The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Kite Realty Group TrustKITE REALTY GROUP, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash FlowsPartners’ Equity
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | |
| | General Partner | | Total |
| | Common
Equity | | Accumulated
Other
Comprehensive
Income (Loss) | |
| Balance at December 31, 2022 | $ | 3,692,171 | | | $ | 74,344 | | | $ | 3,766,515 | |
| Stock compensation activity | 2,135 | | | — | | | 2,135 | |
| Other comprehensive loss attributable to Parent Company | — | | | (11,557) | | | (11,557) | |
| Distributions to Parent Company | (52,659) | | | — | | | (52,659) | |
| Net income attributable to Parent Company | 5,391 | | | — | | | 5,391 | |
| | | | | |
| Adjustment to redeemable noncontrolling interests | (3,821) | | | — | | | (3,821) | |
| Balance at March 31, 2023 | $ | 3,643,217 | | | $ | 62,787 | | | $ | 3,706,004 | |
| Stock compensation activity | 2,960 | | | — | | | 2,960 | |
| Other comprehensive income attributable to Parent Company | — | | | 8,536 | | | 8,536 | |
| Distributions to Parent Company | (52,650) | | | — | | | (52,650) | |
| Net income attributable to Parent Company | 32,058 | | | — | | | 32,058 | |
| | | | | |
| Adjustment to redeemable noncontrolling interests | (4,101) | | | — | | | (4,101) | |
| Balance at June 30, 2023 | $ | 3,621,484 | | | $ | 71,323 | | | $ | 3,692,807 | |
| Stock compensation activity | 2,968 | | | — | | | 2,968 | |
| Other comprehensive loss attributable to Parent Company | — | | | (3,128) | | | (3,128) | |
| Distributions to Parent Company | (52,653) | | | — | | | (52,653) | |
| Net income attributable to Parent Company | 2,070 | | | — | | | 2,070 | |
| Conversion of Limited Partner Units to shares of the Parent Company | 301 | | | — | | | 301 | |
| Adjustment to redeemable noncontrolling interests | (7,071) | | | — | | | (7,071) | |
| Balance at September 30, 2023 | $ | 3,567,099 | | | $ | 68,195 | | | $ | 3,635,294 | |
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2017 | | 2016 |
| Cash flows from operating activities: | | | |
| Consolidated net income (loss) | $ | 11,093 |
| | $ | (785 | ) |
| Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities: | |
| | |
|
| Straight-line rent | (3,593 | ) | | (4,318 | ) |
| Depreciation and amortization | 133,206 |
| | 135,369 |
|
| Gains on sales of operating properties | (15,160 | ) | | (194 | ) |
| Impairment charge | 7,411 |
| | — |
|
| Provision for credit losses | 2,409 |
| | 1,883 |
|
| Compensation expense for equity awards | 4,869 |
| | 3,932 |
|
| Amortization of debt fair value adjustment | (2,200 | ) | | (3,008 | ) |
| Amortization of in-place lease liabilities, net | (2,515 | ) | | (5,822 | ) |
| Changes in assets and liabilities: | |
| | |
|
| Tenant receivables and other | (2,031 | ) | | 2,354 |
|
| Deferred costs and other assets | (12,783 | ) | | (11,846 | ) |
| Accounts payable, accrued expenses, deferred revenue and other liabilities | 1,391 |
| | 3,141 |
|
| Net cash provided by operating activities | 122,097 |
| | 120,706 |
|
| Cash flows from investing activities: | |
| | |
|
| Capital expenditures, net | (59,703 | ) | | (68,352 | ) |
| Net proceeds from sales of operating properties | 76,076 |
| | 139 |
|
| Collection of note receivable | — |
| | 500 |
|
| Change in construction payables | 6,677 |
| | 621 |
|
| Net cash provided by (used in) investing activities | 23,050 |
| | (67,092 | ) |
| Cash flows from financing activities: | |
| | |
|
| Proceeds from issuance of common shares, net | — |
| | 4,383 |
|
| Repurchases of common shares upon the vesting of restricted shares | (808 | ) | | (1,124 | ) |
| Acquisition of partner's interest in Fishers Station operating property | (3,750 | ) | | — |
|
| Loan proceeds | 69,700 |
| | 550,194 |
|
| Loan transaction costs | — |
| | (7,280 | ) |
| Loan payments and related financing escrows | (118,771 | ) | | (531,070 | ) |
| Distributions paid – common shareholders | (75,841 | ) | | (70,650 | ) |
| Distributions paid – redeemable noncontrolling interests | (3,086 | ) | | (2,932 | ) |
| Distributions to noncontrolling interests | — |
| | (222 | ) |
| Net cash used in financing activities | (132,556 | ) | | (58,701 | ) |
| Net change in cash and cash equivalents | 12,591 |
| | (5,087 | ) |
| Cash and cash equivalents, beginning of period | 19,874 |
| | 33,880 |
|
| Cash and cash equivalents, end of period | $ | 32,465 |
| | $ | 28,793 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Kite Realty Group, L.P. and subsidiaries
Consolidated Balance Sheets
(unaudited)
(in thousands, except unit data)
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Assets: | | | |
| Investment properties, at cost | $ | 3,955,928 |
| | $ | 3,996,065 |
|
| Less: accumulated depreciation | (635,583 | ) | | (560,683 | ) |
| | 3,320,345 |
| | 3,435,382 |
|
| | | | |
| Cash and cash equivalents | 32,465 |
| | 19,874 |
|
| Tenant and other receivables, including accrued straight-line rent of $30,956 and $28,703 respectively, net of allowance for uncollectible accounts | 53,271 |
| | 53,087 |
|
| Restricted cash and escrow deposits | 8,878 |
| | 9,037 |
|
| Deferred costs and intangibles, net | 115,623 |
| | 129,264 |
|
| Prepaid and other assets | 12,810 |
| | 9,727 |
|
| Total Assets | $ | 3,543,392 |
| | $ | 3,656,371 |
|
| | | | |
| Liabilities and Equity: | |
| | |
| Mortgage and other indebtedness, net | $ | 1,681,676 |
| | $ | 1,731,074 |
|
| Accounts payable and accrued expenses | 101,574 |
| | 80,664 |
|
| Deferred revenue and intangibles, net and other liabilities | 101,066 |
| | 112,202 |
|
| Total Liabilities | 1,884,316 |
| | 1,923,940 |
|
| Commitments and contingencies | — |
| | — |
|
| Redeemable Limited Partners’ and other redeemable noncontrolling interests | 73,454 |
| | 88,165 |
|
| Partners Equity: | | | |
| Parent Company: | | | |
Common equity, 83,594,068 and 83,545,398 units issued and outstanding at September 30,
2017 and December 31, 2016, respectively | 1,583,874 |
| | 1,643,890 |
|
| Accumulated other comprehensive income (loss) | 1,050 |
| | (316 | ) |
| Total Partners Equity | 1,584,924 |
| | 1,643,574 |
|
| Noncontrolling Interests | 698 |
| | 692 |
|
| Total Equity | 1,585,622 |
| | 1,644,266 |
|
| Total Liabilities and Equity | $ | 3,543,392 |
| | $ | 3,656,371 |
|
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | $ | 3,937,949 | | | $ | (15,902) | | | $ | 3,922,047 | |
| Stock compensation activity | 1,822 | | | — | | | 1,822 | |
| Other comprehensive income attributable to Parent Company | — | | | 38,713 | | | 38,713 | |
| Distributions to Parent Company | (41,600) | | | — | | | (41,600) | |
| Net loss attributable to Parent Company | (16,804) | | | — | | | (16,804) | |
| | | | | |
| Adjustment to redeemable noncontrolling interests | (5,597) | | | — | | | (5,597) | |
| Balance at March 31, 2022 | $ | 3,875,770 | | | $ | 22,811 | | | $ | 3,898,581 | |
| Stock compensation activity | 2,851 | | | — | | | 2,851 | |
| Other comprehensive income attributable to Parent Company | — | | | 17,146 | | | 17,146 | |
| Distributions to Parent Company | (43,808) | | | — | | | (43,808) | |
| Net income attributable to Parent Company | 13,131 | | | — | | | 13,131 | |
| | | | | |
| Adjustment to redeemable noncontrolling interests | 3,239 | | | — | | | 3,239 | |
| Balance at June 30, 2022 | $ | 3,851,183 | | | $ | 39,957 | | | $ | 3,891,140 | |
| Stock compensation activity | 2,881 | | | — | | | 2,881 | |
| Other comprehensive income attributable to Parent Company | — | | | 32,736 | | | 32,736 | |
| Distributions to Parent Company | (46,014) | | | — | | | (46,014) | |
| Net loss attributable to Parent Company | (7,837) | | | — | | | (7,837) | |
| | | | | |
| Adjustment to redeemable noncontrolling interests | (94) | | | — | | | (94) | |
| Balance at September 30, 2022 | $ | 3,800,119 | | | $ | 72,693 | | | $ | 3,872,812 | |
The accompanying notes are an integral part of these consolidated financial statements.
Kite Realty Group,KITE REALTY GROUP, L.P. and subsidiariesAND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(in thousands, except unit and per unit data) |
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | |
| Revenue: | | | | | | | |
| Minimum rent | $ | 67,585 |
| | $ | 69,518 |
| | $ | 204,926 |
| | $ | 205,436 |
|
| Tenant reimbursements | 17,657 |
| | 17,531 |
| | 54,748 |
| | 52,691 |
|
| Other property related revenue | 1,896 |
| | 2,073 |
| | 10,226 |
| | 7,120 |
|
| Total revenue | 87,138 |
| | 89,122 |
| | 269,900 |
| | 265,247 |
|
| Expenses: | | | |
| | | | |
|
| Property operating | 11,859 |
| | 11,916 |
| | 36,950 |
| | 35,454 |
|
| Real estate taxes | 10,826 |
| | 10,690 |
| | 32,384 |
| | 32,327 |
|
| General, administrative, and other | 5,431 |
| | 5,081 |
| | 16,389 |
| | 15,228 |
|
| Transaction costs | — |
| | — |
| | — |
| | 2,771 |
|
| Impairment charge | — |
| | — |
| | 7,411 |
| | — |
|
| Depreciation and amortization | 42,793 |
| | 45,543 |
| | 131,333 |
| | 131,625 |
|
| Total expenses | 70,909 |
| | 73,230 |
| | 224,467 |
| | 217,405 |
|
| Operating income | 16,229 |
| | 15,892 |
| | 45,433 |
| | 47,842 |
|
| Interest expense | (16,372 | ) | | (17,139 | ) | | (49,250 | ) | | (47,964 | ) |
| Income tax benefit (expense) of taxable REIT subsidiary | 33 |
| | (15 | ) | | 64 |
| | (763 | ) |
| Other expense, net | (94 | ) | | — |
| | (314 | ) | | (94 | ) |
| Loss from continuing operations | (204 | ) | | (1,262 | ) | | (4,067 | ) | | (979 | ) |
| Gains on sales of operating properties | — |
| | — |
| | 15,160 |
| | 194 |
|
| Consolidated net (loss) income | (204 | ) | | (1,262 | ) | | 11,093 |
| | (785 | ) |
| Net income attributable to noncontrolling interests | (432 | ) | | (461 | ) | | (1,302 | ) | | (1,443 | ) |
| Net (loss) income attributable to common unitholders | $ | (636 | ) | | $ | (1,723 | ) | | $ | 9,791 |
| | $ | (2,228 | ) |
| | | | | | | | |
| Allocation of net (loss) income: | | | | | | | |
| Limited Partners | $ | (14 | ) | | $ | (41 | ) | | $ | 226 |
| | $ | (52 | ) |
| Parent Company | (622 | ) | | (1,682 | ) | | 9,565 |
| | (2,176 | ) |
| | $ | (636 | ) | | $ | (1,723 | ) | | $ | 9,791 |
| | $ | (2,228 | ) |
| | | | | | | | |
| | | | | | | | |
| Net (loss) income per unit - basic & diluted | $ | (0.01 | ) | | $ | (0.02 | ) | | $ | 0.11 |
| | $ | (0.03 | ) |
| | | | | | | | |
| Weighted average common units outstanding - basic | 85,580,993 |
| | 85,417,753 |
| | 85,561,343 |
| | 85,336,859 |
|
| Weighted average common units outstanding - diluted | 85,580,993 |
| | 85,417,753 |
| | 85,669,087 |
| | 85,336,859 |
|
| | | | | | | | |
| Distributions declared per common unit | $ | 0.3025 |
| | $ | 0.2875 |
| | $ | 0.9075 |
| | $ | 0.8625 |
|
| | | | | | | | |
| Consolidated net (loss) income | $ | (204 | ) | | $ | (1,262 | ) | | $ | 11,093 |
| | $ | (785 | ) |
| Change in fair value of derivatives | 322 |
| | 3,185 |
| | 1,398 |
| | (6,747 | ) |
| Total comprehensive income (loss) | 118 |
| | 1,923 |
| | 12,491 |
| | (7,532 | ) |
| Comprehensive income attributable to noncontrolling interests | (432 | ) | | (461 | ) | | (1,302 | ) | | (1,443 | ) |
| Comprehensive (loss) income attributable to common unitholders | $ | (314 | ) | | $ | 1,462 |
| | $ | 11,189 |
| | $ | (8,975 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Kite Realty Group, L.P. and subsidiaries
Consolidated Statements of Partners’ EquityCash Flows
(Unaudited)
(in thousands)
|
| | | | | | | | | | | |
| | General Partner | | Total |
| | Common Equity | | Accumulated Other Comprehensive (Loss) Income | |
| Balances, December 31, 2016 | $ | 1,643,890 |
| | $ | (316 | ) | | $ | 1,643,574 |
|
| Stock compensation activity | 4,221 |
| | — |
| | 4,221 |
|
| Other comprehensive income attributable to Parent Company | — |
| | 1,366 |
| | 1,366 |
|
| Distributions declared to Parent Company | (75,858 | ) | | — |
| | (75,858 | ) |
| Net income | 9,565 |
| | — |
| | 9,565 |
|
| Acquisition of partner's interest in Fishers Station operating property | (3,750 | ) | | — |
| | (3,750 | ) |
| Adjustment to redeemable noncontrolling interests | 5,806 |
| | — |
| | 5,806 |
|
| Balances, September 30, 2017 | $ | 1,583,874 |
| | $ | 1,050 |
| | $ | 1,584,924 |
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2023 | | 2022 |
| Cash flows from operating activities: | | | |
| Net income (loss) | $ | 40,219 | | | $ | (11,102) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
| Depreciation and amortization | 326,148 | | | 359,265 | |
| Gain on sales of operating properties, net | (22,468) | | | (27,126) | |
| Impairment charges | 477 | | | — | |
| | | |
| Straight-line rent | (9,723) | | | (12,653) | |
| Compensation expense for equity awards | 7,763 | | | 8,209 | |
| Amortization of debt fair value adjustments | (10,027) | | | (10,204) | |
| Amortization of in-place lease liabilities | (9,228) | | | (3,143) | |
| Changes in assets and liabilities: | | | |
| Tenant receivables | (2,104) | | | (7,021) | |
| Deferred costs and other assets | (26,727) | | | (15,691) | |
| Accounts payable, accrued expenses, deferred revenue and other liabilities | (3,153) | | | (18,105) | |
| Net cash provided by operating activities | 291,177 | | | 262,429 | |
| | | |
| Cash flows from investing activities: | | | |
| Acquisition of interests in properties | (78,273) | | | (100,142) | |
| Capital expenditures | (98,694) | | | (106,536) | |
| Net proceeds from sales of land | 917 | | | 3,680 | |
