KRG 10-Q
Kite Realty Group Trust (KRG)
10-Q
2023-11-02
For: 2023-09-30
View Original
Added on
April 09, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended September 30, 2023
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the transition period from to
| Commission File Number: | Kite Realty Group Trust | |||||||
| Commission File Number: | Kite Realty Group, L.P. | |||||||
| (Exact name of registrant as specified in its charter) | ||||||||
| Kite Realty Group Trust | ||||||||||||||
| Kite Realty Group, L.P. | ||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
(Address of principal executive offices) (Zip Code)
(317 ) 577-5600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Kite Realty Group Trust | ☒ | No | o | Kite Realty Group, L.P. | ☒ | No | o | |||||||||||||||||||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| Kite Realty Group Trust | ☒ | No | o | Kite Realty Group, L.P. | ☒ | No | o | |||||||||||||||||||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Kite Realty Group Trust:
| x | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | |||||||||||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||||||||||||||
Kite Realty Group, L.P.:
| Large accelerated filer | o | Accelerated filer | o | x | Smaller reporting company | |||||||||||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
| Kite Realty Group Trust | o | Kite Realty Group, L.P. | o | |||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Kite Realty Group Trust | Yes | ☐ | No | Kite Realty Group, L.P. | Yes | ☐ | No | |||||||||||||||||||||||||
The number of Common Shares outstanding as of October 31, 2023 was 219,387,345 ($0.01 par value).
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2023 of Kite Realty Group Trust, Kite Realty Group, L.P. and its subsidiaries. Unless stated otherwise or the context otherwise requires, references to “Kite Realty Group Trust” or the “Parent Company” mean Kite Realty Group Trust, and references to the “Operating Partnership” mean Kite Realty Group, L.P. and its consolidated subsidiaries. The terms “Company,” “we,” “us,” and “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 is engaged in the ownership, operation, acquisition, development and redevelopment of high-quality, open-air shopping centers and mixed-use assets in select markets in the United States, and the Parent Company conducts substantially all of its activities through the Operating Partnership and its wholly owned subsidiaries. The Parent Company is the sole general partner of the Operating Partnership and as of September 30, 2023 owned approximately 98.5% of the common partnership interests in the Operating Partnership (“General Partner Units”). The remaining 1.5% of the common partnership interests (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”) are owned by the limited partners.
We believe combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into this single report benefits investors by:
•enhancing investors’ understanding of the Parent Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
•eliminating duplicative disclosure and providing a more streamlined and readable presentation of information as a substantial portion of the Company’s disclosure applies to both the Parent Company and the Operating Partnership; and
•creating time and cost efficiencies through the preparation of one combined report instead of two separate reports.
We believe it is important to understand the few differences between the Parent Company and the Operating Partnership in the context of how we operate as an interrelated consolidated company. The Parent Company has no material assets or liabilities other than its investment in the Operating Partnership. The Parent Company issues public equity from time to time but does not have any indebtedness as all debt is incurred by the Operating Partnership. In addition, the Parent Company currently does not nor does it intend to guarantee any debt of the Operating Partnership. The Operating Partnership has numerous wholly owned subsidiaries, and it also owns interests in certain joint ventures. These subsidiaries and joint ventures own and operate retail shopping centers and other real estate assets. The Operating Partnership is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for General Partner Units, the Operating Partnership generates the capital required by the business through its operations, its incurrence of indebtedness and the issuance of Limited Partner Units to third parties.
Shareholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Parent Company and those of the Operating Partnership. In order to highlight this and other differences between the Parent Company and the Operating Partnership, there are separate sections in this report, as applicable, that separately discuss the Parent Company and the Operating Partnership, including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the Parent Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the collective Company.
