lease expiration in 2017, compared to the same period in 2016.with shorter useful lives that became fully depreciated during 2022.
Interest expense decreased $0.8$0.1 million, or 4.5%. The decrease is0.3%, primarily due to the repayment of property level debt using proceeds from our property sales. The decrease wasfavorable interest rate swaps, partially offset by certain development projects,higher interest costs related to our variable rate debt, including Tamiami Crossing, Parkside Town Commons - Phase II and Holly Springs Towne Center - Phase II becoming operational throughout 2016. As a portion of a development project becomes operational, we cease capitalization of the related interest expense.
Comparison of Operating Results for the Nine Months Ended September 30, 2017 to the Nine Months Ended September 30, 2016
The following table reflects income statement line items from our consolidated statements of operations for the nine months ended September 30, 2017 and 2016.
|
| | | | | | | | | | | |
| ($ in thousands) | 2017 | | 2016 | | Net change 2016 to 2017 |
| Revenue: | | | | | |
| Rental income (including tenant reimbursements) | $ | 259,674 |
| | $ | 258,127 |
| | $ | 1,547 |
|
| Other property related revenue | 10,226 |
| | 7,120 |
| | 3,106 |
|
| Total revenue | 269,900 |
| | 265,247 |
| | 4,653 |
|
| Expenses: | | | | | |
| Property operating | 36,950 |
| | 35,454 |
| | 1,496 |
|
| Real estate taxes | 32,384 |
| | 32,327 |
| | 57 |
|
| General, administrative, and other | 16,389 |
| | 15,228 |
| | 1,161 |
|
| Transaction costs | — |
| | 2,771 |
| | (2,771 | ) |
| Impairment charge | 7,411 |
| | — |
| | 7,411 |
|
| Depreciation and amortization | 131,333 |
| | 131,625 |
| | (292 | ) |
| Total expenses | 224,467 |
| | 217,405 |
| | 7,062 |
|
| Operating income | 45,433 |
| | 47,842 |
| | (2,409 | ) |
| Interest expense | (49,250 | ) | | (47,964 | ) | | (1,286 | ) |
| Income tax benefit (expense) of taxable REIT subsidiary | 64 |
| | (763 | ) | | 827 |
|
| Other expense, net | (314 | ) | | (94 | ) | | (220 | ) |
| Loss from continuing operations | (4,067 | ) | | (979 | ) | | (3,088 | ) |
| Gains on sales of operating properties | 15,160 |
| | 194 |
| | 14,966 |
|
| Consolidated net income (loss) | 11,093 |
| | (785 | ) | | 11,878 |
|
| Net income attributable to noncontrolling interests | (1,528 | ) | | (1,391 | ) | | (137 | ) |
| Net income (loss) attributable to Kite Realty Group Trust common shareholders | $ | 9,565 |
| | $ | (2,176 | ) | | $ | 11,741 |
|
| | | | | | |
| Property operating expense to total revenue ratio | 13.7 | % | | 13.4 | % | | |
Rental income (including tenant reimbursements) increased $1.5 million, or 0.6%, due to the following:
|
| | | |
| ($ in thousands) | Net change 2016 to 2017 |
| Properties sold during 2016 and 2017 | $ | (4,189 | ) |
| Properties under redevelopment during 2016 and/or 2017 | (1,465 | ) |
| Properties fully operational during 2016 and 2017 and other | 7,201 |
|
| Total | $ | 1,547 |
|
The net increase of $7.2 million in rental income for properties fully operational during 2016 and 2017 is primarily attributable to an increase in rental rates and an increase in occupancy, which leads to more tenants paying rent. The increase in rental revenue is primarily due to multiple anchor and small shop tenants opening as we completed or partially completed various redevelopment and repositioning projects including an expanded Publix Supermarket at Burnt Store Promenade, Carmike Cinemas at Holly Springs Towne Center - Phase II, Ross Dress for Less and Michaels at Tamiami Crossing, Trader Joe's at Centennial Gateway, Party City at Market Street Village, Marshalls at Bolton Plaza, Ulta Salon at Pine Ridge Crossing, Tuesday Morning at Northdale Promenade, Petco at Hitchcock Plaza, Petsmart at Tarpon Bay Plaza, Buy Buy Baby at Cool Springs Market, Five Below at Shops at Moore and new small shop buildings at Castleton Crossing and Portofino Shopping Center.
The average rent for new comparable leases signed in the first nine months of 2017 was $21.85 per square foot compared to average expiring rent of $17.58 per square foot in that period. The average rent for renewals signed in the first nine months of 2017 was $16.55 per square foot compared to average expiring rent of $15.42 per square foot in that quarter. For our total retail operating portfolio, annualized base rent per square foot improved to $16.01 per square foot as of September 30, 2017, up from $15.42 as of September 30, 2016.
Other property related revenue primarily consists of parking revenues, overage rent, lease termination income and gains on sales of undepreciated assets. This revenue increased by $3.1 million, primarily as a result of higher gains on sales of undepreciated assets of $1.7 million (including the effect of a $4.9 million gainborrowings on the sale of an outlotRevolving Facility that were used to repay mortgages payable at Cove Center during the second quarter of 2017) and an increase of $1.2 million in lease termination income.
Property operating expenses increased $1.5 million, or 4.2%, due to the following:
|
| | | |
| ($ in thousands) | Net change 2016 to 2017 |
| Properties sold during 2016 and 2017 | $ | (754 | ) |
| Properties under redevelopment during 2016 and/or 2017 | 197 |
|
| Properties fully operational during 2016 and 2017 and other | 2,053 |
|
| Total | $ | 1,496 |
|
The net increase of $2.1 million in property operating expenses for properties fully operational during 2016 and 2017 is primarily due to a combination of increases of $0.8 million in bad debt expense driven by certain anchor bankruptcies in 2017, $0.8 million in general building repair and landscaping costs at certain properties, $0.3 million in utility expense, $0.2 million in marketing expense, and $0.1 million in non-recoverable landscaping expense as a result of hurricane damages in Florida. The increases were partially offset by a decrease of $0.3 million in insurance expense.
As a percentage of revenue, property operating expenses increased between years from 13.4% to 13.7%. The increase was mostly due to an increase in certain non-recoverable expenses including bad debt provision, non-recoverable utility expense at several of our properties, and marketing expenses.
Real estate taxes increased $0.1 million, or 0.2%, due to the following:
|
| | | |
| ($ in thousands) | Net change 2016 to 2017 |
| Properties sold during 2016 and 2017 | $ | (584 | ) |
| Properties under redevelopment during 2016 and/or 2017 | 73 |
|
| Properties fully operational during 2016 and 2017 and other | 568 |
|
| Total | $ | 57 |
|
The net $0.6 million increase in real estate taxes for properties fully operational during 2016 and 2017 is primarily due to an increase in current year tax assessments at certain operating properties. The majority of real estate tax expense is recoverable from tenants and such recovery is reflected in tenant reimbursement revenue.
General, administrative and other expenses increased $1.2 million, or 7.6%. The increase is due primarily to higher personnel costs and company overhead expenses, which are partially offset by the severance charge of $0.5 million in 2016.
Transaction costs decreased by $2.8 million, as we did not incur any transaction costs for the nine months ended September 30, 2017.
During the three months ended March 31, 2017, we recorded an impairment charge of $7.4 million related to one of our operating properties. In connection with the preparation and review of the March 31, 2017 financial statements, we evaluated this property for impairment due to the shortening of the intended holding period. We concluded the estimated undiscounted cash flows over the expected holding period did not exceed the carrying value of the asset. Our assessment of this property resulted in the recording of a non-cash impairment charge for the three months ended March 31, 2017. See additional discussion in Note 10 to the consolidated financial statements.