| Net proceeds from sales of operating properties | 123,944 | | | 65,408 | |
| Investment in short-term deposits | — | | | 125,000 | |
| Small business loan repayments | 341 | | | 513 | |
| Change in construction payables | (3,718) | | | (2,636) | |
| Distribution from unconsolidated joint venture | — | | | 1,144 | |
| Capital contribution to unconsolidated joint venture | — | | | (125) | |
| Net cash used in investing activities | (55,483) | | | (13,694) | |
| | | |
| Cash flows from financing activities: | | | |
| Contributions from the General Partner | 64 | | | 20 | |
| Repurchases of common shares upon the vesting of restricted shares | (767) | | | (1,144) | |
| Debt and equity issuance costs | (377) | | | (4,922) | |
| Loan proceeds | 332,095 | | | 445,000 | |
| Loan payments | (467,149) | | | (558,151) | |
| | | |
| Distributions paid – common unitholders | (157,893) | | | (131,422) | |
| Distributions paid – redeemable noncontrolling interests | (2,127) | | | (1,972) | |
| Distributions to noncontrolling interests | (3,196) | | | — | |
| Net cash used in financing activities | (299,350) | | | (252,591) | |
| | | |
| Net change in cash, cash equivalents and restricted cash | (63,656) | | | (3,856) | |
| Cash, cash equivalents and restricted cash, beginning of period | 121,970 | | | 100,363 | |
| Cash, cash equivalents and restricted cash, end of period | $ | 58,314 | | | $ | 96,507 | |
| | | |
| Non-cash investing and financing activities | | | |
| Conversion of Limited Partner Units to shares of the Parent Company | $ | 301 | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
Kite Realty Group, L.P. and subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2017 | | 2016 |
| Cash flows from operating activities: | | | |
| Consolidated net income (loss) | $ | 11,093 |
| | $ | (785 | ) |
| Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities: | | | |
| Straight-line rent | (3,593 | ) | | (4,318 | ) |
| Depreciation and amortization | 133,206 |
| | 135,369 |
|
| Gains on sales of operating properties | (15,160 | ) | | (194 | ) |
| Impairment charge | 7,411 |
| | — |
|
| Provision for credit losses | 2,409 |
| | 1,883 |
|
| Compensation expense for equity awards | 4,869 |
| | 3,932 |
|
| Amortization of debt fair value adjustment | (2,200 | ) | | (3,008 | ) |
| Amortization of in-place lease liabilities, net | (2,515 | ) | | (5,822 | ) |
| Changes in assets and liabilities: | | | |
| Tenant receivables and other | (2,031 | ) | | 2,354 |
|
| Deferred costs and other assets | (12,783 | ) | | (11,846 | ) |
| Accounts payable, accrued expenses, deferred revenue and other liabilities | 1,391 |
| | 3,141 |
|
| Net cash provided by operating activities | 122,097 |
| | 120,706 |
|
| Cash flows from investing activities: | |
| | |
|
| Capital expenditures, net | (59,703 | ) | | (68,352 | ) |
| Net proceeds from sales of operating properties | 76,076 |
| | 139 |
|
| Collection of note receivable | — |
| | 500 |
|
| Change in construction payables | 6,677 |
| | 621 |
|
| Net cash provided by (used in) investing activities | 23,050 |
| | (67,092 | ) |
| Cash flows from financing activities: | |
| | |
|
| Contributions from the General Partner | — |
| | 4,383 |
|
| Repurchases of common shares upon the vesting of restricted shares | (808 | ) | | (1,124 | ) |
| Acquisition of partner's interest in Fishers Station operating property | (3,750 | ) | | — |
|
| Loan proceeds | 69,700 |
| | 550,194 |
|
| Loan transaction costs | — |
| | (7,280 | ) |
| Loan payments and related financing escrows | (118,771 | ) | | (531,070 | ) |
| Distributions paid – common unitholders | (75,841 | ) | | (70,650 | ) |
| Distributions paid – redeemable noncontrolling interests | (3,086 | ) | | (2,932 | ) |
| Distributions to noncontrolling interests | — |
| | (222 | ) |
| Net cash used in financing activities | (132,556 | ) | | (58,701 | ) |
| Net change in cash and cash equivalents | 12,591 |
| | (5,087 | ) |
| Cash and cash equivalents, beginning of period | 19,874 |
| | 33,880 |
|
| Cash and cash equivalents, end of period | $ | 32,465 |
| | $ | 28,793 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Kite Realty Group Trust and Kite Realty Group,KITE REALTY GROUP TRUST AND KITE REALTY GROUP, L.P. and subsidiariesAND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 20172023
(Unaudited)
($ in thousands, except share, per share, unit and per share data)unit amounts and where indicated in millions or billions)
NoteNOTE 1. Organization
ORGANIZATION AND BASIS OF PRESENTATION
Kite Realty Group Trust (the "Parent Company"“Parent Company”), through its majority-owned subsidiary, Kite Realty Group, L.P. (the “Operating Partnership”), owns interests in various operating subsidiaries and joint ventures engaged in the ownership, and operation, acquisition, development and redevelopment of high-quality, neighborhoodopen-air shopping centers and community shopping centersmixed-use assets in select markets in the United States. The terms "Company," "we," "us,"“Company,” “we,” “us,” and "our"“our” refer to the Parent Company and the Operating Partnership, collectively, and those entities owned or controlled by the Parent Company and/or the Operating Partnership.
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, 20172023 owned approximately 97.7%98.5% of the common partnership interests in the Operating Partnership (“General Partner Units”). The remaining 2.3%1.5% 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.
At September 30, 2017, we owned interests in 117 operating and redevelopment properties totaling approximately 23.1 million square feet. We also owned two development projects under construction as of this date.
Note 2. Basis of Presentation, Consolidation, Investments in Joint Ventures, and Noncontrolling Interests
We have prepared theThe accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the presentation not misleading. The unaudited consolidated financial statements as of September 30, 20172023 and for the three and nine months ended September 30, 20172023 and 20162022 include all adjustments, consisting of normal recurring adjustments, necessary in the opinion of management to present fairly the financial information set forth therein. The unaudited consolidated financial statements in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the combined Annual Report on Form 10-K of the Parent Company and the Operating Partnership for the year ended December 31, 2016.
2022.
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.
As of September 30, 2023, the Company’s portfolio consisted of the following:
| | | | | | | | | | | |
| Properties | | Square Footage |
Operating retail properties(1) | 180 | | | 28,290,147 | |
| Office properties | 1 | | | 287,291 | |
| Development and redevelopment projects: | | | |
| Carillon medical office building | 1 | | | 126,000 | |
| The Corner (IN) | 1 | | | 24,000 | |
| Hamilton Crossing Centre | 1 | | | 92,283 | |
| Edwards Multiplex – Ontario | 1 | | | 124,614 | |
(1)Included within operating retail properties are 10 properties that contain an office component. Excludes one operating retail property classified as held for sale as of September 30, 2023. Of the 180 operating retail properties, 177 are consolidated in these financial statements and the remaining three are accounted for under the equity method.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Components of Investment Properties
The following table summarizes the composition of the Company’s investment properties as of September 30, 20172023 and December 31, 2016 was2022 (in thousands):
| | | | | | | | | | | |
| Balance as of |
| September 30, 2023 | | December 31, 2022 |
| Land, buildings and improvements | $ | 7,643,839 | | | $ | 7,656,765 | |
| Construction in progress | 64,569 | | | 75,808 | |
| Investment properties, at cost | $ | 7,708,408 | | | $ | 7,732,573 | |
Components of Rental Income including Allowance for Uncollectible Accounts
Rental income related to the Company’s operating leases is comprised of the following for the three and nine months ended September 30, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Fixed contractual lease payments – operating leases | $ | 159,491 | | | $ | 155,399 | | | $ | 478,215 | | | $ | 457,875 | |
| Variable lease payments – operating leases | 38,100 | | | 36,636 | | | 117,730 | | | 112,725 | |
| Bad debt reserve | (219) | | | (1,882) | | | (2,007) | | | (3,624) | |
| Straight-line rent adjustments | 3,132 | | | 4,328 | | | 9,900 | | | 12,951 | |
| Straight-line rent reserve for uncollectibility | (367) | | | (34) | | | (177) | | | (298) | |
| Amortization of in-place lease liabilities, net | 3,853 | | | 1,228 | | | 9,228 | | | 3,143 | |
| Rental income | $ | 203,990 | | | $ | 195,675 | | | $ | 612,889 | | | $ | 582,772 | |
The Company makes estimates as follows:
|
| | | | | | | | |
| | | Balance at |
| | | September 30,
2017 | | December 31,
2016 |
| Investment properties, at cost: | | | | |
| Land, buildings and improvements | | $ | 3,838,665 |
| | $ | 3,885,223 |
|
| Furniture, equipment and other | | 7,890 |
| | 7,246 |
|
| Land held for development | | 31,142 |
| | 34,171 |
|
| Construction in progress | | 78,231 |
| | 69,425 |
|
| | | $ | 3,955,928 |
| | $ | 3,996,065 |
|
to the collectability of its accounts receivable. In making these estimates, the Company reviews a variety of qualitative and quantitative data and considers such facts as the credit quality of our customer, historical write-off experience and current economic trends, to make a subjective determination. An allowance for uncollectible accounts, including future credit losses of the accrued straight-line rent receivables, is maintained for estimated losses resulting from the inability of certain tenants to meet contractual obligations under their lease agreements.
Consolidation and Investments in Joint Ventures
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 accounts for properties that are owned by joint ventures in accordance with the consolidation guidance. The Operating Partnership evaluates each joint venture and determines first whether to follow the VIE or the voting interest entity ("VOE") model. Once the appropriate consolidation model is identified, the Operating Partnership then evaluates whether it should consolidate the joint venture. Under the VIE model, the Operating Partnership consolidates an entity when it has (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the VOE model, the Operating Partnership consolidates an entity when (i) it controls the entity through ownership of a majority voting interest if the entity is not a limited partnership or (ii) it controls the entity through its ability to remove the other partners or owners in the entity, at its discretion, when the entity is a limited partnership.
In determining whether to consolidate a VIE with the Operating Partnership, we consider all relationships between the Operating Partnership and the applicable VIE, including development agreements, management agreements and other contractual arrangements, in determining whether we have the power to direct the activities of the VIE that most significantly affect the VIE's performance. As of September 30, 2017,2023, we owned investments in threetwo consolidated joint ventures that were VIEs in which the partners did not have substantive participating rights and we were the primary beneficiary. As of this date, September 30, 2023,
these consolidated VIEs had totalmortgage debt of $238.8$112.7 million, which were secured by assets of the VIEs totaling $496.5$217.6 million. The Operating Partnership guarantees the debtsmortgage debt of these VIEs.
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.
beneficiary.
Income Taxes and REIT Compliance
Parent Company
The Parent Company which is considered a corporation for federal income tax purposes, has been organized and operated, and intends to continue to operate, in a manner that will enable it to maintain its qualification as a REIT for U.S. federal income tax purposes. As a result, it generally will not be subject to U.S. federal income tax on the earnings that it distributes to the extent it distributes its “REIT taxable income” (determined before the deduction for dividends paid and excluding net capital gains) to shareholders of the Parent Company and meets certain other requirements on a recurring basis. To the extent that it satisfies this distribution requirement, but distributes less than 100% of its taxable income, it will be subject to U.S. federal corporate income tax on its undistributed REIT taxable income.income at regular corporate income tax rates. REITs are subject to a number of organizational and operational requirements. If the Parent Company fails to qualify as a REIT in any taxable year, it will be subject to U.S. federal income tax on its taxable income at regular corporate income tax rates for a period of four years following the year in which qualification is lost. Additionally, we may also be subject to certain taxes enacted by the Inflation Reduction Act of 2022 that are applicable to non-REIT corporations, including the nondeductible 1% excise tax on certain stock repurchases. We may also be subject to certain U.S. federal, state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed taxable income even if the Parent
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.