KITE REALTY GROUP TRUST AND KITE REALTY GROUP, L.P. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
| Kite Realty Group Trust | |||||||||||
| Kite Realty Group, L.P. and subsidiaries | |||||||||||
| Kite Realty Group Trust and Kite Realty Group, L.P. and subsidiaries | |||||||||||
3
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KITE REALTY GROUP TRUST
Consolidated Balance Sheets
(Unaudited)
($ in thousands, except share and per share data)
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets: | |||||||||||
| Investment properties, at cost | $ | $ | |||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Net investment properties | |||||||||||
| Cash and cash equivalents | |||||||||||
Tenant and other receivables, including accrued straight-line rent of $ and $ | |||||||||||
| Restricted cash and escrow deposits | |||||||||||
| Deferred costs, net | |||||||||||
| Prepaid and other assets | |||||||||||
| Investments in unconsolidated subsidiaries | |||||||||||
| Assets associated with investment property held for sale | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Equity: | |||||||||||
| Liabilities: | |||||||||||
| Mortgage and other indebtedness, net | $ | $ | |||||||||
| Accounts payable and accrued expenses | |||||||||||
| Deferred revenue and other liabilities | |||||||||||
| Liabilities associated with investment property held for sale | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Limited Partners’ interests in the Operating Partnership | |||||||||||
| Equity: | |||||||||||
Common shares, $ September 30, 2023 and December 31, 2022, respectively | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
KITE REALTY GROUP TRUST
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
($ in thousands, except share and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental income | $ | $ | $ | $ | |||||||||||||||||||
| Other property-related revenue | |||||||||||||||||||||||
| Fee income | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Property operating | |||||||||||||||||||||||
| Real estate taxes | |||||||||||||||||||||||
| General, administrative and other | |||||||||||||||||||||||
| Merger and acquisition costs | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Impairment charges | |||||||||||||||||||||||
| Total expenses | |||||||||||||||||||||||
| (Loss) gain on sales of operating properties, net | ( | ||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Income tax (expense) benefit of taxable REIT subsidiary | ( | ( | |||||||||||||||||||||
| Equity in (loss) earnings of unconsolidated subsidiaries | ( | ( | ( | ||||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
| Net income (loss) | ( | ( | |||||||||||||||||||||
| Net income attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Net income (loss) per common share – basic and diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted average common shares outstanding – basic | |||||||||||||||||||||||
| Weighted average common shares outstanding – diluted | |||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Change in fair value of derivatives | ( | ( | |||||||||||||||||||||
| Total comprehensive (loss) income | ( | ||||||||||||||||||||||
Comprehensive income attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive (loss) income attributable to the Company | $ | ( | $ | $ | $ | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
KITE REALTY GROUP TRUST
Consolidated Statements of Shareholders’ Equity
(Unaudited)
(in thousands, except share data)
| Common Shares | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Stock compensation activity | — | — | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Distributions to common shareholders | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | — | |||||||||||||||||||||||||||||||
| Adjustment to redeemable noncontrolling interests | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Stock compensation activity | — | — | |||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Distributions to common shareholders | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | — | |||||||||||||||||||||||||||||||
| Adjustment to redeemable noncontrolling interests | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Stock compensation activity | ( | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Distributions to common shareholders | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | — | |||||||||||||||||||||||||||||||
| Exchange of redeemable noncontrolling interests for common shares | — | — | — | ||||||||||||||||||||||||||||||||
| Adjustment to redeemable noncontrolling interests | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock compensation activity | — | — | |||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Distributions to common shareholders | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss attributable to common shareholders | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Adjustment to redeemable noncontrolling interests | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Stock compensation activity | — | — | |||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Distributions to common shareholders | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | — | |||||||||||||||||||||||||||||||