Depreciation and amortization expense decreased $0.3 million, or 0.2%, due to the following:
|
| | | |
| ($ in thousands) | Net change 2016 to 2017 |
| Properties sold during 2016 and 2017 | $ | (2,414 | ) |
| Properties under redevelopment during 2016 and/or 2017 | 1,287 |
|
| Properties fully operational during 2016 and 2017 and other | 835 |
|
| Total | $ | (292 | ) |
The net increase of $1.3 million in properties under redevelopment during 2016 and 2017 is primarily due to $4.5 million of accelerated depreciation and amortization from the demolition of a building at our Fishers Station redevelopment property in preparation for the replacement anchor tenant. This increase was partially offset by $2.0 million of accelerated depreciation and amortization from the demolition of a portion of a building at our Burnt Store Promenade operating property in 2016 and a decrease of $1.4 million in accelerated depreciation and amortization on tenant-specific assets caused by tenants vacating prior to their lease expiration in 2016, compared to the same period in 2017. The net increase of $0.8 million in depreciation and amortization at properties fully operational during 2016 and 2017 is primarily due to accelerated depreciation and amortization on tenant-specific assets caused by tenants vacating prior to their lease expiration in 2017, compared to the same period in 2016.
Interest expense increased $1.3 million or 2.7%. The increase is due to securing longer-term fixed rate debt through the issuance of senior unsecured notes in the third quarter of 2016 that carried higher interest rates than the variable rate on our unsecured revolving credit facility and certain property level secured debt, which were paid down or retired with the proceeds. The increase is also due to certain development projects, including Tamiami Crossing, Parkside Town Commons - Phase II and Holly Springs Towne Center - Phase II, becoming operational or partially operational throughout 2016. As a portion of a development project becomes operational, we cease capitalization of the related interest expense.
We recorded an income tax benefit of our taxable REIT subsidiary of less than $0.1 million compared to an income tax expense of our taxable REIT subsidiary of $0.8 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease is primarily due to lower gains on sales of residential units at Eddy Street Commons for the nine months ended September 30, 2017, compared to the same period in 2016. The last of the units in Phase I were sold in 2016.
We recorded a net gain of $15.2 million on the sale of our Cove Center, Clay Marketplace, The Shops at Village Walk and Wheatland Towne Center operating properties for the nine months ended September 30, 2017.
maturity.
Net Operating Income and Same Property Net Operating Income
We use property net operating income (“NOI”), a non-GAAP financial measure, to evaluate the performance of our properties. We define NOI as income from our real estate, including lease termination fees received from tenants, less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions and certain corporate level expenses.expenses, including merger and acquisition costs. We believe that NOI is helpful to investors as a measure of our operating 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 depreciation and amortization, interest expense, and impairment, if any.
We also use same property NOI ("(“Same Property NOI"NOI”), a non-GAAP financial measure, to evaluate the performance of our properties. Same Property NOI excludesis net income excluding properties that have not been owned for the full periodperiods presented. ItSame Property NOI also excludes (i) net gains from outlot sales, (ii) straight-line rent revenue, bad debt expense and recoveries,(iii) lease termination fees,income in excess of lost rent, (iv) amortization of lease intangibles, and (v) significant prior period expense recoveries and adjustments, if any. When we receive payments in excess of any accounts receivable for terminating a lease, Same Property NOI will include such excess payments as monthly rent until the earlier of the expiration of 12 months or the start date of a replacement tenant. We believe that Same Property NOI is helpful to investors as a measure of our operating performance because it includes only the NOI of properties that have been owned for the full period presented, whichperiods presented. We believe such presentation eliminates disparities in net income due to the acquisition or disposition of properties during the particular periodperiods presented, and thus provides a more consistent metric for the comparison of our properties. TheSame Property NOI includes the results of properties that have been owned for the entire current and prior year to date results represent the sum of the individual quarters, as reported.
reporting periods.
NOI and Same Property NOI should not, however, be considered as alternatives to net income (calculated in accordance with GAAP) as indicators of our financial performance. Our computation of NOI and Same Property NOI may differ from the methodology used by other REITs and, therefore, may not be comparable to such other REITs.
When evaluating the properties that are included in the same property pool, we have established specific criteria for determining the inclusion of properties acquired or those recently under development. An acquired property is included in the same property pool when there is a full quarter of operations in both years subsequent to the acquisition date. Development and redevelopment properties are included in the same property pool four full quarters after the properties have been transferred to the operating portfolio. A redevelopment property is first excluded from the same property pool when the execution of a
redevelopment plan is likely and we (a) begin recapturing space from tenants. tenants or (b) the contemplated plan significantly impacts the operations of the property.
For the three and nine months ended September 30, 2017 and 2016, we excluded eight redevelopment properties and the recently completed Northdale Promenade redevelopment fromMarch 31, 2023, the same property pool that met these criteriaexcludes the following:
•properties acquired or placed in service during 2022 and 2023;
•the multifamily rental units and commercial portion at One Loudoun Downtown – Pads G & H;
•Shoppes at Quarterfield and Circle East, which were ownedreclassified from active redevelopment into our operating portfolio in both comparable periods.June 2022 and September 2022, respectively;
•three active development and redevelopment projects;
•Edwards Multiplex – Ontario, which was reclassified from our operating portfolio into redevelopment in March 2023;
•properties sold or classified as held for sale during 2022 and 2023; and
•office properties.
The following table reflectspresents Same Property NOI and a reconciliation to net income (loss) attributable to common shareholders for the three and nine months ended March 31, 2023 and 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | Change | | | | | | |
Number of properties in same property pool for the period(1) | 177 | | | 177 | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Leased percentage at period end | 94.9 | % | | 93.8 | % | | | | | | | | |
Economic occupancy percentage(2) | 92.3 | % | | 90.4 | % | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Same Property NOI | $ | 139,009 | | | $ | 130,477 | | | 6.5 | % | | | | | | |
| | | | | | | | | | | |
Reconciliation of Same Property NOI to most directly comparable GAAP measure: | | | | | | | | | | | |
| Net operating income – same properties | $ | 139,009 | | | $ | 130,477 | | | | | | | | | |
| | | | | | | | | | | |
Net operating income – non-same activity(3) | 11,473 | | | 8,818 | | | | | | | | | |
| Total property NOI | 150,482 | | | 139,295 | | | 8.0 | % | | | | | | |
| Other income, net | 1,959 | | | 1,963 | | | | | | | | | |
| General, administrative and other | (13,384) | | | (13,309) | | | | | | | | | |
| Merger and acquisition costs | — | | | (925) | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Depreciation and amortization | (108,071) | | | (121,504) | | | | | | | | | |
| Interest expense | (25,425) | | | (25,514) | | | | | | | | | |
| Gain on sales of operating properties, net | — | | | 3,168 | | | | | | | | | |
| Net (income) loss attributable to noncontrolling interests | (170) | | | 22 | | | | | | | | | |
| Net income (loss) attributable to common shareholders | $ | 5,391 | | | $ | (16,804) | | | | | | | | | |
(1)Same Property NOI excludes the following: (i) properties acquired or placed in service during 2022 and 2023; (ii) the multifamily rental units and commercial portion at One Loudoun Downtown – Pads G & H; (iii) Shoppes at Quarterfield and Circle East, which were reclassified from active redevelopment into our operating portfolio in June 2022 and September 30, 20172022, respectively; (iv) three active development and 2016:redevelopment projects; (v) Edwards Multiplex – Ontario, which was reclassified from our operating portfolio into redevelopment in March 2023; (vi) properties sold or classified as held for sale during 2022 and 2023; and (vii) office properties.