We have elected to treat Kite Realty Holdings, LLC as a taxable REIT subsidiaryTRS of the Operating Partnership. In addition, in connection with the merger with Retail Properties of America, Inc. (“RPAI”) in October 2021, we assumed RPAI’s existing TRS, IWR Protective Corporation, as a TRS of the Operating Partnership and we may elect to treat other subsidiaries as taxable REIT subsidiariesTRSs in the future. This election enables us to receive income and provide services that would otherwise be impermissible for a REIT. Deferred tax assets and liabilities are established for temporary differences between the financial reporting bases and the tax bases of assets and liabilities at the tax rates expected to be in effect when the temporary differences reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Operating Partnership
The allocated share of income and loss, other than the operations of our taxable REIT subsidiary,TRSs, is included in the income tax returns of the Operating Partnership'sPartnership’s partners. Accordingly, the only U.S. federal income taxes included in the accompanying consolidated financial statements are in connection with the Operating Partnership's taxable REIT subsidiary.
TRSs.
Noncontrolling Interests
We report the non-redeemable noncontrolling interests in subsidiaries as equity, and the amount of consolidated net income attributable to these noncontrolling interests is set forth separately in the consolidated financial statements. The following table summarizes the non-redeemable noncontrolling interests in consolidated properties for the nine months ended September 30, 20172023 and 2016 were2022 (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
| Noncontrolling interests balance as of January 1, | $ | 5,370 | | | $ | 5,146 | |
| Net income allocable to noncontrolling interests, excluding redeemable noncontrolling interests | 201 | | | 139 | |
| Distributions to noncontrolling interests | (3,196) | | | — | |
| Noncontrolling interests balance as of September 30, | $ | 2,375 | | | $ | 5,285 | |
Noncontrolling Interests – Joint Venture
Prior to the merger with RPAI, RPAI entered into a joint venture related to the development, ownership and operation of the multifamily rental portion of the expansion project at One Loudoun Downtown – Pads G & H. The Company owns 90% of the joint venture.
During the nine months ended September 30, 2023, the Company originated a 10-year $95.1 million mortgage payable at a fixed interest rate of 5.36% secured by the joint venture project. In conjunction with the loan origination, the joint venture’s construction loan was repaid. Under terms defined in the joint venture agreement, after construction completion and stabilization of the development project (as defined in the joint venture agreement), the Company has the ability to call, and the joint venture partner has the ability to put to the Company, subject to certain conditions, the joint venture partner’s interest in the joint venture at fair value. As of September 30, 2023, these conditions for exercising the put and call options have been met but neither the Company nor the joint venture partner has exercised their respective options.
The joint venture is considered a VIE primarily because the Company’s joint venture partner does not have substantive kick-out rights or substantive participating rights. The Company is considered the primary beneficiary as follows:
|
| | | | | | | |
| | 2017 | | 2016 |
| Noncontrolling interests balance January 1 | $ | 692 |
| | $ | 773 |
|
Net income allocable to noncontrolling interests,
excluding redeemable noncontrolling interests | 6 |
| | 147 |
|
| Distributions to noncontrolling interests | — |
| | (222 | ) |
| Noncontrolling interests balance at September 30 | $ | 698 |
| | $ | 698 |
|
it has a controlling financial interest in the joint venture. As such, the Company has consolidated this joint venture and presented the joint venture partner’s interests as noncontrolling interests.
Redeemable Noncontrolling Interests -– Limited Partners
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. AtAs of September 30, 20172023 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, 20172023 and 2016,2022, the weighted average interests of the Parent Company and the limited partners in the Operating Partnership were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Parent Company’s weighted average interest in Operating Partnership | 98.5 | % | | 98.7 | % | | 98.6 | % | | 98.8 | % |
| Limited partners’ weighted average interests in Operating Partnership | 1.5 | % | | 1.3 | % | | 1.4 | % | | 1.2 | % |
|
| | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Parent Company’s weighted average basic interest in
Operating Partnership | 97.7 | % | | 97.7 | % | | 97.7 | % | | 97.7 | % |
Limited partners' weighted average basic interests in
Operating Partnership | 2.3 | % | | 2.3 | % | | 2.3 | % | | 2.3 | % |
AtAs of September 30, 2017 and December 31, 2016,2023, the Parent Company'sCompany’s interest and the limited partners'partners’ redeemable noncontrolling ownership interests in the Operating Partnership were 97.7%98.5% and 2.3% as1.5%. As of December 31, 2022, the end of each period presented.
Parent Company’s interest and the limited partners’ redeemable noncontrolling ownership interests in the Operating Partnership were 98.7% and 1.3%.
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.
There were 1,986,8303,434,881 and 1,942,3402,870,697 Limited Partner Units outstanding as of September 30, 20172023 and December 31, 2016,2022, respectively. The increase in Limited Partner Units outstanding from December 31, 20162022 is due to non-cash compensation
awards madegranted to our executive officers in the form of Limited Partner Units and the exercise of previously granted Appreciation Only Long-Term Incentive Plan (“AO LTIP”) Units in exchange for Limited Partner Units.
Redeemable Noncontrolling Interests -– Subsidiaries
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 September 30, 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, were outstanding subsequent to the merger with Inland Diversified and are accounted for as noncontrolling interests in these properties. A portion of the remaining venture. In October 2022, the remaining Class B units became redeemable at ourthe partner’s election in March 2017, and the remaining Class B units will become redeemable at our partner's election in October 2022 based on the applicable joint venture and the fulfillment of certain redemption criteria. Beginning in December 2020 and November 2022, with respect to the applicable joint venture, the Class B units can be redeemed at the election of either our partner or uscriteria for cash or Limited Partner Units in the Operating Partnership. NoneIn October 2022, we received notice from our joint venture partner of its exercise of their right to redeem the issuedremaining Class B units for cash in the amount of $9.7 million, which redemption was funded using cash on October 3, 2022. Prior to the redemption, the Class B units did not have a maturity date and none arewere not mandatorily redeemable unless either party hashad elected for the units to be redeemed. We consolidate thesePrior to the redemption, we consolidated this joint venturesventure because we controlcontrolled the decision making of each of the joint venturesdecision-making and our joint venture partners havepartner had limited protective rights.
We received notice from one of our partners exercising their rightPrior to redeem $8.3 million of their Class B units for cash. The amount that will be redeemed was reclassified from Limited partners' interests in Operating Partnership and other redeemable noncontrolling interests to Accounts payable and accrued expenses in the consolidated balance sheets. We expect to fund the redemption, using cash prior to December 27, 2017.
We classify the remainder ofwe classified the redeemable noncontrolling interests in certain subsidiariesrelated to the remaining Class B units in the accompanying consolidated balance sheets outside of permanent equity because, under certain circumstances, we may becould have been required to pay cash to the Class B unitholders in specific subsidiariesthis subsidiary upon redemption of their interests. The carrying amount of these redeemable noncontrolling interests is required to be reflected at the greater of initial book value or redemption value with a corresponding adjustment to additional paid-in capital. As of September 30, 2017 and December 31, 2016,2022, the redemption amounts of these interests did not exceed their fair value nor did they exceed the initial book value.
The redeemable noncontrolling interests in the Operating Partnership and subsidiaries for the nine months ended September 30, 20172023 and 20162022 were as follows:follows (in thousands):
|
| | | | | | | |
| | 2017 | | 2016 |
| Redeemable noncontrolling interests balance January 1 | $ | 88,165 |
| | $ | 92,315 |
|
| Net income allocable to redeemable noncontrolling interests | 1,522 |
| | 1,244 |
|
| Distributions declared to redeemable noncontrolling interests | (3,099 | ) | | (2,973 | ) |
| Liability reclassification due to exercise of partial redemption option by joint venture partner | (8,261 | ) | | — |
|
| Other, net, including adjustments to redemption value | (4,873 | ) | | 8,892 |
|
| Total limited partners' interests in Operating Partnership and other redeemable noncontrolling interests balance at September 30 | $ | 73,454 |
| | $ | 99,478 |
|
| | | |
| | | |
| Limited partners' interests in Operating Partnership | $ | 40,923 |
| | $ | 55,368 |
|
| Other redeemable noncontrolling interests in certain subsidiaries | 32,531 |
| | 44,110 |
|
| Total limited partners' interests in Operating Partnership and other redeemable noncontrolling interests balance at September 30 | $ | 73,454 |
| | $ | 99,478 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
| Redeemable noncontrolling interests balance as of January 1, | $ | 53,967 | | | $ | 55,173 | |
| Net income allocable to redeemable noncontrolling interests | 499 | | | 269 | |
| Distributions declared to redeemable noncontrolling interests | (2,281) | | | (1,972) | |
| Other, net including adjustments to redemption value | 14,815 | | | 3,484 | |
Total limited partners’ interests in the Operating Partnership and other redeemable noncontrolling interests balance as of September 30, | $ | 67,000 | | | $ | 56,954 | |
| | | |
| | | |
| Limited partners’ interests in the Operating Partnership | $ | 67,000 | | | $ | 46,884 | |
| Other redeemable noncontrolling interests in certain subsidiaries | — | | | 10,070 | |
Total limited partners’ interests in the Operating Partnership and other redeemable noncontrolling interests balance as of September 30, | $ | 67,000 | | | $ | 56,954 | |
Fair Value Measurements
We follow the framework established under accounting standard FASBFinancial Accounting Standards Board ASC 820,Fair Value Measurements and Disclosures, for measuring fair value of non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis but only in certain circumstances, such as a business combination or upon determination of an impairment.
Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
•Level 1 fair value inputs are quoted prices in active markets for identical instruments to which we have access.
•Level 2 fair value inputs are inputs other than quoted prices included in Level 1 that are observable for similar instruments, either directly or indirectly, and appropriately consider counterparty creditworthiness in the valuations.valuation.
•Level 3 fair value inputs reflect our best estimate of inputs and assumptions market participants would use in pricing an instrument at the measurement date. The inputs are unobservable in the market and significant to the valuation estimate.
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.
Recently IssuedEffects of Accounting Pronouncements
Any recently issued accounting standards or pronouncements have been excluded as they are either not relevant to the Company or are not expected to have a material impact on the Company’s consolidated financial statements.
NOTE 3. ACQUISITIONS
The Company closed on the following asset acquisition during the nine months ended September 30, 2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Property Name | | Metropolitan
Statistical Area (“MSA”) | | Property Type | | Square
Footage | | Acquisition
Price |
| September 22, 2023 | | Prestonwood Place | | Dallas | | Multi-tenant retail | | 155,975 | | | $ | 81,000 | |
The Company closed on the following asset acquisitions during the nine months ended September 30, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Property Name | | MSA | | Property Type | | Square
Footage | | Acquisition
Price |
| February 16, 2022 | | Pebble Marketplace | | Las Vegas | | Multi-tenant retail | | 85,796 | | | $ | 44,100 | |
| April 13, 2022 | | MacArthur Crossing | | Dallas | | Two-tenant building | | 56,077 | | | 21,920 | |
| July 15, 2022 | | Palms Plaza | | Miami | | Multi-tenant retail | | 68,976 | | | 35,750 | |
| | | | | | | | 210,849 | | | $ | 101,770 | |
The above acquisitions were funded using a combination of available cash on hand and proceeds from the Company’s unsecured revolving line of credit. Substantially all of the purchase price was allocated to investment properties.
NOTE 4. DISPOSITIONS AND IMPAIRMENT CHARGES
The Company closed on the following dispositions during the nine months ended September 30, 2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Property Name | | MSA | | Property Type | | Square
Footage | | Sales Price | | Gain (Loss) |
| May 8, 2023 | | Kingwood Commons | | Houston | | Multi-tenant retail | | 158,172 | | | $ | 27,350 | | | $ | 4,736 | |
| June 8, 2023 | | Pan Am Plaza & Garage | | Indianapolis | | Land & garage | | — | | | 52,025 | | | 23,635 | |
| September 11, 2023 | | Reisterstown Road Plaza | | Dallas | | Multi-tenant retail | | 376,683 | | | 48,250 | | | (5,903) | |
| | | | | | | | 534,855 | | | $ | 127,625 | | | $ | 22,468 | |
The Company closed on the following dispositions during the nine months ended September 30, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Property Name | | MSA | | Property Type | | Square
Footage | | Sales Price | | Gain |
| January 26, 2022 | | Hamilton Crossing Centre | | Indianapolis | | Redevelopment(1) | | — | | | $ | 6,900 | | | $ | 3,168 | |
| June 16, 2022 | | Plaza Del Lago | | Chicago | | Multi-tenant retail(2) | | 100,016 | | | 58,650 | | | 23,958 | |
| | | | | | | | 100,016 | | | $ | 65,550 | | | $ | 27,126 | |
(1)We sold a portion of the redevelopment at Hamilton Crossing Centre.
(2)Plaza Del Lago also contains 8,800 square feet of residential space comprised of 18 multifamily rental units.
As of September 30, 2023, the Company had entered into a contract to sell Eastside, a 43,640 square foot multi-tenant retail property located in the Dallas MSA. This property qualified for held-for-sale accounting treatment upon meeting all applicable GAAP criteria during the quarter ended September 30, 2023, at which time depreciation and amortization ceased. In May 2014,addition, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenueassets and liabilities associated with this property are separately classified as held for sale in the accompanying consolidated balance sheet as of September 30, 2023. No properties qualified for held-for-sale accounting treatment as of December 31, 2022.
As of September 30, 2023, in conjunction with classifying Eastside as held for sale, the Company recorded the asset at the lower of cost or fair value less estimated costs to sell, which was approximately $14.1 million. The estimated fair value of Eastside was based upon the expected sales price from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing GAAP revenue recognition guidance. It will also affect the existing GAAP guidance governing the sale of nonfinancial assets. The new standard’s core principle is that a company will recognize revenue when it satisfies performance obligations by transferring promised goods or services to customers in an amount that reflects the consideration to which the company expectsexecuted sales contract and determined to be entitled a Level 3 input within the fair value hierarchy. As a result, we recorded a $0.5 million impairment charge during the three months ended September 30, 2023. Eastside was sold on October 24, 2023 for a gross sales price of $14.4 million.