| Adjustment to redeemable noncontrolling interests | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Stock compensation activity | ( | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Distributions to common shareholders | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss attributable to common shareholders | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Adjustment to redeemable noncontrolling interests | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
KITE REALTY GROUP TRUST
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Gain on sales of operating properties, net | ( | ( | |||||||||
| Impairment charges | |||||||||||
| Straight-line rent | ( | ( | |||||||||
| Compensation expense for equity awards | |||||||||||
| Amortization of debt fair value adjustments | ( | ( | |||||||||
| Amortization of in-place lease liabilities | ( | ( | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Tenant receivables | ( | ( | |||||||||
| Deferred costs and other assets | ( | ( | |||||||||
| Accounts payable, accrued expenses, deferred revenue and other liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions of interests in properties | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Net proceeds from sales of land | |||||||||||
| Net proceeds from sales of operating properties | |||||||||||
| Investment in short-term deposits | |||||||||||
| Small business loan repayments | |||||||||||
| Change in construction payables | ( | ( | |||||||||
| Distribution from unconsolidated joint venture | |||||||||||
| Capital contribution to unconsolidated joint venture | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of common shares, net | |||||||||||
| Repurchases of common shares upon the vesting of restricted shares | ( | ( | |||||||||
| Debt and equity issuance costs | ( | ( | |||||||||
| Loan proceeds | |||||||||||
| Loan payments | ( | ( | |||||||||
| Distributions paid – common shareholders | ( | ( | |||||||||
| Distributions paid – redeemable noncontrolling interests | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net change in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
| Non-cash investing and financing activities | |||||||||||
| Exchange of redeemable noncontrolling interests for common shares | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
KITE REALTY GROUP, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands, except unit data)
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets: | |||||||||||
| Investment properties, at cost | $ | $ | |||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Net investment properties | |||||||||||
| Cash and cash equivalents | |||||||||||
Tenant and other receivables, including accrued straight-line rent of $ and $ | |||||||||||
| Restricted cash and escrow deposits | |||||||||||
| Deferred costs, net | |||||||||||
| Prepaid and other assets | |||||||||||
| Investments in unconsolidated subsidiaries | |||||||||||
| Assets associated with investment property held for sale | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Equity: | |||||||||||
| Liabilities: | |||||||||||
| Mortgage and other indebtedness, net | $ | $ | |||||||||
| Accounts payable and accrued expenses | |||||||||||
| Deferred revenue and other liabilities | |||||||||||
| Liabilities associated with investment property held for sale | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Limited Partners’ interests in the Operating Partnership | |||||||||||
| Partners’ Equity: | |||||||||||
Common equity, at September 30, 2023 and December 31, 2022, respectively | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Total Partners’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
KITE REALTY GROUP, L.P. AND 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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental income | $ | $ | $ | $ | |||||||||||||||||||
| Other property-related revenue | |||||||||||||||||||||||
| Fee income | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Property operating | |||||||||||||||||||||||
| Real estate taxes | |||||||||||||||||||||||
| General, administrative and other | |||||||||||||||||||||||
| Merger and acquisition costs | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Impairment charges | |||||||||||||||||||||||
| Total expenses | |||||||||||||||||||||||
| (Loss) gain on sales of operating properties, net | ( | ||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Income tax (expense) benefit of taxable REIT subsidiary | ( | ( | |||||||||||||||||||||
| Equity in (loss) earnings of unconsolidated subsidiaries | ( | ( | ( | ||||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
| Net income (loss) | ( | ( | |||||||||||||||||||||
| Net income attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) attributable to common unitholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Allocation of net income (loss): | |||||||||||||||||||||||
| Limited Partners | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Parent Company | ( | ( | |||||||||||||||||||||
| $ | $ | ( | $ | $ | ( | ||||||||||||||||||
| Net income (loss) per common unit – basic and diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted average common units outstanding – basic | |||||||||||||||||||||||
| Weighted average common units outstanding – diluted | |||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Change in fair value of derivatives | ( | ( | |||||||||||||||||||||
| Total comprehensive (loss) income | ( | ||||||||||||||||||||||
Comprehensive income attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
Comprehensive (loss) income attributable to common unitholders | $ | ( | $ | $ | $ | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
9