(2)Excludes leases that are signed but for which tenants have not yet commenced the payment of cash rent; calculated as a weighted average based on the timing of cash rent commencement and expiration during the period.
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| ($ in thousands) | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Number of properties for the quarter1 | 104 |
| | 104 |
| | | |
|
| |
|
| | |
| | | | | | | | | | | | |
| Leased percentage at period end | 94.4 | % | | 95.1 | % | | | | 94.4 | % | | 95.1 | % | | |
Economic Occupancy percentage2 | 93.5 | % | | 92.8 | % | | | | 93.7 | % | | 92.9 | % | | |
| | | | | | | | | | | | |
Same Property NOI3 | $ | 55,249 |
| | $ | 53,320 |
| | 3.6% | | $ | 165,836 |
| | $ | 160,516 |
| | 3.3% |
| Same Property NOI - excluding the impact of the 3-R initiative | | | | | 3.9% | | | | | | 3.9% |
| | | | | | | | | | | | |
| Reconciliation of Same Property NOI to Most Directly Comparable GAAP Measure: | |
| | |
| | | | |
| | |
| | |
| Net operating income - same properties | $ | 55,249 |
| | $ | 53,320 |
| | | | $ | 165,836 |
| | $ | 160,516 |
| | |
Net operating income - non-same activity4 | 9,614 |
| | 13,561 |
| | | | 36,611 |
| | 38,191 |
| | |
| Provision for bad debts - same properties | (410 | ) | | (365 | ) | | | | (1,881 | ) | | (1,241 | ) | | |
| Other expense, net | (61 | ) | | (15 | ) | | | | (250 | ) | | (857 | ) | | |
| General, administrative and other | (5,431 | ) | | (5,081 | ) | | | | (16,389 | ) | | (15,228 | ) | | |
| Transaction costs | — |
| | — |
| | | | — |
| | (2,771 | ) | | |
| Impairment charge | — |
| | — |
| | | | (7,411 | ) | | — |
| | |
| Depreciation and amortization expense | (42,793 | ) | | (45,543 | ) | | | | (131,333 | ) | | (131,625 | ) | | |
| Interest expense | (16,372 | ) | | (17,139 | ) | | | | (49,250 | ) | | (47,964 | ) | | |
| Gains on sales of operating properties | — |
| | — |
| | | | 15,160 |
| | 194 |
| | |
| Net income attributable to noncontrolling interests | (418 | ) | | (420 | ) | | | | (1,528 | ) | | (1,391 | ) | | |
| Net (loss) income attributable to common shareholders | $ | (622 | ) | | $ | (1,682 | ) | | | | $ | 9,565 |
| | $ | (2,176 | ) | | |
|
| | | | | | | | | | | | |
____________________ |
1 | Same Property NOI excludes eight properties in redevelopment, the recently completed Northdale Promenade redevelopment as well as office properties (Thirty South Meridian and Eddy Street Commons). |
2 | Excludes leases that are signed but for which tenants have not yet commenced the payment of cash rent. Calculated as a weighted average based on the timing of cash rent commencement and expiration during the period. |
3 | Same Property NOI excludes net gains from outlot sales, straight-line rent revenue, bad debt expense and recoveries, lease termination fees, amortization of lease intangibles and significant prior period expense recoveries and adjustments, if any. |
4 | Includes non-cash activity across the portfolio as well as net operating income from properties not included in the same property pool. |
(3)Includes non-cash activity across the portfolio as well as NOI from properties not included in the same property pool, including properties sold during both periods.
Our Same Property NOI increased 3.6%6.5% for the three months ended September 30, 2017 and 3.3% for the nine months ended September 30, 2017March 31, 2023 compared to the same periodsperiod of the prior year. This increase wasyear primarily due to increases in rental rates and an improvement in economic occupancy causedhigher base rent driven by the completion of several 3-R projects since the third quarter of 2016. We also realized a $0.3 million improvement from expense control and operating expense recovery resulting in an improvement in net recoveries for the nine months ended September 30, 2017.
Liquidity and Capital Resources
Overview
Our primary finance and capital strategy is to maintain a strong balance sheet with sufficient flexibility to fund our operating and investment activities in a cost-effective manner. We consider a number of factors when evaluating our level of indebtedness
and when making decisions regarding additional borrowings or equity offerings, including the estimated value of properties to be developed or acquired, the estimated market value of our properties and the Company as a whole upon placement of the borrowing or offering, and the ability of particular properties to generate cash flow to cover debt service. We will continue to monitor the capital markets and may consider raising additional capital through the issuance of our common or preferred shares, unsecured debt securities, or other securities.
Our Principal Capital Resources
For a discussion of cash generated from operations, see “Cash Flows,” beginning on page 36. In addition to cash generated from operations, we discuss below our other principal capital resources.
The increased operating cash flows of the Company have enhanced our liquidity position and reduced our borrowing costs. We continue to focus on a balanced approach to growth and staggering debt maturities in order to retain our financial flexibility.
As of September 30, 2017, we had approximately $394.1 million available under our unsecured revolving credit facility for future borrowings based on the unencumbered property pool allocated to the unsecured revolving credit facility. We also had $32.5 million in cash and cash equivalents as of September 30, 2017.
We were in compliance with all applicable financial covenants under our unsecured revolving credit facility, our unsecured term loans and our senior unsecured notes as of September 30, 2017.
We have on file with the SEC a shelf registration statement on Form S-3 relating to the offer and sale, from time to time, of an indeterminate amount of equity and debt securities. Equity securities may be offered and sold by the Parent Company, and the net proceeds of any such offerings would be contributed to the Operating Partnership in exchange for additional General Partner Units. Debt securities may be offered and sold by the Operating Partnership with the Operating Partnership receiving the proceeds. From time to time, we may issue securities under this shelf registration statement to fund the repayment of long-term debt upon maturity and for other general corporate purposes.
We currently have an at-the-market equity program that allows the Parent Company to issue new common shares from time to time, with an aggregate offering price of up to $250.0 million. We have $245.9 million remaining available for future common share issuances under our current at-the-market equity program.
In the future, we will continue to monitor the capital markets and may consider raising additional capital through the issuance of our common shares, preferred shares or other securities. We may also raise capital by disposing of properties, land parcels or other assets that are no longer core components of our growth strategy. The sale price may differ from our carrying value at the time of sale.
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, an economic downturn could adversely affect the ability of some of our tenants to meet their lease obligations.
Our Principal Liquidity Needs
Short-Term Liquidity Needs
Near-Term Debt Maturities. As of September 30, 2017, we had $38.1 million of secured debt scheduled to mature prior to September 30, 2018, excluding scheduled monthly principal payments. We believe we have sufficient liquidity to repay these obligations from current resources and our capacity for future borrowings under the unsecured revolving credit facility.
Other Short-Term Liquidity Needs. The requirements for qualifying as a REIT and for a tax deduction for some or all of the dividends paid to shareholders necessitate that we distribute at least 90% of our taxable income on an annual basis. Such requirements 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 to our common shareholders and to Common Unit holders, and recurring capital expenditures.