The following table presents the assets and liabilities associated with the investment property, Eastside, classified as held for sale as of September 30, 2023 (in exchange for fulfilling those performance obligations. In doing so, companies will need to exercise more judgment and make more estimates than under existing GAAP guidance.thousands):
| | | | | | |
| September 30, 2023 | |
| Assets | | |
| Investment properties, at cost | $ | 15,016 | | |
| Less: accumulated depreciation | (1,218) | | |
| Net investment properties | 13,798 | | |
| | |
| Tenant and other receivables | 100 | | |
| Deferred costs, net | 411 | | |
| | |
| Assets associated with investment property held for sale | $ | 14,309 | | |
| | |
| Liabilities | | |
| | |
| Accounts payable and accrued expenses | $ | 398 | | |
| Deferred revenue and other liabilities | 188 | | |
| Liabilities associated with investment property held for sale | $ | 586 | | |
Under this standard, entities will now generally recognize the sale, and any associated gain or loss, of a real estate property when control of the property transfers, as long as collectability of the consideration is probable.
We have preliminarily evaluated our revenue streams and we currently expect that less than 1% of our recurring revenue will be impacted by this new standard upon its initial adoption. Additionally, we have historically disposed of property and land in all cash transactions withThere were no continuing future involvement in thediscontinued operations and therefore, do not expect the new standard to significantly impact the recognition of property and land sales. During the first nine months of 2017, we disposed of several operating properties and land parcels in all cash transactions with no continuing future involvement. The gains recognized were approximately 8% of our total revenue for the nine months ended September 30, 2017. As we do not have any continuing
involvement in the operations2023 and 2022 as none of the operating propertiesdispositions represented a strategic shift that has had, or will have, a material effect on our operations or financial results.
NOTE 5. DEFERRED COSTS AND INTANGIBLES, NET
Deferred costs consist primarily of acquired lease intangible assets, broker fees and land sold, the accounting for the transactions would have remained the same under ASC 2014-09.
ASU 2014-09 is effective for public entities for annualcapitalized internal commissions incurred in connection with lease originations. Deferred leasing costs, lease intangibles and interim reporting periods beginning after December 15, 2017. ASU 2014-09 allows for either recognizing the cumulative effect of application (i) at the start of the earliest comparative period presented (with the option to use any or all of three practical expedients) or (ii) as a cumulative effect adjustment as of the date of initial application, with no restatement of comparative periods presented. We expect to adopt ASU 2014-09 using the modified retrospective approach.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making certain changes to lessor accounting, including the accounting for sales-type and direct financing leases. ASU 2016-02 will be effective for annual and interim reporting periods beginning on or after December 15, 2018, with early adoption permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. As a result of the adoption of ASU 2016-02, we expect common area maintenance reimbursements thatsimilar costs are of a fixed nature to be recognizedamortized on a straight linestraight-line basis over the termterms of the lease as these tenant reimbursements will be considered a non-lease componentrelated leases. As of September 30, 2023 and will be subject to ASU 2014-09. We also expect to recognize right of use assets on our balance sheet related to certain ground leases where we are the lessee. Upon adoptionDecember 31, 2022, deferred costs consisted of the standard, we anticipate recognizing a rightfollowing (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Acquired lease intangible assets | $ | 450,740 | | | $ | 522,152 | |
| Deferred leasing costs and other | 71,754 | | | 66,842 | |
| | 522,494 | | | 588,994 | |
| Less: accumulated amortization | (197,434) | | | (179,166) | |
| $ | 325,060 | | | $ | 409,828 | |
| Less: deferred costs associated with investment property held for sale | (411) | | | — | |
| Total | $ | 324,649 | | | $ | 409,828 | |
Amortization of use asset currently estimated to be between $35 million and $40 million. In addition to evaluating the impact of adopting the new accounting standard on our consolidated financial statements, we are evaluating our existing lease contracts and compensation structure, as well as our current and future information system capabilities.
The new leasing standard also amends ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers. Under ASC 340-40, incremental costs of obtaining a contract are recognized as an asset if the entity expects to recover them, which will reduce thedeferred leasing costs, currently capitalized. Upon adoptionlease intangibles and other is included within “Depreciation and amortization” in the accompanying consolidated statements of the new standard, we expectoperations and comprehensive income. The amortization of above-market lease intangibles is included as a reduction to “Rental income” in certain capitalized costs and a corresponding increase in general, administrative, and other expense and a decrease in amortization expense on ourthe accompanying consolidated statementstatements of operations but the magnitudeand comprehensive income. The amounts of that change is dependent upon certain variables currently under evaluation, including compensation structure in place upon adoption.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 amends the existing accounting standards for business combinations, by providing a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the assets and activities are not a business. This screen reduces the number of transactions that will likely qualify as business combinations. ASU 2017-01 will be effective for annual and interim reporting periods beginning on or after December 15, 2017, with early adoption permitted. We adopted ASU 2017-01such amortization included in the first quarteraccompanying consolidated statements of 2017. We expect that future acquisitions of single investment properties or a portfolio of investment properties will likely not meet the definition of a businessoperations and in such event, direct transaction costs will be capitalized.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging:Targeted Improvements to Accounting for Hedging Activities. ASU 2017-02 better aligns a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 will be effective for annual and interim reporting periods beginning on or after December 15, 2018, with early adoption permitted using a modified retrospective transition method. This adoption method will require us to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earningsare as of the beginning of the fiscal year that an entity adopts the update. While we continue to assess all potential impacts of the standard, we do not expect the adoption of ASU 2017-12 to have a material impact on our consolidated financial statements.follows (in thousands):
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| 2023 | | 2022 |
| Amortization of deferred leasing costs, lease intangibles and other | $ | 83,768 | | | $ | 117,177 | |
| Amortization of above-market lease intangibles | $ | 9,305 | | | $ | 10,161 | |
Note 3. Earnings Per Share or Unit
Basic 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 determined based on the weighted average common number of 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 earliest date possible.
Potentially dilutive securities include outstanding options to acquire common shares; Limited Partner Units, which may be exchanged for either cash or common shares, at the Parent Company’s option and under certain circumstances; units granted under our Outperformance Incentive Compensation Plan ("Outperformance Plan"); and deferred common share units, which may be
credited to the personal accounts of non-employee trustees in lieu of the payment of cash compensation or the issuance of common shares to such trustees. Limited Partner Units have been omitted from the Parent Company’s denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the denominator would have no dilutive impact. Weighted average Limited Partner Units outstanding for the nine months ended September 30, 2017 and 2016 were 2.0 million and 1.9 million, respectively.
Approximately 0.1 million outstanding options to acquire common shares were excluded from the computations of diluted earnings per share or unit for the nine months ended September 30, 2017, because their impact was not dilutive. Due to the net loss allocable to common shareholders and Common Unit holders for each of the three months ended September 30, 2017 and 2016 and the nine months ended September 30, 2016, no securities had a dilutive impact for these periods.
Note 4. Mortgage and Other IndebtednessNOTE 6. DEFERRED REVENUE, INTANGIBLES, NET AND OTHER LIABILITIES
MortgageDeferred revenue and other indebtednessliabilities consist of (i) the unamortized fair value of below-market lease liabilities recorded in connection with purchase accounting, (ii) retainage payables for development and redevelopment projects, (iii) tenant rent payments received in advance of the month in which they are due, and (iv) lease liabilities recorded upon adoption of ASU 2016-02, Leases (Topic 842). The amortization 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 2085. Tenant rent payments received in advance are recognized as revenue in the period to which they apply, which is typically the month following their receipt.
As of September 30, 2023 and December 31, 2022, deferred revenue, intangibles, net and other liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Unamortized in-place lease liabilities | $ | 167,390 | | | $ | 188,815 | |
| Retainages payable and other | 12,005 | | | 12,110 | |
| Tenant rents received in advance | 31,392 | | | 29,947 | |
| Lease liabilities | 69,361 | | | 67,167 | |
| $ | 280,148 | | | $ | 298,039 | |
| Less: deferred revenue associated with investment property held for sale | (188) | | | — | |
| Total | $ | 279,960 | | | $ | 298,039 | |
The amortization of below-market lease intangibles is included as a component of “Rental income” in the accompanying consolidated statements of operations and comprehensive income and totaled $18.5 million and $13.3 million for the nine months ended September 30, 2023 and 2022, respectively.
NOTE 7. MORTGAGE AND OTHER INDEBTEDNESS
The following table summarizes the Company’s indebtedness as of September 30, 20172023 and December 31, 2016:2022 (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Mortgages payable | $ | 154,567 | | | $ | 233,621 | |
| Senior unsecured notes | 1,829,635 | | | 1,924,635 | |
| Unsecured term loans | 820,000 | | | 820,000 | |
| Unsecured revolving line of credit | 39,000 | | | — | |
| 2,843,202 | | | 2,978,256 | |
| Unamortized discounts and premiums, net | 35,721 | | | 44,362 | |
| Unamortized debt issuance costs, net | (10,095) | | | (12,319) | |
| Total mortgage and other indebtedness, net | $ | 2,868,828 | | | $ | 3,010,299 | |
|
| | | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| | Principal | | Unamortized Net Premiums | | Unamortized Debt Issuance Costs | | Total |
| Senior unsecured notes - fixed rate | $ | 550,000 |
| | $ | — |
| | $ | (5,693 | ) | | $ | 544,307 |
|
| Unsecured revolving credit facility | 41,100 |
| | — |
| | (2,109 | ) | | 38,991 |
|
| Unsecured term loans | 400,000 |
| | — |
| | (1,871 | ) | | 398,129 |
|
| Mortgage notes payable - fixed rate | 577,975 |
| | 9,909 |
| | (814 | ) | | 587,070 |
|
| Mortgage notes payable - variable rate | 113,815 |
| | — |
| | (636 | ) | | 113,179 |
|
| Total mortgage and other indebtedness | $ | 1,682,890 |
| | $ | 9,909 |
| | $ | (11,123 | ) | | $ | 1,681,676 |
|
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Principal | | Unamortized Net Premiums | | Unamortized Debt Issuance Costs | | Total |
| Senior unsecured notes - fixed rate | $ | 550,000 |
| | $ | — |
| | $ | (6,140 | ) | | $ | 543,860 |
|
| Unsecured revolving credit facility | 79,600 |
| | — |
| | (2,723 | ) | | 76,877 |
|
| Unsecured term loans | 400,000 |
| | — |
| | (2,179 | ) | | 397,821 |
|
| Mortgage notes payable - fixed rate | 587,762 |
| | 12,109 |
| | (994 | ) | | 598,877 |
|
| Mortgage notes payable - variable rate | 114,388 |
| | — |
| | (749 | ) | | 113,639 |
|
| Total mortgage and other indebtedness | $ | 1,731,750 |
| | $ | 12,109 |
| | $ | (12,785 | ) | | $ | 1,731,074 |
|
Consolidated indebtedness, including weighted average maturitiesinterest rates and weighted average interest ratesmaturities as of September 30, 2017,2023, considering the impact of interest rate swaps, is summarized below:below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amount
Outstanding | | Ratio | | Weighted Average
Interest Rate | | Weighted Average Years
to Maturity |
Fixed rate debt(1) | $ | 2,631,602 | | | 93 | % | | 4.01 | % | | 4.2 |
Variable rate debt(2) | 211,600 | | | 7 | % | | 8.58 | % | | 3.1 |
| Debt discounts, premiums and issuance costs, net | 25,626 | | | N/A | | N/A | | N/A |
| Total | $ | 2,868,828 | | | 100 | % | | 4.35 | % | | 4.1 |
(1)Fixed rate debt includes the portion of variable rate debt that has been hedged by interest rate swaps. As of September 30, 2023, $820.0 million in variable rate debt is hedged to a fixed rate for a weighted average of 1.9 years. |
| | | | | | | | | | | |
| | Outstanding Amount | | Ratio | | Weighted Average
Interest Rate | | Weighted Average
Maturity (Years) |
Fixed rate debt1 | $ | 1,588,505 |
| | 94 | % | | 4.08 | % | | 5.8 |
| Variable rate debt | 94,385 |
| | 6 | % | | 2.73 | % | | 4.4 |
| Net debt premiums and issuance costs, net | (1,214 | ) | | N/A |
| | N/A |
| | N/A |
| Total | $ | 1,681,676 |
| | 100 | % | | 4.00 | % | | 5.7 |
Mortgages Payable
The following table summarizes the Company’s mortgages payable (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Balance | | Weighted Average
Interest Rate | | Weighted Average Years
to Maturity | | Balance | | Weighted Average
Interest Rate | | Weighted Average Years
to Maturity |
Fixed rate mortgages payable(1) | $ | 136,967 | | | 5.09 | % | | 8.3 | | $ | 205,328 | | | 3.98 | % | | 1.4 |
Variable rate mortgage payable(2) | 17,600 | | | 7.54 | % | | 3.8 | | 28,293 | | | 5.96 | % | | 0.6 |
| Total mortgages payable | $ | 154,567 | | | | | | | $ | 233,621 | | | | | |
(1)The fixed rate mortgages had interest rates ranging from 3.75% to 5.73% as of September 30, 2023 and December 31, 2022. |
| |
____________________ |
1 | Fixed rate debt includes, and variable rate date excludes, the portion of such debt that has been hedged by interest rate derivatives. As of September 30, 2017, $460.5 million in variable rate debt is hedged for a weighted average 2.0 years. |
(2)During the three months ended September 30, 2023, the interest rate on the variable rate mortgage increased to Bloomberg Short Term Bank Yield Index (“BSBY”) plus 215 basis points from BSBY plus 160 basis points in conjunction with the July 2023 amendment of the loan agreement. The one-month BSBY rate was 5.39% and 4.36% as of September 30, 2023 and December 31, 2022, respectively.