KITE REALTY GROUP, L.P. AND SUBSIDIARIES
Consolidated Statements of Partners’ Equity
(Unaudited)
(in thousands)
| General Partner | Total | ||||||||||||||||
| Common Equity | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ||||||||||||||
| Stock compensation activity | — | ||||||||||||||||
| Other comprehensive loss attributable to Parent Company | — | ( | ( | ||||||||||||||
| Distributions to Parent Company | ( | — | ( | ||||||||||||||
| Net income attributable to Parent Company | — | ||||||||||||||||
| Adjustment to redeemable noncontrolling interests | ( | — | ( | ||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ||||||||||||||
| Stock compensation activity | — | ||||||||||||||||
| Other comprehensive income attributable to Parent Company | — | ||||||||||||||||
| Distributions to Parent Company | ( | — | ( | ||||||||||||||
| Net income attributable to Parent Company | — | ||||||||||||||||
| Adjustment to redeemable noncontrolling interests | ( | — | ( | ||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ||||||||||||||
| Stock compensation activity | — | ||||||||||||||||
| Other comprehensive loss attributable to Parent Company | — | ( | ( | ||||||||||||||
| Distributions to Parent Company | ( | — | ( | ||||||||||||||
| Net income attributable to Parent Company | — | ||||||||||||||||
| Conversion of Limited Partner Units to shares of the Parent Company | — | ||||||||||||||||
| Adjustment to redeemable noncontrolling interests | ( | — | ( | ||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ||||||||||||||
| Balance at December 31, 2021 | $ | $ | ( | $ | |||||||||||||
| Stock compensation activity | — | ||||||||||||||||
| Other comprehensive income attributable to Parent Company | — | ||||||||||||||||
| Distributions to Parent Company | ( | — | ( | ||||||||||||||
| Net loss attributable to Parent Company | ( | — | ( | ||||||||||||||
| Adjustment to redeemable noncontrolling interests | ( | — | ( | ||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ||||||||||||||
| Stock compensation activity | — | ||||||||||||||||
| Other comprehensive income attributable to Parent Company | — | ||||||||||||||||
| Distributions to Parent Company | ( | — | ( | ||||||||||||||
| Net income attributable to Parent Company | — | ||||||||||||||||
| Adjustment to redeemable noncontrolling interests | — | ||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ||||||||||||||
| Stock compensation activity | — | ||||||||||||||||
| Other comprehensive income attributable to Parent Company | — | ||||||||||||||||
| Distributions to Parent Company | ( | — | ( | ||||||||||||||
| Net loss attributable to Parent Company | ( | — | ( | ||||||||||||||
| Adjustment to redeemable noncontrolling interests | ( | — | ( | ||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
10
KITE REALTY GROUP, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Gain on sales of operating properties, net | ( | ( | |||||||||
| Impairment charges | |||||||||||
| Straight-line rent | ( | ( | |||||||||
| Compensation expense for equity awards | |||||||||||
| Amortization of debt fair value adjustments | ( | ( | |||||||||
| Amortization of in-place lease liabilities | ( | ( | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Tenant receivables | ( | ( | |||||||||
| Deferred costs and other assets | ( | ( | |||||||||
| Accounts payable, accrued expenses, deferred revenue and other liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of interests in properties | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Net proceeds from sales of land | |||||||||||
| Net proceeds from sales of operating properties | |||||||||||
| Investment in short-term deposits | |||||||||||
| Small business loan repayments | |||||||||||
| Change in construction payables | ( | ( | |||||||||
| Distribution from unconsolidated joint venture | |||||||||||
| Capital contribution to unconsolidated joint venture | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Contributions from the General Partner | |||||||||||
| Repurchases of common shares upon the vesting of restricted shares | ( | ( | |||||||||
| Debt and equity issuance costs | ( | ( | |||||||||
| Loan proceeds | |||||||||||
| Loan payments | ( | ( | |||||||||
| Distributions paid – common unitholders | ( | ( | |||||||||
| Distributions paid – redeemable noncontrolling interests | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net change in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
| Non-cash investing and financing activities | |||||||||||
| Conversion of Limited Partner Units to shares of the Parent Company | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
11
KITE REALTY GROUP TRUST AND KITE REALTY GROUP, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
($ in thousands, except share, per share, unit and per unit amounts and where indicated in millions or billions)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Kite Realty Group Trust (the “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, operation, acquisition, development and redevelopment of high-quality, open-air shopping centers and mixed-use assets in select markets in the United States. The terms “Company,” “we,” “us,” and “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 (“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, 2023 owned approximately 98.5 % of the common partnership interests in the Operating Partnership (“General Partner Units”). The remaining 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.