In August 2017, our Board of Trustees declared a cash distribution of $0.3025 per common share and Common Unit for the third quarter of 2017. This distribution was paid on October 13, 2017 to common shareholders and Common Unit holders of record as of October 6, 2017. Future distributions, if any, are at the discretion of the Board of Trustees.
Other short-term liquidity needs include expenditures for tenant improvements, external leasing commissions and recurring capital expenditures. During the nine months ended September 30, 2017, we incurred $2.2 million of costs for recurring capital expenditures on operating properties and also incurred $13.4 million of costs for tenant improvements and external leasing commissions (excluding development and redevelopment properties). We currently anticipate incurring approximately $14 million to $16 million of additional major tenant improvements and renovation costs within the next 12 months at a number of our operating properties.
We received notice from one of our joint venture partners exercising its right to redeem $8.3 million of its noncontrolling interests that became redeemable in March 2017. We expect to fund the redemption using cash prior to December 27, 2017. See further discussion in Note 2 to the consolidated financial statements.
As of September 30, 2017, we had two development projects under construction. The total estimated cost of these projects is approximately $11.1 million, of which $2.1 million had been incurred as of September 30, 2017. We anticipate incurring the majority of the remaining $9.0 million of costs over the next 12 to 18 months. In addition, we have begun construction of a full-service hotel at Phase I of Eddy Street Commons, which we project will cost $40 million, net of Tax Increment Financing of $6.0 million, and the Company is in negotiations to form and retain a minority interest in an unconsolidated joint venture to complete and own the hotel. We believe we have sufficient financing in place to fund these projects and expect to do so through cash flow from operations or borrowings on our unsecured revolving credit facility.
We have eight properties in our 3-R initiative that are currently under construction. Total estimated costs of this construction are expected to be in the range of $72.5 million to $79.0 million and are expected to be incurred through the end of 2018. We expect to be able to fund the majority of these costs from operating cash flows.
Long-Term Liquidity Needs
Our long-term liquidity needs consist primarily of funds necessary to pay for any new development projects, redevelopment of existing properties, non-recurring capital expenditures, acquisitions of properties, and payment of indebtedness at maturity.
Potential Redevelopment, Reposition, Repurpose Opportunities. We are currently evaluating additional redevelopment, repositioning, and repurposing of several other operating properties as part of our 3-R initiative. Total estimated costs of these properties are currently expected to be in the range of $45 million to $61 million. We believe we will have sufficient funding for these projects through cash flow from operations and borrowings on our unsecured revolving credit facility.
Selective Acquisitions, Developments and Joint Ventures. We may selectively pursue the acquisition and development of other properties, which would require additional capital. It is unlikely that we would have sufficient funds on hand to meet these long-term capital requirements. We would have to satisfy these needs through additional borrowings, sales of common or preferred shares, issuance of Operating Partnership units, cash generated through property dispositions or future property acquisitions and/or participation in joint venture arrangements. We cannot be certain that we would have access to these sources of capital on satisfactory terms, if at all, to fund our long-term liquidity requirements. We evaluate all future opportunities against pre-established criteria including, but not limited to, location, demographics, expected return, tenant credit quality, tenant relationships, and amount of existing retail space. Our ability to access the capital markets will be dependent on a number of factors, including general capital market conditions.
Capital Expenditures on Consolidated Properties
The following table summarizes cash capital expenditures for our development and redevelopment properties and other capital expenditures for the nine months ended September 30, 2017:
|
| | | |
| | Year to Date – |
($ in thousands) | September 30,
2017 |
| Development Projects | $ | 2,003 |
|
| Under Construction 3-R Projects | 29,032 |
|
| 3-R Opportunities | 1,848 |
|
Recently completed developments/redevelopments and other1 | 12,581 |
|
| Recurring operating capital expenditures (primarily tenant improvement payments) | 14,239 |
|
| Total | $ | 59,703 |
|
|
| |
____________________ |
1 | This classification includes Parkside Town Commons - Phase II, Holly Springs Towne Center - Phase II, Tamiami Crossing and Northdale Promenade. |
We capitalize certain indirect costs such as interest, payroll, and other general and administrative costs related to these development activities. If we were to experience a 10% reduction in development and redevelopment activities, without a corresponding decrease in indirect project costs, we would have recorded additional expense of $0.1 million and $0.2 million for the three and nine months ended September 30, 2017.
Debt Maturities
The following table presents maturities of mortgage debt and corporate debt as of September 30, 2017:
|
| | | | | | | | | | | |
($ in thousands) | Scheduled Principal Payments | | Term Maturity1 | | Total |
| 2017 | $ | 1,241 |
| | $ | — |
| | $ | 1,241 |
|
| 2018 | 5,635 |
| | 37,584 |
| | 43,219 |
|
| 2019 | 5,975 |
| | — |
| | 5,975 |
|
| 2020 | 5,920 |
| | 42,339 |
| | 48,259 |
|
| 2021 | 4,624 |
| | 400,975 |
| | 405,599 |
|
| Thereafter | 8,349 |
| | 1,170,248 |
| | 1,178,597 |
|
| | $ | 31,744 |
| | $ | 1,651,146 |
| | $ | 1,682,890 |
|
| Unamortized net debt premiums and issuance costs, net | |
| | |
| | (1,214 | ) |
| Total | |
| | |
| | $ | 1,681,676 |
|
|
| |
____________________ |
1 | This presentation reflects the Company's exercise of its option to extend the maturity date by one year to July 28, 2021 for the Company's unsecured credit facility. |
Failure to comply with our obligations under our indebtedness agreements (including our payment obligations) could cause an event of default under such debt, which, among other things, could result in the loss of title to assets securing such debt, the acceleration of principal and interest payments or the termination of the debt facilities, or exposure to the risk of foreclosure. In addition, certain of our variable rate loans contain cross-default provisions which provide that a violation by us of any financial covenant set forth in our unsecured revolving credit facility agreement will constitute an event of default under the loans, which could allow the lenders to accelerate the amounts due under our indebtedness agreements if we fail to satisfy these financial covenants. See “Item 1.A Risk Factors – Risks Related to Our Operations” in Kite Realty Group Trust's Annual Report on Form 10-K for the year ended December 31, 2016 for more information related to the risks associated with our indebtedness.
Impact of Changes in Credit Ratings on Our Liquidity
We have been assigned investment grade corporate credit ratings from two nationally recognized credit rating agencies. These ratings remain unchanged as of September 30, 2017.
In the future, the ratings could change based upon, among other things, the impact that prevailing economic conditions may have on our results of operations and financial condition. Credit rating reductions by one or more rating agencies could also adversely affect our access to funding sources, the cost and other terms of obtaining funding, as well as our overall financial condition, operating results and cash flow.
Cash Flows
As of September 30, 2017, we had cash and cash equivalents on hand of $32.5 million. We may be subject to concentrations of credit risk with regard to our cash and cash equivalents. We place our cash and short-term cash investments with highly rated financial institutions. While we attempt to limit our exposure at any point in time, occasionally, such cash and investments may temporarily be in excess of FDIC and SIPC insurance limits. We also maintain certain compensating balances in several financial institutions in support of borrowings from those institutions. Such compensating balances were not material to the consolidated balance sheets.
Comparison of the Nine Months Ended September 30, 2017 to the Nine Months Ended September 30, 2016
Cash provided by operating activities was $122.1 million for the nine months ended September 30, 2017, an increase of $1.4 million from the same period of 2016. The increase was primarily due to an improvement in the collection of outstanding account receivables, the completion of several 3-R projects, and higher revenue on sales of undepreciated assets in 2017, partially offset by a decrease in cash provided by operating activities due to our 2017 property sales.