Mortgage indebtedness is collateralizedMortgages payable, which are secured by certain real estate properties and, leases, and isin some cases, by guarantees from the Operating Partnership, are generally due in monthly installments of principal and interest and principal and maturesmature over various terms through 2030.2033. During the nine months ended September 30, 2023, we (i) 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 expansion project at One Loudoun Downtown – Pads G & H, (ii) amended the loan agreement on the variable rate mortgage secured by Delray Marketplace to extend the maturity date to August 4, 2026, with a one-year extension option, and made a $9.9 million paydown of the principal balance using available cash on hand, (iii) repaid mortgages payable totaling $161.5 million that had a weighted average fixed interest rate of 3.85%, and (iv) made scheduled principal payments of $2.7 million related to amortizing loans.
Variable interest ratesUnsecured Notes
The following table summarizes the Company’s senior unsecured notes and exchangeable senior notes (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2023 | | December 31, 2022 |
| Maturity Date | | Balance | | Interest Rate | | Balance | | Interest Rate |
| Senior notes – 4.23% due 2023 | September 10, 2023 | | $ | — | | | — | % | | $ | 95,000 | | | 4.23 | % |
| Senior notes – 4.58% due 2024 | June 30, 2024 | | 149,635 | | | 4.58 | % | | 149,635 | | | 4.58 | % |
| Senior notes – 4.00% due 2025 | March 15, 2025 | | 350,000 | | | 4.00 | % | | 350,000 | | | 4.00 | % |
Senior notes – SOFR + 3.65% due 2025(1) | September 10, 2025 | | 80,000 | | | 9.17 | % | | 80,000 | | | 8.41 | % |
| Senior notes – 4.08% due 2026 | September 30, 2026 | | 100,000 | | | 4.08 | % | | 100,000 | | | 4.08 | % |
| Senior notes – 4.00% due 2026 | October 1, 2026 | | 300,000 | | | 4.00 | % | | 300,000 | | | 4.00 | % |
| Senior exchangeable notes – 0.75% due 2027 | April 1, 2027 | | 175,000 | | | 0.75 | % | | 175,000 | | | 0.75 | % |
Senior notes – SOFR + 3.75% due 2027(2) | September 10, 2027 | | 75,000 | | | 9.27 | % | | 75,000 | | | 8.51 | % |
| Senior notes – 4.24% due 2028 | December 28, 2028 | | 100,000 | | | 4.24 | % | | 100,000 | | | 4.24 | % |
| Senior notes – 4.82% due 2029 | June 28, 2029 | | 100,000 | | | 4.82 | % | | 100,000 | | | 4.82 | % |
| Senior notes – 4.75% due 2030 | September 15, 2030 | | 400,000 | | | 4.75 | % | | 400,000 | | | 4.75 | % |
| Total senior unsecured notes | | | $ | 1,829,635 | | | | | $ | 1,924,635 | | | |
(1)On July 1, 2023, the fallback rate in the derivative agreement went into effect. As of September 30, 2023, $80,000 of 4.47% senior unsecured notes has been swapped to a variable rate of three-month Secured Overnight Financing Rate (“SOFR”) plus 3.65% through September 10, 2025. As of December 31, 2022, $80,000 of 4.47% senior unsecured notes had been swapped to a variable rate of three-month London Interbank Offered Rate (“LIBOR”) plus 3.65%.
(2)On July 1, 2023, the fallback rate in the derivative agreement went into effect. As of September 30, 2023, $75,000 of 4.57% senior unsecured notes has been swapped to a variable rate of three-month SOFR plus 3.75% through September 10, 2025. As of December 31, 2022, $75,000 of 4.57% senior unsecured notes had been swapped to a variable rate of three-month LIBOR plus 3.75%.
During the three months ended September 30, 2023, the Company repaid the $95.0 million principal balance of the 4.23% senior unsecured notes due 2023 using available cash on mortgage indebtedness arehand.
Unsecured Term Loans and Revolving Line of Credit
The following table summarizes the Company’s term loans and revolving line of credit (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2023 | | December 31, 2022 |
| Maturity Date | | Balance | | Interest Rate | | Balance | | Interest Rate |
Unsecured term loan due 2024 – fixed rate(1) | July 17, 2024 | | $ | 120,000 | | | 2.68 | % | | $ | 120,000 | | | 2.68 | % |
Unsecured term loan due 2025 – fixed rate(2) | October 24, 2025 | | 250,000 | | | 5.09 | % | | 250,000 | | | 5.09 | % |
Unsecured term loan due 2026 – fixed rate(3) | July 17, 2026 | | 150,000 | | | 2.73 | % | | 150,000 | | | 2.73 | % |
Unsecured term loan due 2029 – fixed rate(4) | July 29, 2029 | | 300,000 | | | 4.05 | % | | 300,000 | | | 4.05 | % |
| Total unsecured term loans | | | $ | 820,000 | | | | | $ | 820,000 | | | |
| | | | | | | | | |
Unsecured credit facility revolving line of credit – variable rate(5) | January 8, 2026 | | $ | 39,000 | | | 6.51 | % | | $ | — | | | 5.56 | % |
(1)$120,000 of SOFR-based variable rate debt has been swapped to a fixed rate of 1.58% plus a credit spread based on LIBOR plus spreadsa ratings grid ranging from 1600.80% to 225 basis points. At1.65% through July 17, 2024. The applicable credit spread was 1.10% as of September 30, 2017,2023 and December 31, 2022.
(2)$250,000 of SOFR-based variable rate debt has been swapped to a fixed rate of 5.09% through October 24, 2025. The maturity date of the one-month LIBOR interestterm loan may be extended for up to three additional periods of one year each at the Operating Partnership’s option, subject to certain conditions.
(3)$150,000 of SOFR-based variable rate was 1.23%. Fixed interest rates on mortgage indebtedness range from 3.78%debt has been swapped to 6.78%.
Debt Issuance Costs
Debt issuance costs are amortizeda fixed rate of 1.68% plus a credit spread based on a straight-line basis overratings grid ranging from 0.75% to 1.60% through July 17, 2026. The applicable credit spread was 1.05% as of September 30, 2023 and December 31, 2022.
(4)$300,000 of SOFR-based variable rate debt has been swapped to a fixed rate of 2.70% plus a credit spread based on a ratings grid ranging from 1.15% to 2.20% through November 22, 2023. The applicable credit spread was 1.35% as of September 30, 2023 and December 31, 2022.
(5)The revolving line of credit has two six-month extension options that the termsCompany can exercise, at its election, subject to (i) customary representations and warranties, including, but not limited to, the absence of an event of default as defined in the unsecured credit agreement and (ii) payment of an extension fee equal to 0.075% of the respective loan agreements.
The accompanying consolidated statementsrevolving line of operations include amortization of debt issuance costs as a component of interest expense as follows:
|
| | | | | | | | |
| | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 |
| Amortization of debt issuance costs | | $ | 2,014 |
| | $ | 3,744 |
|
credit capacity.
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 total commitment of $500 million that matures in July 2020 (inclusive of two six-month extension options), a $200seven-year $300.0 million unsecured term loan maturing in July 2021("(the “$300M Term Loan"Loan”) and a $200 million seven-year unsecured term loan maturing in October 2022.
The. Under the Second Amendment, the Operating Partnership has the option, subject to certain customary conditions, to increase the borrowing availabilityRevolving 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 facility amount of up 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 Credit Facility to $1 billion and theOperating Partnership’s option, to increase the Term Loan to provide for an additional $200 million, in each case subject to certain conditions,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 September 30, 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 September 30, 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 obtaining commitments from one or more lenders.
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 September 30, 2023, we were in compliance with all such covenants.
As of September 30, 2017, $41.1 million was outstanding under the Credit Facility. Additionally,2023, we had letters of credit outstanding which totaled $5.3totaling $0.3 million, against which no amounts were advanced as of September 30, 2017.2023.
Unsecured Term Loans
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, 2017,2023, the valueOperating 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 2029, each of which bears interest at a rate 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 assetsotherwise applicable interest rate margin by one basis point upon achievement of targets set forth in our unencumbered asset pool, calculated pursuant toeach agreement.
The following table summarizes the Credit Facility agreement, was $1.4 billion. Taking into account outstanding borrowings onkey terms of the line of credit,unsecured 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. 2023 (dollars in 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% |
Our ability(1)The maturity date may be extended for up to borrow underthree additional periods of one year each at the Credit Facility isOperating Partnership’s option, subject to our compliance with various restrictivecertain conditions.
Under the agreement related to the $120M Term Loan and financial covenants,the $150M Term Loan, the Operating Partnership has the option to increase each of the term loans to $250.0 million upon the Operating Partnership’s request, subject to certain conditions, including with respectobtaining commitments from any one or more lenders, whether or not currently party to liens, indebtedness, investments, dividends, mergersthe term loan agreement, to provide such increased amounts. The Operating Partnership is permitted to prepay each of the $120M Term Loan and asset sales. As of September 30, 2017, we were$150M Term Loan, in compliance with all such covenants.
Senior Unsecured Notes
whole or in part, at any time without being subject to a prepayment fee.
The Operating Partnership has $550the option to increase the $250M Term Loan to $300.0 million, of seniorsubject to certain conditions, including obtaining commitments from any one or more lenders, whether or not currently party to the term loan agreement, to provide such increased amounts. The Operating Partnership is permitted to prepay the $250M Term Loan in whole or in part, at any time, subject to a prepayment fee if prepaid on or before October 25, 2023.
The Operating Partnership is 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.
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
| Amortization of debt issuance costs | $ | 2,685 | | | $ | 2,169 | |
Fair Value of Fixed and Variable Rate Debt
As of September 30, 2017,2023, 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%6.22% to 6.78%8.20%. As of September 30, 2017,2023, the estimated fair value of variable rate debt was $555.6$880.2 million compared to the book value of $554.9$876.6 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%6.47% 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%7.42%.
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 September 30, 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 | | September 30, 2023 | | December 31, 2022 |
| Cash Flow | | Four | | $ | 250,000 | | | SOFR | | 2.99 | % | | 12/1/2022 | | 10/24/2025 | | $ | 9,158 | | | $ | 7,134 | |
| Cash Flow | | Two | | 100,000 | | | SOFR | | 2.66 | % | | 8/1/2022 | | 8/1/2025 | | 4,012 | | | 3,616 | |
| Cash Flow | | Two | | 200,000 | | | SOFR | | 2.72 | % | | 8/3/2022 | | 11/22/2023 | | 750 | | | 3,663 | |
| Cash Flow | | Three | | 120,000 | | | SOFR | | 1.58 | % | | 8/15/2022 | | 7/17/2024 | | 3,557 | | | 5,461 | |
| Cash Flow | | Three | | 150,000 | | | SOFR | | 1.68 | % | | 8/15/2022 | | 7/17/2026 | | 11,491 | | | 10,896 | |
| | | | $ | 820,000 | | | | | | | | | | | $ | 28,968 | | | $ | 30,770 | |
| | | | | | | | | | | | | | | | |
Fair Value(2) | | Two | | $ | 155,000 | | | SOFR | | SOFR + 3.70% | | 4/23/2021 | | 9/10/2025 | | $ | (12,791) | | | $ | (14,177) | |
| | | | | | | | | | | | | | | | |
Forward-Starting Cash Flow | | Two | | $ | 200,000 | | | SOFR | | 2.37 | % | | 11/22/2023 | | 8/1/2025 | | $ | 8,187 | | | $ | 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)On July 1, 2023, the fallback rate in the derivative agreements went into effect. The derivative agreements swap a blended fixed rate of 4.52% for a blended floating rate of three-month SOFR plus 3.70% as of September 30, 2023 and three-month LIBOR plus 3.70% as of December 31, 2022.
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 nine months ended September 30, 2023, we accelerated the reclassification of $3.1 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 September 30, 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 $5.5 million and $13.2 million was reclassified as an increase to earnings during the three and nine months ended September 30, 2023, respectively. Approximately $1.2 million and $8.6 million was reclassified as a decrease to earnings during the three and nine months ended September 30, 2022, respectively. As interest payments on our derivatives are made over the next 12 months, we estimate the decrease to interest expense to be approximately $28.4 million, assuming the current SOFR curve.
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 third quarter of 20172023. This distribution was paid on October 13, 2023 to common shareholders and Common Unit holders of record as of October 6, 2017. The distribution was paid on October 13, 2017.
Note 7. Deferred Costs and Intangibles, 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 over2023. For the terms of the related leases. Atnine months ended September 30, 20172023, we declared cash distributions totaling $0.72 per common share and December 31, 2016, deferred costs consistedCommon Unit.
For the three and nine months ended September 30, 2022, we declared cash distributions of $0.22 and $0.63, respectively, per common share and Common Unit.
At-The-Market Offering Program
In February 2021, 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 |
|
AmortizationCompany and the Operating Partnership entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with each of deferred leasing costs, leasing intangiblesBofA 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 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 September 30, 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 inSeptember 30, 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) 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 3.3 million and $10.63.1 million for the three and nine months ended September 30, 20172023, and 2016,3.0 million and 2.7 million for the three and nine months ended September 30, 2022, respectively.
Due to the net loss allocable to common shareholders and Common Unit holders for the three and nine months ended September 30, 2022, no securities had a dilutive impact for those periods.
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 September 30, 2023, the outstanding loan balance was $32.9 million, of which our share was $11.5 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 September 30, 2023, the outstanding balance of the loans was $52.4 million, of which our share was $26.2 million.