Cash provided by investing activities was $23.1 million for the nine months ended September 30, 2017, as compared to cash used in investing activities of $67.1 million in the same period of 2016. Highlights of significant cash sources and uses in investing activities are as follows:
Net proceeds of $76.1 million related to the sale of Cove Center in March 2017 and Clay Marketplace, The Shops at Village Walk and Wheatland Towne Crossing in June 2017, compared to net proceeds of $0.1 million over the same period in 2016;
Decrease in capital expenditures of $8.6 millionoccupancy and an increase in construction payables of $6.7 million. In 2017, we incurred additional construction costs at our Parkside Towne Commons - Phase II and Holly Springs Towne Center - Phase II development projects, and additional construction costs at several of our redevelopment properties.overage rent.
Cash used in financing activities was $132.6 million for the nine months ended September 30, 2017, compared to cash used in financing activities of $58.7 million in the same period of 2016. Highlights of significant cash sources and uses in financing activities during the first nine months of 2017 are as follows:
We retired the $6.7 million loan secured by our Pleasant Hill Commons operating property using a draw on the unsecured revolving credit facility;
We borrowed $63.0 million on the unsecured revolving credit facility to fund development activities, redevelopment activities, and tenant improvement costs;
We used the $76.1 million proceeds from the sale of four operating properties to pay down the unsecured revolving credit facility;
We repaid $32.3 million on the Credit Facility using cash flows generated from operations; and
We made distributions to common shareholders and Common Unit holders of $78.9 million.
Funds From Operations
Funds fromFrom Operations ("FFO"(“FFO”) is a widely used performance measure for real estate companies and is provided here as a supplemental measure of our operating performance. We calculate FFO, a non-GAAP financial measure, in accordance with the best practices described in the April 2002 National Policy Bulletin of the National Association of Real Estate Investment Trusts ("NAREIT"(“NAREIT”)., as restated in 2018. The NAREIT white paper defines FFO as net income (determined(calculated in accordance with GAAP), excluding gains (or
losses) from sales and impairments of depreciated property, plus(i) depreciation and amortization related to real estate, (ii) gains and after adjustments for unconsolidated partnershipslosses from the sale of certain real estate assets, (iii) gains and joint ventures.
losses from change in control, and (iv) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.
Considering the nature of our business as a real estate owner and operator, we believethe Company believes that FFO is helpful to investors 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 depreciated property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. For informational purposes, we have also provided FFO adjusted for accelerated amortization of debt issuance costs, transaction costs and a severance charge in 2016. We believe this supplemental information provides a meaningful measure of our operating performance. We believe our presentation of FFO, as adjusted, provides investors with another financial measure that may facilitate comparison of operating performance between periods and among our peer companies. FFO(a) should not be considered as an alternative to net income (determined(calculated in accordance with GAAP) as an indicatorfor the purpose of measuring our financial performance, (b) is not an alternative to cash flowflows from operating activities (determined(calculated in accordance with GAAP) as a measure of our liquidity, and (c) is not indicative of funds available to satisfy 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 definition differently than we do.
From time to time, the Company may report or provide guidance with respect to “FFO, as adjusted,” which removes the impact of certain non-recurring and non-operating transactions or other items the Company does not consider to be representative of its core operating results including, without limitation, (i) gains or losses associated with the early extinguishment of debt, (ii) gains or losses associated with litigation involving the Company that is not in the normal course of business, (iii) merger and acquisition costs, (iv) the impact on earnings from employee severance, (v) the excess of redemption value over carrying value of preferred stock redemption, and (vi) in 2022, the impact of prior period bad debt or the collection of accounts receivable previously written off (“prior period collection impact”) due to the recovery from the COVID-19 pandemic, which are not otherwise adjusted in the Company’s calculation of FFO.
Our calculations of FFO1 and reconciliation to consolidated net income and FFO, as adjusted, for the three and nine months ended September 30, 2017March 31, 2023 and 20162022 (unaudited) are as follows:follows (dollars in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Net income (loss) | $ | 5,561 | | | $ | (16,826) | | | | | |
| Less: net income attributable to noncontrolling interests in properties | (104) | | | (144) | | | | | |
| Less: gain on sales of operating properties, net | — | | | (3,168) | | | | | |
| | | | | | | |
Add: depreciation and amortization of consolidated and unconsolidated entities, net of noncontrolling interests | 108,309 | | | 121,847 | | | | | |
FFO of the Operating Partnership(1) | 113,766 | | | 101,709 | | | | | |
| Less: Limited Partners’ interests in FFO | (1,507) | | | (1,118) | | | | | |
FFO attributable to common shareholders(1) | $ | 112,259 | | | $ | 100,591 | | | | | |
| FFO per share of the Operating Partnership – diluted | $ | 0.51 | | | $ | 0.46 | | | | | |
| | | | | | | |
FFO of the Operating Partnership(1) | $ | 113,766 | | | $ | 101,709 | | | | | |
| Add: merger and acquisition costs | — | | | 925 | | | | | |
| Less: prior period collection impact | — | | | (1,096) | | | | | |
| FFO, as adjusted, of the Operating Partnership | $ | 113,766 | | | $ | 101,538 | | | | | |
| FFO, as adjusted, per share of the Operating Partnership – diluted | $ | 0.51 | | | $ | 0.46 | | | | | |
(1)“FFO of the Operating Partnership” measures 100% of the operating performance of the Operating Partnership’s real estate properties. “FFO attributable to common shareholders” reflects a reduction for the redeemable noncontrolling weighted average diluted interest in the Operating Partnership. |
| | | | | | | | | | | | | | | |
| ($ in thousands) | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Consolidated net (loss) income | $ | (204 | ) | | $ | (1,262 | ) | | $ | 11,093 |
| | $ | (785 | ) |
| Less: net income attributable to noncontrolling interests in properties | (432 | ) | | (461 | ) | | (1,302 | ) | | (1,383 | ) |
| Less: gains on sales of operating properties | — |
| | — |
| | (15,160 | ) | | (194 | ) |
| Add: impairment charge | — |
| | — |
| | 7,411 |
| | — |
|
| Add: depreciation and amortization of consolidated entities, net of noncontrolling interests | 42,474 |
| | 45,310 |
| | 129,890 |
| | 130,909 |
|
FFO of the Operating Partnership1 | 41,838 |
| | 43,587 |
| | 131,932 |
| | 128,547 |
|
| Less: Limited Partners' interests in FFO | (949 | ) | | (918 | ) | | (2,995 | ) | | (2,708 | ) |
Funds From Operations attributable to Kite Realty Group Trust common shareholders1 | $ | 40,889 |
| | $ | 42,669 |
| | $ | 128,937 |
| | $ | 125,839 |
|
| | | | | | | | |
FFO of the Operating Partnership1 | $ | 41,838 |
| | $ | 43,587 |
| | $ | 131,932 |
| | $ | 128,547 |
|
| Add: accelerated amortization of debt issuance costs (non-cash) | — |
| | 1,121 |
| | — |
| | 1,121 |
|
| Add: transaction costs | — |
| | — |
| | — |
| | 2,771 |
|
| Add: severance charge | — |
| | — |
| | — |
| | 500 |
|
| FFO, as adjusted, of the Operating Partnership | $ | 41,838 |
| | $ | 44,708 |
| | $ | 131,932 |
| | $ | 132,939 |
|
|
| |
____________________ |
1 | “FFO of the Operating Partnership" measures 100% of the operating performance of the Operating Partnership’s real estate properties. “FFO attributable to Kite Realty Group Trust common shareholders” reflects a reduction for the redeemable noncontrolling weighted average diluted interest in the Operating Partnership. |
Earnings before Interest, Tax,Taxes, Depreciation and Amortization
(“EBITDA”)
We define EBITDA, a non-GAAP financial measure, as net income before depreciation and amortization, interest expense, and income tax expense of the taxable REIT subsidiary.subsidiary, and depreciation and amortization. For informational purposes, we have also providedprovide Adjusted EBITDA, which we define as EBITDA less (i) Adjusted EBITDA from unconsolidated entities, (ii) gains on sales of operating properties or impairment charges, (iii) merger and acquisition costs, (iv) other income and expense, (iv)(v) noncontrolling interest Adjusted EBITDA, and (v)(vi) other non-recurring activity or items impacting comparability from period to period. Annualized Adjusted EBITDA is Adjusted EBITDA for the most recent quarter multiplied by four. Net Debt to Adjusted EBITDA is our share of net debt divided by Annualized Adjusted EBITDA. EBITDA, Adjusted
EBITDA, Annualized Adjusted EBITDA and Net Debt to Adjusted EBITDA, as calculated by us, are not comparable to EBITDA and EBITDA-related measures reported by other REITs that do not define EBITDA and EBITDA-related measures exactly as we do. EBITDA, Adjusted EBITDA and Annualized Adjusted EBITDA do not represent cash generated from operating activities in accordance with GAAP and should not be considered alternatives to net income as an indicator of performance or as alternatives to cash flows from operating activities as an indicator of liquidity.
Considering the nature of our business as a real estate owner and operator, we believe that EBITDA, Adjusted EBITDA and the ratio of Net Debt to Adjusted EBITDA are helpful to investors in measuring our operational performance because they exclude 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 depreciated property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. For informational purposes, we have also providedprovide Annualized Adjusted EBITDA,
adjusted as described above. We believe this supplemental information provides a meaningful measure of our operating performance. We believe presenting EBITDA and the related measures in this manner allows investors and other interested parties to form a more meaningful assessment of our operating results.
The following table presents a reconciliation of our EBITDA, Adjusted EBITDA and Annualized Adjusted EBITDA to consolidated net income (the most directly comparable GAAP measure) and a calculation of Net Debt to Adjusted EBITDA.
|
| | | |
| ($ in thousands) | Three Months Ended
September 30, 2017 |
| Consolidated net income | $ | (204 | ) |
| Adjustments to net income | |
|
| Depreciation and amortization | 42,793 |
|
| Interest expense | 16,372 |
|
| Income tax benefit of taxable REIT subsidiary | (33 | ) |
| Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) | 58,928 |
|
| Adjustments to EBITDA: | |
| Unconsolidated EBITDA | 34 |
|
| Other income and expense, net | 94 |
|
| Noncontrolling interest | (432 | ) |
| Adjusted EBITDA | 58,624 |
|
| | |
Annualized Adjusted EBITDA1 | $ | 234,496 |
|
| | |
| Company share of net debt: | |
|
| Mortgage and other indebtedness | 1,681,676 |
|
Less: Partner share of consolidated joint venture debt2 | (13,373 | ) |
| Less: Cash, cash equivalents, and restricted cash | (41,343 | ) |
| Less: Net debt premiums and issuance costs, net | 1,214 |
|
| Company Share of Net Debt | 1,628,174 |
|
| Net Debt to Adjusted EBITDA | 6.9x |
|
| | | | | |
| Three Months Ended March 31, 2023 |
| Net income | $ | 5,561 | |
| Depreciation and amortization | 108,071 | |
| Interest expense | 25,425 | |
| Income tax benefit of taxable REIT subsidiary | (29) | |
| EBITDA | 139,028 | |
| Unconsolidated Adjusted EBITDA | 450 | |
| |
____________________ | |
1Other income and expense, net | Represents Adjusted EBITDA for the three months ended September 30, 2017 (as shown in the table above) multiplied by four. (159) | |
2Noncontrolling interests | (104) | |
| Adjusted EBITDA | 139,215 | |
| |
Annualized Adjusted EBITDA(1) | $ | 556,860 | |
| |
| Company share of Net Debt: | |
| Mortgage and other indebtedness, net | $ | 2,972,567 | |
| Plus: Company share of unconsolidated joint venture debt | 44,243 | |
Less: Partner share of consolidated joint venture debt is calculated based upon the partner's pro-rata ownership(2) | (562) | |
| Less: cash, cash equivalents, and restricted cash | (54,953) | |
| Less: debt discounts, premiums and issuance costs, net | (31,647) | |
Company share of the joint venture, multiplied by the related secured debt balance. In all cases, this debt is the responsibility of the consolidated joint venture.Net Debt | $ | 2,929,648 | |
| Net Debt to Adjusted EBITDA | 5.3x |
(1)Represents Adjusted EBITDA for the three months ended March 31, 2023 (as shown in the table above) multiplied by four.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements that in our opinion have, or are reasonably likely to have, a material current or future effect on our financial condition, results(2)Partner share of operations, liquidity, capital expenditures or capital resources. We do, however, have certain obligations related to someconsolidated joint venture debt is calculated based upon the partner’s pro rata ownership of the projects injoint venture, multiplied by the related secured debt balance.
Liquidity and Capital Resources
Overview
Our primary finance and capital strategy is to maintain a strong balance sheet with sufficient flexibility to fund our operating and investment activities in a cost-effective manner. We consider a number of factors when evaluating our level of indebtedness and making decisions regarding additional borrowings or equity offerings, including the interest or dividend rate, the maturity date and the Company’s debt maturity ladder, the impact of financial metrics such as overall Company leverage levels and coverage ratios, and the Company’s ability to generate cash flow to cover debt service. We will continue to monitor the capital markets and may consider raising additional capital through the issuance of our common or preferred shares, unsecured debt securities, or other securities.
As of March 31, 2023, we had approximately $43.7 million in cash on hand, $9.0 million in restricted cash and escrow deposits, $1.0 billion of remaining availability under the $1.1 billion unsecured revolving credit facility (the “Revolving Facility”), and $122.8 million of debt maturities for the remainder of 2023. We believe we will have adequate liquidity over the next 12 months and beyond to operate our business and meet our cash requirements.
We derive the majority of our revenue from tenants who lease space from us under existing lease agreements at each of our properties. Therefore, our ability to generate cash from operations is dependent upon 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, an economic downturn, instability in the banking sector, and/or the ongoing effects of COVID-19, among other events, could adversely affect the ability of some of our tenants to meet their lease obligations.
Our Principal Capital Resources
For a discussion of cash generated from operations, see “Cash Flows” beginning on page 37. In addition to cash generated from operations, our other principal capital resources are discussed below.
Over the last several years, we have made substantial progress in enhancing our liquidity position and reducing our leverage and borrowing costs. We continue to focus on a balanced approach to growth and staggering debt maturities in order to retain our financial flexibility.
As of March 31, 2023, we had approximately $1.0 billion available under the Revolving Facility for future borrowings. We also had $43.7 million in cash and cash equivalents as of March 31, 2023.
We were in compliance with all applicable financial covenants under the Revolving Facility, unsecured term loans and senior unsecured notes as of March 31, 2023.