As of September 30, 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 tenants to complete all or portionsNOTE 12. RELATED PARTY TRANSACTIONS
On August 7, 2023, a wholly owned subsidiary of the Company (“KRG Development”) assigned to Pan Am Development Partners, LLC (“Assignee”) certain rights and obligations related to the development and redevelopment projects. We believe we currently have sufficient financing in place to fund these projects and expect to do so primarily through borrowingsof a hotel 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
DuringPan Am Plaza site across from 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 propertyIndiana Convention Center 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 millionIndianapolis, IN, including certain future development rights and a net gainright of $6.3 million.
Duringfirst offer involving the three months ended March 31, 2017, we soldproject (collectively, the “Project Rights and Obligations”). Assignee is a wholly owned subsidiary of Circle Block Investors, LLC, the parent company that owns the Conrad Indianapolis hotel, of which Mr. Alvin E. Kite, our Cove Center operating property in Stuart, Florida for gross proceedsChairman Emeritus and the father of $23.1 millionMr. John A. Kite, is the majority owner, and a net gainMr. John A. Kite, our Chief Executive Officer and Chairman of $8.9 million.
the Board, and Mr. Thomas K. McGowan, our President and Chief Operating Officer, are minority owners. In connection with the preparationtransaction, Assignee assumed all Project Rights and reviewObligations from and after August 7, 2023 and agreed to pay KRG Development an assignment fee of up to $3.5 million (the “Assignment Fee”), which is due and payable upon the completion of certain development activities that are expected to occur in 2024. In connection with the transactions, Mr. Kite and Mr. McGowan expressly acknowledged and agreed that they remain subject to their executive employment agreements with the Company, including, without limitation, the obligation of each executive to devote substantially all his business time and effort to the performance of his duties for the Company. Assignee will engage a team of full-time professionals to perform the Project Rights and Obligations. The transaction was approved by a special transaction committee of the March 31, 2017 financial statements, we evaluated an operating property for impairment due to the shorteningindependent trustees of the intended holding period. We concludedCompany (the “Transaction Committee”) as well as the estimated undiscounted cash flows overCompany’s independent trustees. The Transaction Committee engaged a third-party financial advisor to assist it in determining the expected holding period did not exceed the carryingnet value of the asset. The Company estimatedProject Rights and Obligations and establishing the fair valueAssignment Fee.
NOTE 13. SUBSEQUENT EVENTS
Subsequent to September 30, 2023, we closed on the disposition of Eastside, a 43,640 square foot multi-tenant retail property in the Dallas MSA, which was classified as held for sale as of September 30, 2023, for a gross sales price of $14.4 million and no gain or loss on sale due to previously recognized impairment charges. A portion of the propertyproceeds was used to repay amounts outstanding on the Revolving Facility.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be $26.0 million using Level 3 inputs withinread in conjunction with the fair value hierarchy, primarily usingaccompanying historical financial statements and related notes thereto. In this discussion, unless the market approach. We compared the fair value measurementcontext suggests otherwise, references 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.“our Company,” “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.
AtAs of September 30, 2017,2023, we owned interests in 117180 operating and redevelopmentretail properties totaling approximately 23.128.3 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 180 operating retail properties, 10 contain an office component. We also owned two development projects under construction as of this date.date and an additional two properties with future redevelopment opportunities.
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 increased significantly over the past two years and remained elevated with a slow downtrend. 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 rental rates in many of our leases are below current market rates for comparable space and that upon renewal or re-leasing, such rates may be increased to be in line with current rates, which may offset certain inflationary expense pressures. Due to the high inflation environment, the U.S. Federal Reserve 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 third quarter of 2017,2023, we executed 86 new and renewal leases on 214 individual spaces totaling 432,8141,398,695 square feet.feet (14.2% cash leasing spread on 165 comparable leases). New leases were signed on 3967 individual spaces for 92,089226,593 square feet of gross leasable area ("GLA"(“GLA”) (36.0% cash leasing spread on 33 comparable leases), while non-option renewal leases were signed on 4783 individual spaces for 340,725329,048 square feet of GLA.
ForGLA (17.8% cash leasing spread on 68 comparable leases) and option renewals were signed on 64 individual spaces for 843,054 square feet of GLA (8.3% cash leasing spread). Excluding option renewals, the blended cash spreads for comparable new and non-option renewal leases whichwere 24.0%. 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 three and nine months ended September 30, 20172023 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:
|
| | | | | | | |
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 |
|
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 |
|
Development Activities
Acquisitions
The following development properties became operational from January 1, 2016 through September 30, 2017:
|
| | | | | | | |
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 |
|
Redevelopment Activities
The followingoperating properties were under active redevelopmentacquired at various times during the period from January 1, 20162022 through September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | |
| 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 | |
| Prestonwood Place | | Dallas, TX | | September 22, 2023 | | 155,975 | |
Dispositions
The following operating and other properties were sold during the period from January 1, 2022 through September 30, 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 | | — | |
| Kingwood Commons | | Houston, TX | | May 8, 2023 | | 158,172 | |
| Pan Am Plaza & Garage | | Indianapolis, IN | | June 8, 2023 | | — | |
| Reisterstown Road Plaza | | Baltimore, MD | | September 11, 2023 | | 376,683 | |
(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.
In addition to the above dispositions, Eastside, a 43,640 square foot operating retail property located in the Dallas MSA, is classified as held for sale as of September 30, 2023 and was sold on October 24, 2023.
Development and Redevelopment Projects
The following properties were under active development or redevelopment at various times during the period from January 1, 2022 through September 30, 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 |
|
Hamilton Crossing Centre2(2)(3) | | Indianapolis, IN | | June 2014 | | Pending | | 92,283 |
|
City Center2
| | White Plains, NY | | December 2015 | | Pending | | 360,880 |
|
Fishers Station2
| | Indianapolis, IN | | December 2015 | | Pending | | 175,229 |
|
Beechwood Promenade2
| | Athens, GA | | December 2015 | | Pending | | 348,815 |
|
The Corner2
| | Indianapolis, IN | | December 2015 | | Pending | | 26,500 |
|
Rampart Commons2
| | Las Vegas, NV | | March 2016 | | Pending | | 79,455 |
|
Northdale Promenade3
| | Tampa, FL | | March 2016 | | June 2017 | | 173,862 |
|
Burnt Store2
| | Punta Gorda, FL | | June 2016 | | Pending | | 95,795 |
|
|
| |
____________________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 | | June 2023 | | 39,900 | |
3Carillon MOB(2) | 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(2) | | 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, 20172023 to the Three Months Ended September 30, 20162022
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, 20172023 and 2016. 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2023 | | 2022 | | Change |
| Revenue: | | | | | |
| Rental income | $ | 203,990 | | | $ | 195,675 | | | $ | 8,315 | |
| Other property-related revenue | 2,172 | | | 3,013 | | | (841) | |
| Fee income | 1,057 | | | 1,623 | | | (566) | |
| Total revenue | 207,219 | | | 200,311 | | | 6,908 | |
| | | | | |
| Expenses: | | | | | |
| Property operating | 27,644 | | | 25,507 | | | 2,137 | |
| Real estate taxes | 26,453 | | | 25,703 | | | 750 | |
| General, administrative and other | 13,917 | | | 14,859 | | | (942) | |
| Merger and acquisition costs | — | | | 108 | | | (108) | |
| Depreciation and amortization | 105,930 | | | 115,831 | | | (9,901) | |
| Impairment charges | 477 | | | — | | | 477 | |
| Total expenses | 174,421 | | | 182,008 | | | (7,587) | |
| | | | | |
| Loss on sales of operating properties, net | (5,972) | | | — | | | (5,972) | |
| | | | | |
| Operating income | 26,826 | | | 18,303 | | | 8,523 | |
| Other (expense) income: | | | | | |
| Interest expense | (25,484) | | | (26,226) | | | 742 | |
| Income tax expense of taxable REIT subsidiary | (68) | | | — | | | (68) | |
| | | | | |
| Equity in (loss) earnings of unconsolidated subsidiaries | (47) | | | 144 | | | (191) | |
| Other income, net | 950 | | | 58 | | | 892 | |
| Net income (loss) | 2,177 | | | (7,721) | | | 9,898 | |
| Net income attributable to noncontrolling interests | (107) | | | (116) | | | 9 | |
| Net income (loss) attributable to common shareholders | $ | 2,070 | | | $ | (7,837) | | | $ | 9,907 | |
| | | | | | | | | | | | | | | | | |
| Property operating expense to total revenue ratio | 13.3 | % | | 12.7 | % | | |
|
| | | | | | | | | | | |
| ($ 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 $8.3 million, or 2.1%4.2%, due to the following:following (in thousands):
|
| | | |
| ($ 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 September 30, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (1,709) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 1,304 | |
| Properties fully operational during 2022 and 2023 and other | 8,720 | |
| Total | $ | 8,315 | |
The net increase of $1.9$8.7 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 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, 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 by the average rent for new comparable leases signedincreases in the third quarter of 2017 increasing to $28.04 per square foot compared to average expiringfollowing: (i) base minimum rent of $23.58 per square foot. The average rent for renewals signed in the third quarter$3.6 million, (ii) tenant reimbursements due to higher recoverable common area maintenance expenses of 2017 was $17.99 per square foot compared to average expiring$2.3 million, and (iii) overage rent of $16.40 per square foot in that quarter. For our total retail operating portfolio, annualized base rent per square foot$0.2 million due to improved to $16.01 per square foot astenant performance, along with lower bad debt expense of $1.7 million. The occupancy of the fully operational properties decreased from 91.9% for the three months ended September 30, 2017, up from $15.42 as of2022 to 91.6% for the three months ended 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 decreased by $0.2$0.8 million primarily due toas a result of lower gains on sales of undepreciated assets of $0.4 millionrecognized during the three months ended September 30, 2023 and a decrease in parking revenue due to the sale of $0.2Pam Am Plaza Garage in June 2023.
We recorded fee income of $1.1 million and $1.6 million during the three months ended September 30, 2023 and 2022, respectively, from property management and development services provided to third parties and unconsolidated joint ventures. The decrease in overage rent, partially offset by an increasefee income is primarily related to a decrease in development fees earned related to the development of $0.3 million in lease termination income.a corporate campus for Republic Airways at Hamilton Crossing Centre.
Property operating expenses decreased $0.1increased $2.1 million, or 0.5%8.4%, due to the following:following (in thousands):
|
| | | |
| ($ 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 September 30, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (658) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 64 | |
| Properties fully operational during 2022 and 2023 and other | 2,731 | |
| Total | $ | 2,137 | |
The net increase of $0.1$2.7 million in property operating expenses for properties that were fully operational during 20162022 and 20172023 is primarily due to a combination of increases in bad debt expense primarily related to certain tenant bankruptcies, utilitythe following: (i) $2.0 million in non-recoverable operating expenses, (ii) $0.2 million in landscaping and repairs and maintenance expense, and non-recoverable landscaping expense as a result of hurricane damages(iii) $0.2 million in Florida, offset by decreases in general building repair and security expense at certain properties. None of the individual fluctuations were greater than $0.2 million.
utilities. As a percentage of revenue, property operating expenses increased between periods from 13.4%12.7% to 13.6%. The increase was mostly13.3% due to an increase in non-recoverable landscaping expense as a result of hurricane damagesexpenses in Florida.2023.
Real estate taxes increased $0.1$0.8 million, or 1.3%2.9%, due to the following:following (in thousands):
|
| | | |
| ($ 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 September 30, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (187) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 331 | |
| Properties fully operational during 2022 and 2023 and other | 606 | |
| Total | $ | 750 | |
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 increase in current yearhigher 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 $0.4decreased $0.9 million, or 6.9%. The6.3%, primarily due to lower incremental head count and the timing of backfills, partially offset by an increase is due primarily to higher personnel costs and company overheadin executive transportation expenses.
The Company did not incur any significant merger and acquisition costs related to the merger with RPAI during the three months ended September 30, 2023 and 2022.
Depreciation and amortization expense decreased $2.8$9.9 million, or 6.0%8.5%, due to the following:following (in thousands):
|
| | | |
| ($ 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 September 30, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (1,811) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 976 | |
| Properties fully operational during 2022 and 2023 and other | (9,066) | |
| Total | $ | (9,901) | |
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$9.1 million in depreciation and amortization at properties that were fully operational during 20162022 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 decreased $0.8 million or 4.5%. The decrease2023 is primarily due to the repaymenttiming of placing assets in service and writing-off tenant-related assets as a result of tenant move-outs.
Based on the results of our evaluations for impairment, we recorded a $0.5 million impairment charge during the three months ended September 30, 2023 on Eastside, a retail operating property level debt using proceeds from our property sales. The decrease waslocated in the Dallas MSA that qualified for held-for-sale accounting treatment as of September 30, 2023. No impairment charges were recorded during the three months ended September 30, 2022.
We recorded a net loss on sales of operating properties of $6.0 million for the three months ended September 30, 2023 on the sale of Reisterstown Road Plaza. We did not sell any properties during the three months ended September 30, 2022.
Interest expense decreased $0.7 million, or 2.8%, primarily due to favorable interest rate swaps, partially offset by certain development projects, 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 thehigher interest costs related interest expense.to our variable rate debt.