In November 2021, the Company filed with the SEC a shelf registration statement on Form S-3, which is effective for a term of three years, relating to the offer and sale, from time to time, of an indeterminate amount of equity and debt securities. Equity securities may be offered and sold by the Parent Company, and the net proceeds of any such offerings would be contributed to the Operating Partnership in exchange for additional General Partner Units. Debt securities may be offered and sold by the Operating Partnership with the Operating Partnership receiving the proceeds. From time to time, we may issue securities under this shelf registration statement for general corporate purposes, which may include acquisitions of additional properties, repayment of outstanding indebtedness, capital expenditures, the expansion, redevelopment, and/or improvement of properties in our portfolio, working capital and other general purposes.
In February 2021, the Company and the Operating Partnership entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with each of BofA Securities, Inc., Citigroup Global Markets Inc., KeyBanc Capital Markets Inc. and Raymond James & Associates, Inc., pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $150.0 million of its common shares of beneficial interest, $0.01 par value per share under an at-the-market offering program (the “ATM Program”). In November 2021, the Company and the Operating Partnership amended the Equity Distribution Agreement to reflect their filing of a shelf registration statement on November 16, 2021 with the SEC. The Operating Partnership intends to use the net proceeds, if any, to repay borrowings under the Revolving Facility and other indebtedness and for working capital and other general corporate purposes. The Operating Partnership may also use the net proceeds for acquisitions of operating properties and the development properties.or redevelopment of properties, although there are currently no understandings, commitments or agreements to do so. As of March 31, 2023, the Company has not sold any common shares under the ATM Program.
In the future, we will continue to monitor the capital markets and may consider raising additional capital through the issuance of our common shares, preferred shares or other securities. We may also raise capital by disposing of properties, land parcels or other assets that are no longer core components of our growth strategy. The sale price may differ from our carrying value at the time of sale.
Contractual ObligationsOur Principal Liquidity Needs
Short-Term Liquidity Needs
ExceptNear-Term Debt Maturities. As of March 31, 2023, we had $27.8 million of secured debt, excluding scheduled monthly principal payments, and $95.0 million of unsecured debt scheduled to mature prior to March 31, 2024. We believe we have sufficient liquidity to repay these obligations from cash on hand and borrowings on the Revolving Facility.
Other Short-Term Liquidity Needs. The requirements for qualifying as a REIT and for a tax deduction for some or all of the dividends paid to shareholders necessitate that we distribute at least 90% of our taxable income on an annual basis. Such requirements cause us to have substantial liquidity needs over both the short and long term. Our short-term liquidity needs consist primarily of funds necessary to pay operating expenses associated with respectour operating properties, scheduled interest and principal payments on our debt of approximately $90.0 million and $2.3 million, respectively, for the remainder of 2023, expected dividend payments to our debt maturitiescommon shareholders and Common Unit holders, and recurring capital expenditures.
In February 2023, our Board of Trustees declared a cash distribution of $0.24 per common share and Common Unit for the first quarter of 2023. This distribution was paid on April 14, 2023 to common shareholders and Common Unit holders of record as discussedof April 7, 2023. Future distributions, if any, are at the discretion of the Board of Trustees, who will continue to evaluate our
sources and uses of capital, liquidity position, operating fundamentals, maintenance of our REIT qualification and other factors they may deem relevant. We believe we have sufficient liquidity to pay any dividend from cash on page 35, therehand and borrowings on the Revolving Facility.
Other short-term liquidity needs include expenditures for tenant improvements, external leasing commissions and recurring capital expenditures. During the three months ended March 31, 2023, we incurred $3.0 million for recurring capital expenditures on operating properties and $15.1 million for tenant improvements and external leasing commissions, which includes costs to re-lease anchor space at our operating properties related to tenants open and operating as of March 31, 2023 (excluding development and redevelopment properties). We currently anticipate incurring approximately $100 million of additional major tenant improvement costs related to leasing activity for space that is currently vacant at a number of our operating properties over the next 12 to 18 months. We believe we have been no significant changesthe ability to fund these costs through cash flows from operations or borrowings on the Revolving Facility. In 2023, certain retailers have filed for Chapter 11 bankruptcy protection including Bed Bath & Beyond Inc., a tenant that, as of March 31, 2023, occupied 582,000 square feet across 22 locations in our contractual obligations disclosedportfolio and generates $7.8 million of annualized base rent. If leases were rejected in the bankruptcy process, the re-leasing costs may be significant depending on the number of closures.
During the three months ended March 31, 2023, we began redevelopment activities at Edwards Multiplex – Ontario and reclassified this property from our operating portfolio into redevelopment. As of March 31, 2023, we had development projects under construction at The Landing at Tradition – Phase II, the medical office building at Carillon, and The Corner (IN). Our share of total estimated costs for these three projects is $102.8 million, of which our share of the remaining expected funding requirement is estimated to be $70.9 million. As of March 31, 2023, we have incurred $33.0 million of these costs. We anticipate incurring the majority of the remaining costs for these projects over the next 24 months and believe we have the ability to fund these projects through cash flows from operations or borrowings on the Revolving Facility.
Share Repurchase Program
The Company has an existing share repurchase program under which it may repurchase, from time to time, up to a maximum of $300.0 million of its common shares (the “Share Repurchase Program”). The Company intends to fund any future repurchases under the Share Repurchase Program with cash on hand or availability under the Revolving Facility, subject to any applicable restrictions. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors. In February 2023, the Company extended the Share Repurchase Program for an additional year so it will now terminate on February 28, 2024, if not terminated or extended prior to that date. As of March 31, 2023, the Company has not repurchased any shares under the Share Repurchase Program.
Long-Term Liquidity Needs
Our long-term liquidity needs consist primarily of funds necessary to pay for any new development projects, redevelopment of existing properties, non-recurring capital expenditures, acquisitions of properties, payment of indebtedness at maturity and obligations under ground leases.
Selective Acquisitions, Developments and Joint Ventures. We may selectively pursue the acquisition, development and redevelopment of other properties, which would require additional capital. It is unlikely that we would have sufficient funds on hand to meet these long-term capital requirements. We would have to satisfy these needs through additional borrowings, sales of common or preferred shares, issuance of Operating Partnership units, cash generated through property dispositions and/or participation in joint venture arrangements. We cannot be certain that we would have access to these sources of capital on satisfactory terms, if at all, to fund our long-term liquidity requirements. We evaluate all future opportunities against pre-established criteria including, but not limited to, location, demographics, expected return, tenant credit quality, tenant relationships, and the amount of existing retail space. Our ability to access the capital markets will depend on a number of factors, including general capital market conditions.
Potential Debt Repurchases. We may from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to repurchase our senior unsecured notes maturing at various dates through September 2030 in open-market transactions, by tender offer or otherwise, as market conditions warrant.
Commitments under Ground Leases. We are obligated under 12 ground leases for approximately 98 acres of land as of March 31, 2023. Most of these ground leases require fixed annual rent payments and the expiration dates of the remaining initial terms of these ground leases range from 2025 to 2092.
Capital Expenditures on Consolidated Properties
The following table summarizes cash capital expenditures for our development and redevelopment projects and other capital expenditures for the three months ended March 31, 2023 (in thousands):
| | | | | |
| Three Months Ended
March 31, 2023 |
| Active development and redevelopment projects | $ | 9,022 | |
| |
| |
| |
| Recurring operating capital expenditures (primarily tenant improvements) and other | 30,099 | |
| Total | $ | 39,121 | |
We capitalize certain indirect costs such as interest, payroll, and other general and administrative costs related to these development activities. If we had experienced a 10% reduction in development and redevelopment activities, without a corresponding decrease in indirect project costs, we would have recorded additional expense of $0.1 million for the three months ended March 31, 2023.
Debt Maturities
The following table summarizes the scheduled maturities and principal amortization of the Company’s indebtedness as of March 31, 2023, presented on a calendar year basis (in thousands):
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| Secured Debt | | | | |
| Scheduled
Principal Payments | | Term
Maturities | | Unsecured Debt | | Total |
| 2023 | $ | 2,261 | | | $ | 27,813 | | | $ | 95,000 | | | $ | 125,074 | |
| 2024 | 2,721 | | | — | | | 269,635 | | | 272,356 | |
| 2025 | 2,848 | | | — | | | 680,000 | | | 682,848 | |
| 2026 | 2,981 | | | — | | | 675,000 | | | 677,981 | |
| 2027 | 3,120 | | | — | | | 375,000 | | | 378,120 | |
| Thereafter | 27,061 | | | 2,480 | | | 775,000 | | | 804,541 | |
| | $ | 40,992 | | | $ | 30,293 | | | $ | 2,869,635 | | | $ | 2,940,920 | |
| Debt discounts, premiums and issuance costs, net | | | | | | 31,647 | |
| Total | | | | | | | $ | 2,972,567 | |
Failure to comply with the obligations under our debt agreements, including payment obligations, could cause an event of default under such debt, which, among other things, could result in the loss of title to the assets securing the debt, acceleration of the payment of all principal and interest and/or termination of the agreements, or exposure to the risk of foreclosure. In addition, certain of our variable rate loans contain cross-default provisions whereby a violation by the Company of any financial covenant set forth in the Revolving Facility will constitute an “Event of Default” under the loans, which could allow the lenders to accelerate the amounts due under our debt agreements if we fail to satisfy these financial covenants. See “Item 1A. Risk Factors – Risks Related to Our Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016.2022 for more information related to the risks associated with our indebtedness.
Impact of Changes in Credit Ratings on Our Liquidity
We have received investment grade corporate credit ratings from three nationally recognized credit rating agencies. These ratings did not change as of March 31, 2023. In the future, these ratings could change based upon, among other things, the impact that prevailing economic conditions may have on our results of operations and financial condition. Credit rating reductions by one or more rating agencies could also adversely affect our access to funding sources, the cost and other terms of obtaining funding, as well as our overall financial condition, operating results and cash flow.
Cash Flows
As of March 31, 2023, we had cash, cash equivalents and restricted cash of $52.7 million. We may be subject to concentrations of credit risk with regard to our cash and cash equivalents. We place our cash and short-term investments with highly rated financial institutions. While we attempt to limit our exposure at any point in time, occasionally such cash and investments may temporarily exceed the Federal Deposit Insurance Corporation (“FDIC”) and the Securities Investor Protection
Corporation (“SIPC”) insurance limits. We also maintain certain compensating balances in several financial institutions in support of borrowings from those institutions. Such compensating balances were not material to the accompanying consolidated balance sheets.
Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022
Our cash flow activities are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | Change |
| Net cash provided by operating activities | $ | 63,603 | | | $ | 49,583 | | | $ | 14,020 | |
| Net cash used in investing activities | (41,514) | | | (62,183) | | | 20,669 | |
| Net cash used in financing activities | (91,364) | | | (5,573) | | | (85,791) | |
| Decrease in cash, cash equivalents and restricted cash | (69,275) | | | (18,173) | | | (51,102) | |
| Cash, cash equivalents and restricted cash, at beginning of period | 121,970 | | | 100,363 | | | |
| Cash, cash equivalents and restricted cash, at end of period | $ | 52,695 | | | $ | 82,190 | | | |
Cash provided by operating activities was $63.6 million for the three months ended March 31, 2023 and $49.6 million for the same period of 2022. The cash flows were positively impacted from an increase in net operating income.
Cash used in investing activities was $41.5 million for the three months ended March 31, 2023 and $62.2 million for the same period of 2022. Highlights of significant cash sources and uses in investing activities are as follows:
•We acquired Pebble Marketplace and deposited funds for the acquisition of the two-tenant building adjacent to MacArthur Crossing for a total of $44.3 million during the three months ended March 31, 2022; and
•Capital expenditures increased by $15.4 million driven by the construction activity at our development projects and anchor leasing activity, partially offset by a change in construction payables of $2.6 million for the three months ended March 31, 2023.
Cash used in financing activities was $91.4 million for the three months ended March 31, 2023 and $5.6 million for the same period of 2022. Highlights of significant cash sources and uses in financing activities are as follows:
•We borrowed $162.0 million on the Revolving Facility and used the proceeds to repay $199.3 million of mortgage debt during the three months ended March 31, 2023 compared to borrowings of $80.0 million on the Revolving Facility, a portion of which were used to repay $42.2 million of mortgage debt during the three months ended March 31, 2022; and
•We made distributions to common shareholders and holders of common partnership interests in the Operating Partnership of $53.3 million during the three months ended March 31, 2023 compared to distributions of $42.2 million during the three months ended March 31, 2022.
Critical Accounting Estimates
We based the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There were no changes made by management to the critical accounting policies in the three months ended March 31, 2023. We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 21, 2023.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Related to Fixed and Variable Rate Debt
WeAs of March 31, 2023, we had $1.7$3.0 billion of outstanding consolidated indebtedness as(inclusive of September 30, 2017 (exclusive of net unamortized debt discounts, premiums and issuance costs net of $1.2 million on acquired indebtedness)$31.6 million). As of this date,In addition, we were party to various consolidated interest rate hedge agreements totaling $460.5$975.0 million with expiration datesmaturities over various terms through 2021.2026. Reflecting the effects of these hedge
agreements, our fixed and variable rate debt was $1.6would have been $2.6 billion (94%(90%) and $0.1 billion (6%$308.1 million (10%), respectively, of our total consolidated indebtedness at September 30, 2017.
as of March 31, 2023.
As of September 30, 2017,March 31, 2023, we had $38.1$95.0 million of fixed rate debt maturingscheduled to mature within the next twelve12 months. A 100 basis100-basis point change in market interest rates on this debt as of March 31, 2023 would not materially impact thechange our annual cash flows associated with this hedged debt.flow by $1.0 million. A 100 basis100-basis point change in interest rates on our unhedged variable rate debt as of September 30, 2017March 31, 2023 would change our annual cash flow by $0.9$3.1 million. Based upon the terms of our variable rate debt, we are most vulnerable to a change in short-term Secured Overnight Financing Rate (“SOFR”) interest rates.
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Item 4. | Controls and Procedures |
ITEM 4. CONTROLS AND PROCEDURES
Kite Realty Group Trust
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Parent 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 Parent Company'sCompany’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There has been no change in the Parent Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(b) under the Securities Exchange Act of 1934 of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2017March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Kite Realty Group, L.P.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Operating Partnership’s management, including itsthe Chief Executive Officer and Chief Financial Officer of Kite Realty Group Trust (the sole general partner of Kite Realty Group, L.P.), 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 Operating Partnership'sPartnership’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There has been no change in the Operating Partnership’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(b) under the Securities Exchange Act of 1934 of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2017March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
PART II — OTHER INFORMATION
We are not subject to any material litigation nor, to management’s knowledge, is any material litigation currently threatened against us. We are parties to routine litigation, claims, and administrative proceedings arising in the ordinary course of business. Management believes that such matters will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows taken as a whole.