Comparison of Operating Results for the Nine Months Ended September 30, 20172023 to the Nine Months Ended September 30, 20162022
The following table reflects income statement line items fromchanges in the components of our consolidated statements of operations for the nine months ended September 30, 20172023 and 2016. 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2023 | | 2022 | | Change |
| Revenue: | | | | | |
| Rental income | $ | 612,889 | | | $ | 582,772 | | | $ | 30,117 | |
| Other property-related revenue | 5,971 | | | 7,932 | | | (1,961) | |
| Fee income | 3,868 | | | 6,603 | | | (2,735) | |
| Total revenue | 622,728 | | | 597,307 | | | 25,421 | |
| | | | | |
| Expenses: | | | | | |
| Property operating | 82,190 | | | 77,558 | | | 4,632 | |
| Real estate taxes | 80,333 | | | 80,445 | | | (112) | |
| General, administrative and other | 41,800 | | | 41,977 | | | (177) | |
| Merger and acquisition costs | — | | | 1,006 | | | (1,006) | |
| Depreciation and amortization | 323,463 | | | 357,096 | | | (33,633) | |
| Impairment charges | 477 | | | — | | | 477 | |
| Total expenses | 528,263 | | | 558,082 | | | (29,819) | |
| | | | | |
| Gain on sales of operating properties, net | 22,468 | | | 27,126 | | | (4,658) | |
| | | | | |
| Operating income | 116,933 | | | 66,351 | | | 50,582 | |
| Other (expense) income: | | | | | |
| Interest expense | (78,114) | | | (77,449) | | | (665) | |
| Income tax (expense) benefit of taxable REIT subsidiary | (84) | | | 259 | | | (343) | |
| | | | | |
| Equity in loss of unconsolidated subsidiaries | (173) | | | (56) | | | (117) | |
| Other income (expense), net | 1,657 | | | (207) | | | 1,864 | |
| Net income (loss) | 40,219 | | | (11,102) | | | 51,321 | |
| Net income attributable to noncontrolling interests | (700) | | | (408) | | | (292) | |
| Net income (loss) attributable to common shareholders | $ | 39,519 | | | $ | (11,510) | | | $ | 51,029 | |
| | | | | | | | | | | | | | | | | |
| Property operating expense to total revenue ratio | 13.2 | % | | 13.0 | % | | |
|
| | | | | | | | | | | |
| ($ 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$30.1 million, or 0.6%5.2%, due to the following:following (in thousands):
|
| | | |
| ($ 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 |
|
| | | | | |
| Net change nine months ended September 30, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (3,779) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 9,170 | |
| Properties fully operational during 2022 and 2023 and other | 24,726 | |
| Total | $ | 30,117 | |
The net increase of $7.2$24.7 million in rental income for properties that were fully operational during 20162022 and 20172023 is primarily attributabledue to increases in the following: (i) base minimum rent of $13.5 million due 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(ii) tenant reimbursements of $4.9 million 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 expiringhigher recoverable common area maintenance expenses, (iii) overage rent of $17.58 per square foot$1.8 million due to improved tenant performance, and (iv) lease termination income of $1.7 million, along with a decrease in that period. The average rent for renewals signedbad debt expense of $1.2 million. These variances were partially offset by a decrease in the first nine monthsancillary income 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.$0.4 million.
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 increaseddecreased by $3.1$2.0 million primarily as a result of higherlower gains on sales of undepreciated assets of $1.7 million (includingrecognized during the effect ofnine months ended September 30, 2023 and a $4.9 million gain ondecrease in parking revenue due to the sale of an outlot at Cove CenterPam Am Plaza Garage in June 2023.
We recorded fee income of $3.9 million and $6.6 million during the second quarternine months ended September 30, 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 2017) and an increase of $1.2 million in lease termination income.a corporate campus for Republic Airways at Hamilton Crossing Centre.
Property operating expenses increased $1.5$4.6 million, or 4.2%6.0%, due to the following:following (in thousands):
|
| | | |
| ($ 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 |
|
| | | | | |
| Net change nine months ended September 30, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (1,218) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 1,030 | |
| Properties fully operational during 2022 and 2023 and other | 4,820 | |
| Total | $ | 4,632 | |
The net increase of $2.1$4.8 million in property operating expenses for properties that were fully operational during 20162022 and 20172023 is primarily due to a combination of increases of $0.8$2.8 million in bad debt expense driven by certain anchor bankruptcies in 2017, $0.8non-recoverable operating expenses, $1.3 million in general building repairlandscaping and landscaping costs at certain properties,repairs and maintenance expense, and $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 wereutilities, partially offset by a decrease of $0.3 million decrease in insurance expense.
As a percentage of revenue, property operating expenses increased between years from 13.4%13.0% to 13.7%. The increase was mostly13.2% 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.in 2023.
Real estate taxes increaseddecreased $0.1 million, or 0.2%0.1%, due to the following:following (in thousands):
|
| | | |
| ($ 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 |
|
| | | | | |
| Net change nine months ended September 30, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (1,313) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 1,255 | |
| Properties fully operational during 2022 and 2023 and other | (54) | |
| Total | $ | (112) | |
The net $0.6decrease of $0.1 million increase in real estate taxes for properties that were fully operational during 20162022 and 20172023 is primarily due to an increasea decrease in current yearreal estate tax assessments at certain operating properties.properties in the portfolio in 2023, partially offset by lower real estate tax refunds received in 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 $1.2decreased $0.2 million, or 7.6%. The increase is0.4%, primarily due primarily to higher personnel costslower incremental head count and company overhead expenses, which arethe timing of backfills, partially offset by the severance charge of $0.5 millionan increase in 2016.executive transportation expenses.
Transaction costs decreased by $2.8 million, as weThe Company did not incur any transactionsignificant merger and acquisition costs forrelated to the merger with RPAI during the nine months ended September 30, 2017.
During2023. The Company incurred $1.0 million of merger and acquisition costs during the threenine months ended March 31, 2017, we recorded an impairment chargeSeptember 30, 2022, primarily consisting of $7.4 million related to one of our operating properties. In connection with the preparationprofessional fees 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.technology costs.
Depreciation and amortization expense decreased $0.3$33.6 million, or 0.2%9.4%, due to the following:following (in thousands):
| | | | | |
| Net change nine months ended September 30, 2022 to 2023 |
| Properties or components of properties sold or held for sale during 2022 and/or 2023 | $ | (6,925) | |
| Properties under redevelopment or acquired during 2022 and/or 2023 | 4,023 | |
| Properties fully operational during 2022 and 2023 and other | (30,731) | |
| Total | $ | (33,633) | |
|
| | | |
| ($ 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$30.7 million in depreciation and amortization at properties that were fully operational during 20162022 and 20172023 is primarily due to accelerated depreciation and amortizationcertain assets with shorter useful lives that became fully depreciated during the prior year.
Based 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 $1.3results of our evaluations for impairment, we recorded a $0.5 million or 2.7%. The increase is due to securing longer-term fixed rate debt throughimpairment charge during the issuance of senior unsecured notesnine months ended September 30, 2023 on Eastside, a retail operating property located in the third quarterDallas MSA that qualified for held-for-sale accounting treatment as of 2016 that carried higher interest rates thanSeptember 30, 2023. No impairment charges were recorded during 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.
nine months ended September 30, 2022.
We recorded an income tax benefita net gain on sales of our taxable REIT subsidiaryoperating properties of less than $0.1 million compared to an income tax expense of our taxable REIT subsidiary of $0.8$22.5 million for the nine months ended September 30, 20172023 on the sale of Kingwood Commons, the undeveloped land and 2016, respectively. The decrease is primarily duerelated parking garage at Pan Am Plaza, and Reisterstown Road Plaza compared to lower gainsa net gain of $27.1 million on salesthe sale of residential units at Eddy Street CommonsPlaza Del Lago and a portion of Hamilton Crossing Centre for the nine months ended September 30, 2017, compared2022.
Interest expense increased $0.7 million, or 0.9%, primarily due 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 millionhigher interest costs related to our variable rate debt, including borrowings on the sale of our Cove Center, Clay Marketplace, The Shops$1.1 billion unsecured revolving credit facility (the “Revolving Facility”) that were used to repay mortgages payable at Village Walk and Wheatland Towne Center operating properties for the nine months ended September 30, 2017.
maturity, partially offset by favorable interest rate swaps.
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 from2023, 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, Circle East and The Landing at Tradition – Phase II, which were ownedreclassified from active redevelopment into our operating portfolio in both comparable periods.June 2022, September 2022 and June 2023, respectively;
•two 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 September 30, 20172023 and 2016:2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change |
Number of properties in same property pool for the period(1) | 175 | | | 175 | | | | | 175 | | | 175 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Leased percentage at period end(2) | 93.5 | % | | 94.7 | % | | | | 93.5 | % | | 94.7 | % | | |
Economic occupancy percentage at period end(2) | 91.3 | % | | 91.8 | % | | | | 91.3 | % | | 91.8 | % | | |
Economic occupancy percentage(3) | 91.6 | % | | 91.9 | % | | | | 92.2 | % | | 91.5 | % | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | 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 | ) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Same Property NOI | $ | 139,256 | | | $ | 133,061 | | | 4.7 | % | | $ | 415,170 | | | $ | 393,475 | | | 5.5 | % |
| | | | | | | | | | | |
Reconciliation of Same Property NOI to most directly comparable GAAP measure: | | | | | | | | | | | |
| Net operating income – same properties | $ | 139,256 | | | $ | 133,061 | | | | | $ | 415,170 | | | $ | 393,475 | | | |
| | | | | | | | | | | |
Net operating income – non-same activity(4) | 12,809 | | | 14,417 | | | | | 41,167 | | | 39,226 | | | |
| Total property NOI | 152,065 | | | 147,478 | | | 3.1 | % | | 456,337 | | | 432,701 | | | 5.5 | % |
| Other income, net | 1,892 | | | 1,825 | | | | | 5,268 | | | 6,599 | | | |
| General, administrative and other | (13,917) | | | (14,859) | | | | | (41,800) | | | (41,977) | | | |
| Merger and acquisition costs | — | | | (108) | | | | | — | | | (1,006) | | | |
| | | | | | | | | | | |
| Impairment charges | (477) | | | — | | | | | (477) | | | — | | | |
| Depreciation and amortization | (105,930) | | | (115,831) | | | | | (323,463) | | | (357,096) | | | |
| Interest expense | (25,484) | | | (26,226) | | | | | (78,114) | | | (77,449) | | | |
| (Loss) gain on sales of operating properties, net | (5,972) | | | — | | | | | 22,468 | | | 27,126 | | | |
| Net income attributable to noncontrolling interests | (107) | | | (116) | | | | | (700) | | | (408) | | | |
| Net income (loss) attributable to common shareholders | $ | 2,070 | | | $ | (7,837) | | | | | $ | 39,519 | | | $ | (11,510) | | | |
(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, Circle East and The Landing at Tradition – Phase II, which were reclassified from active redevelopment into our operating portfolio in June 2022, September 2022 and June 2023, respectively; (iv) two active development and 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. |
| | | | | | | | | | | | |
____________________ |
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. |
(2)Decrease in leased and economic occupancy percentages is primarily attributable to the Bed Bath & Beyond Inc. bankruptcy.
(3)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.
(4)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%4.7% for the three months ended September 30, 2017 and 3.3% for the nine months ended September 30, 20172023 compared to the same periodsperiod of the prior year. This increase wasyear primarily due to increases in rental rateshigher base rent driven by positive new and an improvement in economic occupancy caused 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 torenewal leasing spreads, contractual rent 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 million and an increase in construction payables of $6.7 million. In 2017, we incurred additional construction costs at our Parkside Towne Commons - Phase IIoverage rent, and Holly Springs Towne Center - Phase II development projects, and additional construction costs at several of our redevelopment properties.lower bad debt expense.
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, 20172023 and 20162022 (unaudited) are as follows:follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Net income (loss) | $ | 2,177 | | | $ | (7,721) | | | $ | 40,219 | | | $ | (11,102) | |
| Less: net income attributable to noncontrolling interests in properties | (67) | | | (209) | | | (201) | | | (535) | |
| Less: loss (gain) on sales of operating properties, net | 5,972 | | | — | | | (22,468) | | | (27,126) | |
| Add: impairment charges | 477 | | | — | | | 477 | | | — | |
Add: depreciation and amortization of consolidated and unconsolidated entities, net of noncontrolling interests | 106,171 | | | 116,186 | | | 324,216 | | | 358,161 | |
FFO of the Operating Partnership(1) | 114,730 | | | 108,256 | | | 342,243 | | | 319,398 | |
| Less: Limited Partners’ interests in FFO | (1,685) | | | (1,437) | | | (4,739) | | | (3,932) | |
FFO attributable to common shareholders(1) | $ | 113,045 | | | $ | 106,819 | | | $ | 337,504 | | | $ | 315,466 | |
| FFO per share of the Operating Partnership – diluted | $ | 0.51 | | | $ | 0.49 | | | $ | 1.54 | | | $ | 1.44 | |
| | | | | | | |
FFO of the Operating Partnership(1) | $ | 114,730 | | | $ | 108,256 | | | $ | 342,243 | | | $ | 319,398 | |
| Add: merger and acquisition costs | — | | | 108 | | | — | | | 1,006 | |
| Less: prior period collection impact | — | | | (691) | | | — | | | (2,745) | |
| FFO, as adjusted, of the Operating Partnership | $ | 114,730 | | | $ | 107,673 | | | $ | 342,243 | | | $ | 317,659 | |
| FFO, as adjusted, per share of the Operating Partnership – diluted | $ | 0.51 | | | $ | 0.48 | | | $ | 1.54 | | | $ | 1.43 | |
(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
September 30, 2023 |
| Net income | $ | 2,177 | |
| Depreciation and amortization | 105,930 | |
| Interest expense | 25,484 | |
| Income tax expense of taxable REIT subsidiary | 68 | |
| EBITDA | 133,659 | |
| Unconsolidated Adjusted EBITDA | 591 | |
| |
____________________Impairment charges | 477 | |
1Loss on sales of operating properties, net | Represents Adjusted EBITDA for the three months ended September 30, 2017 (as shown in the table above) multiplied by four. 5,972 | |
2Other income and expense, net | (903) | |
| Noncontrolling interests | (197) | |
| Adjusted EBITDA | 139,599 | |
| |
Annualized Adjusted EBITDA(1) | $ | 558,394 | |
| |
| Company share of Net Debt: | |
| Mortgage and other indebtedness, net | $ | 2,868,828 | |
| Plus: Company share of unconsolidated joint venture debt | 51,738 | |
Less: Partner share of consolidated joint venture debt is calculated based upon the partner's pro-rata ownership(2) | (9,861) | |
| Less: cash, cash equivalents, and restricted cash | (61,410) | |
| Less: debt discounts, premiums and issuance costs, net | (25,626) | |
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 | $ | 2,823,669 | |
| Net Debt to Adjusted EBITDA | 5.1x |
(1)Represents Adjusted EBITDA for the three months ended September 30, 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 September 30, 2023, we had approximately $52.3 million in cash and cash equivalents on hand, $6.0 million in restricted cash and escrow deposits, $1.1 billion of remaining availability under the Revolving Facility, and no debt maturities until June 2024. During the nine months ended September 30, 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 expansion project at One Loudoun Downtown – Pads G & H and repaid the $95.0 million principal balance of the 4.23% senior unsecured notes due 2023 using available cash on hand. 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, tenant bankruptcies, inflation, labor shortages, supply chain constraints, and/or increasing energy prices and interest rates, 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 42. 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 September 30, 2023, we had approximately $1.1 billion available under the Revolving Facility for future borrowings. We also had $52.3 million in cash and cash equivalents as of September 30, 2023.
We were in compliance with all applicable financial covenants under the Revolving Facility, unsecured term loans and senior unsecured notes as of September 30, 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 September 30, 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.
Our Principal Liquidity Needs
ExceptShort-Term Liquidity Needs
Near-Term Debt Maturities. As of September 30, 2023, we had no secured debt, excluding scheduled monthly principal payments, and $269.6 million of unsecured debt scheduled to mature prior to September 30, 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 $30.0 million and $1.3 million, respectively, for the remainder of 2023, expected dividend payments to our common shareholders and Common Unit holders, and recurring capital expenditures.
In July 2023, our Board of Trustees declared a cash distribution of $0.24 per common share and Common Unit for the third quarter of 2023. This distribution was paid on October 13, 2023 to common shareholders and Common Unit holders of record as of October 6, 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 hand 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 nine months ended September 30, 2023, we incurred $13.4 million for recurring capital expenditures on operating properties and $65.4 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 September 30, 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 the ability to fund these costs through cash flows from operations or borrowings on the Revolving Facility. In 2023, certain retailers have filed for bankruptcy protection including Bed Bath & Beyond Inc., a tenant that, as of December 31, 2022, occupied 613,000 square feet across 23 locations in our portfolio and generated $8.3 million of annualized base rent. As part of its bankruptcy process, three of the former tenant’s leases were acquired by other retailers and the remaining leases were rejected. Re-leasing costs may be significant for the leases that were rejected, and we could experience a significant reduction in our revenues from those properties over the next 12 to 18 months.
During the nine months ended September 30, 2023, we completed major redevelopment construction activities at The Landing at Tradition – Phase II and placed this project in service. In addition, we began redevelopment activities at Edwards Multiplex – Ontario and reclassified this property from our operating portfolio into redevelopment. As of September 30, 2023, we had development projects under construction at the medical office building at Carillon and The Corner (IN). Our share of total estimated costs for these two projects is $91.6 million, of which our share of the expected funding requirement is estimated to be $59.7 million. As of September 30, 2023, we have incurred $27.1 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 September 30, 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 September 30, 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 nine months ended September 30, 2023 (in thousands):
| | | | | |
| Nine Months Ended
September 30, 2023 |
| Active development and redevelopment projects | $ | 21,110 | |
| |
| |
| |
| Recurring operating capital expenditures (primarily tenant improvements) and other | 77,584 | |
| Total | $ | 98,694 | |
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 $0.3 million for the nine months ended September 30, 2023.
Debt Maturities
The following table summarizes the scheduled maturities and principal amortization of the Company’s indebtedness as of September 30, 2023, presented on a calendar year basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Secured Debt | | | | |
| Scheduled
Principal Payments | | Term
Maturities | | Unsecured Debt | | Total |
| 2023 | $ | 1,260 | | | $ | — | | | $ | — | | | $ | 1,260 | |
| 2024 | 5,121 | | | — | | | 269,635 | | | 274,756 | |
| 2025 | 5,248 | | | — | | | 680,000 | | | 685,248 | |
| 2026 | 5,381 | | | — | | | 589,000 | | | 594,381 | |
| 2027 | 4,720 | | | 8,200 | | | 250,000 | | | 262,920 | |
| Thereafter | 31,849 | | | 92,788 | | | 900,000 | | | 1,024,637 | |
| | $ | 53,579 | | | $ | 100,988 | | | $ | 2,688,635 | | | $ | 2,843,202 | |
| Debt discounts, premiums and issuance costs, net | | | | | | 25,626 | |
| Total | | | | | | | $ | 2,868,828 | |
Failure to comply with the obligations under our debt maturities as discussed on page 35, there have been no significant changes to our contractualagreements, including payment obligations, disclosedcould 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 September 30, 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 September 30, 2023, we had cash, cash equivalents and restricted cash of $58.3 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 Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022
Our cash flow activities are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2023 | | 2022 | | Change |
| Net cash provided by operating activities | $ | 291,177 | | | $ | 262,429 | | | $ | 28,748 | |
| Net cash used in investing activities | (55,483) | | | (13,694) | | | (41,789) | |
| Net cash used in financing activities | (299,350) | | | (252,591) | | | (46,759) | |
| Decrease in cash, cash equivalents and restricted cash | (63,656) | | | (3,856) | | | (59,800) | |
| Cash, cash equivalents and restricted cash, at beginning of period | 121,970 | | | 100,363 | | | |
| Cash, cash equivalents and restricted cash, at end of period | $ | 58,314 | | | $ | 96,507 | | | |
Cash provided by operating activities was $291.2 million for the nine months ended September 30, 2023 and $262.4 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 $55.5 million for the nine months ended September 30, 2023 and $13.7 million for the same period of 2022. Highlights of significant cash sources and uses in investing activities are as follows:
•We received net proceeds of $123.9 million from the sale of Kingwood Commons, the undeveloped land and related parking garage at Pan Am Plaza, and Reisterstown Road Plaza during the nine months ended September 30, 2023 compared to net proceeds of $65.4 million from the sale of Plaza Del Lago and a portion of Hamilton Crossing Centre during the nine months ended September 30, 2022;
•We acquired Prestonwood Place for $78.3 million during the nine months ended September 30, 2023 compared to the acquisitions of Pebble Marketplace, the two-tenant building adjacent to MacArthur Crossing, and Palms Plaza for $100.1 million during the nine months ended September 30, 2022;
•We received the proceeds from a $125.0 million short-term deposit that matured on April 7, 2022 during the nine months ended September 30, 2022; and
•Capital expenditures decreased by $7.8 million primarily related to the timing of capital projects along with a change in construction payables of $3.7 million for the nine months ended September 30, 2023.
Cash used in financing activities was $299.4 million for the nine months ended September 30, 2023 and $252.6 million for the same period of 2022. Highlights of significant cash sources and uses in financing activities are as follows:
•We borrowed $237.0 million on the Revolving Facility and received proceeds of $95.1 million from the origination of a mortgage payable during the nine months ended September 30, 2023 compared to borrowings of $145.0 million on the Revolving Facility and entering into a seven-year $300.0 million unsecured term loan during the nine months ended September 30, 2022;
•We repaid (i) $198.0 million of borrowings on the Revolving Facility, (ii) $174.1 million of mortgages payable, and (iii) the $95.0 million principal balance of the 4.23% senior unsecured notes due 2023 during the nine months ended September 30, 2023 compared to repayments of (i) $200.0 million of borrowings on the Revolving Facility, (ii) a $200.0 million unsecured term loan that was scheduled to mature in 2023, and (iii) $158.2 million of mortgages payable during the nine months ended September 30, 2022; and
•We made distributions to common shareholders and holders of common partnership interests in the Operating Partnership of $160.0 million during the nine months ended September 30, 2023 compared to distributions of $133.4 million during the nine months ended September 30, 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 September 30, 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 September 30, 2023, we had $1.7$2.9 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)$25.6 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%(93%) and $0.1 billion (6%$211.6 million (7%), respectively, of our total consolidated indebtedness atas of September 30, 2017.
2023.
As of September 30, 2017,2023, we had $38.1$269.6 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 September 30, 2023 would not materially impact thechange our annual cash flows associated with this hedged debt.flow by $2.7 million. A 100 basis100-basis point change in interest rates on our unhedged variable rate debt as of September 30, 20172023 would change our annual cash flow by $0.9$2.1 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, 20172023 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, 20172023 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
ITEM 1. 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.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in response to Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 filed on February 21, 2023.
Not Applicable
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Item 2. | Unregistered SalesITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Issuer Purchases of Equity Securities and Use of Proceeds |
Issuer Repurchases; Unregistered Sales of Securities
During the three months ended September 30, 2017,2023, certain of our employees surrendered common shares owned by them to satisfy their statutory minimum U.S. federal and state tax obligations associated with the vesting of restricted common shares of beneficial interest issued under ourthe Company’s 2013 Equity Incentive Plan, ("2013 Plan").
as amended and restated as of May 11, 2022. These shares were repurchased by the Company.
The following table summarizes all of these repurchases during the three months ended September 30, 2017:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total number
of shares
purchased | | Average price
paid per share | | Total number of
shares purchased
as part of publicly
announced plans
or programs | | Maximum number of shares that may yet be purchased under the plans or programs(1) |
| July 1, 2023 to July 31, 2023 | | 1,191 | | | $ | 22.35 | | | N/A | | $ | 300,000,000 | |
| August 1, 2023 to August 31, 2023 | | — | | | $ | — | | | N/A | | $ | 300,000,000 | |
| September 1, 2023 to September 30, 2023 | | — | | | $ | — | | | N/A | | $ | 300,000,000 | |
| Total | | 1,191 | | | $ | 22.35 | | | | | |
(1)Represents amounts outstanding under the Company’s authorized Share Repurchase Program, which was announced in February 2021. In April 2022, the Company’s Board of Trustees increased the size of the program from $150.0 million to $300.0 million and in February 2023, extended the program for an additional year. The program may be suspended or terminated at any time by the Company and will terminate on February 28, 2024, if not terminated or extended prior to that date.
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| | | | | | | | | | | |
| Period | | Total number of shares purchased1 | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum number of shares that may yet be purchased under the plans or programs |
| July 1 - July 31 | | 1,240 |
| | $ | 19.29 |
| | N/A | | N/A |
| August 1 - August 31 | | 715 |
| | $ | 19.94 |
| | N/A | | N/A |
| September 1 - September 30 | | — |
| | — |
| | N/A | | N/A |
| Total | | 1,955 |
| | | | | | |
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____________________ |
1 | The number of shares purchased represents common shares surrendered by certain of our employees to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common shares of beneficial interest issued under our 2013 Plan. With respect to these shares, the price paid per share is based on the closing price of our common shares as of the date of the determination of the statutory minimum federal and state tax obligations. |
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Item 3. | Defaults Upon Senior Securities |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicableapplicable.
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Item 4. | Mine Safety Disclosures |
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicableapplicable.
ITEM 5. OTHER INFORMATION
Trading Arrangements
Not ApplicableDuring the three months ended September 30, 2023, none of our officers or trustees adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
45
ITEM 6. EXHIBITS
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| | | | | | | | | | | | | |
Item 6.Exhibit No. | Exhibits |
| Description | | Location |
| | | | |
Exhibit No.3.1 | | Description | | Location |
3.1 | | | | Incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K of Kite Realty Group Trust filed with the SEC on February 27, 201528, 2022 |
| | | | |
| 3.2 | |
| | Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on May 28, 2015 |
| | | | |
3.3 | | | | Incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K of Kite Realty Group Trust filed with the SEC on February 27, 2015 |
| | | | |
3.4 | |
| | Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on May 28, 2015 |
| | | | |
4.1 | | | | Incorporated by reference to Exhibit 4.1 to Kite Realty Group Trust's registration statement on Form S-11 (File No. 333-114224) declared effective by the SEC on August 10, 2004 |
| | | | |
4.2 | | | | Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on September 27, 2016 |
| | | | |
4.3 | | | | Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on September 27, 2016 |
| | | | |
| 2022 |
| | | | |
4.431.1 | | | | Incorporated by reference to Exhibits 4.2 and 4.3 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on September 27, 2016 |
| | | | |
31.1 | | | | Filed herewith |
| | | | |
| 31.2 | | | | Filed herewith |
| | | | |
| 31.3 | | | | Filed herewith |
| | | | |
| 31.4 | | | | Filed herewith |
| | | | |
| 32.1 | | | | Filed herewith |
| | | | |
| 32.2 | | | | Filed herewith |
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| 101.INS | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | Filed herewith |
| | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | Filed herewith |
| | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
| | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
| | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
| | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
| | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant hasregistrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | |
| | KITE REALTY GROUP TRUST | |
| | | | |
| Date: | November 2, 2023 | By: | /s/ JOHN A. KITE | |
| | |
| KITE REALTY GROUP TRUST |
| | |
November 3, 2017 | By: | /s/ John A. Kite | |
(Date) | | John A. Kite |
| | Chairman and Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | | |
| | | | |
| Date: | November 3, 20172, 2023 | By: | /s/ DanielHEATH R. SinkFEAR | |
(Date) | | Daniel R. Sink | | |
| | | Heath R. Fear | |
| | | Executive Vice President and Chief Financial Officer | |
| | | (Principal Financial Officer) | |
| | | | |
| | | | |
| | KITE REALTY GROUP, L.P. | |
| | | By: Kite Realty Group Trust, its sole general partner | |
| | | | |
| Date: | November 2, 2023 | By: | /s/ JOHN A. KITE | |
| | | | |
| | | John A. Kite | |
| | | Chairman and Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | | |
| | | | |
| Date: | November 2, 2023 | By: | /s/ HEATH R. FEAR | |
| | | | |
| | | Heath R. Fear | |
| | | Executive Vice President and Chief Financial Officer | |
| | | (Principal Financial Officer) | |