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange 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, 2023 and for the three and nine months ended September 30, 2023 and 2022 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, 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.
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As of September 30, 2023, the Company’s portfolio consisted of the following:
| Properties | Square Footage | ||||||||||
Operating retail properties(1) | |||||||||||
| Office properties | |||||||||||
| Development and redevelopment projects: | |||||||||||
| Carillon medical office building | |||||||||||
| The Corner (IN) | |||||||||||
| Hamilton Crossing Centre | |||||||||||
| Edwards Multiplex – Ontario | |||||||||||
(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, 2023 and December 31, 2022 (in thousands):
| Balance as of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Land, buildings and improvements | $ | $ | |||||||||
| Construction in progress | |||||||||||
| Investment properties, at cost | $ | $ | |||||||||
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 | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease payments – operating leases | |||||||||||||||||||||||
| Bad debt reserve | ( | ( | ( | ( | |||||||||||||||||||
| Straight-line rent adjustments | |||||||||||||||||||||||
| Straight-line rent reserve for uncollectibility | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of in-place lease liabilities, net | |||||||||||||||||||||||
| Rental income | $ | $ | $ | $ | |||||||||||||||||||
The Company makes estimates as 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 subsidiaries (“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. As of September 30, 2023, we owned investments in two consolidated joint ventures that were VIEs in which the partners did not have substantive participating rights and we were the primary beneficiary. As of September 30, 2023,
13
these consolidated VIEs had mortgage debt of $112.7 million, which were secured by assets of the VIEs totaling $217.6 million. The Operating Partnership guarantees the mortgage 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.
Income Taxes and REIT Compliance
Parent Company
The Parent Company 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 income tax on its undistributed REIT taxable 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 TRS 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 TRSs 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 TRSs, is included in the income tax returns of the Operating Partnership’s partners. Accordingly, the only U.S. federal income taxes included in the accompanying consolidated financial statements are in connection with the 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, 2023 and 2022 (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Noncontrolling interests balance as of January 1, | $ | $ | |||||||||
| Net income allocable to noncontrolling interests, excluding redeemable noncontrolling interests | |||||||||||
| Distributions to noncontrolling interests | ( | ||||||||||
Noncontrolling interests balance as of September 30, | $ | $ | |||||||||
14
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 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. As of September 30, 2023 and December 31, 2022, the redemption value of the redeemable noncontrolling interests in the Operating Partnership exceeded the historical book value, and the balances 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’s equity. For the three and nine months ended September 30, 2023 and 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 | % | % | % | % | |||||||||||||||||||
| Limited partners’ weighted average interests in Operating Partnership | % | % | % | % | |||||||||||||||||||
As of September 30, 2023, the Parent Company’s interest and the limited partners’ redeemable noncontrolling ownership interests in the Operating Partnership were 98.5 % and 1.5 %. As of December 31, 2022, the 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’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 3,434,881 and 2,870,697 Limited Partner Units outstanding as of September 30, 2023 and December 31, 2022, respectively. The increase in Limited Partner Units outstanding from December 31, 2022 is due to non-cash compensation
15
awards granted 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”) 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. As of September 30, 2022, the Class B units related to one of these joint ventures that owned Crossing at Killingly Commons, our multi-tenant retail property in Dayville, Connecticut, were outstanding and accounted for as noncontrolling interests in the remaining venture. In October 2022, the remaining Class B units became redeemable at the partner’s election and the fulfillment of certain redemption criteria for cash or Limited Partner Units in the Operating Partnership. In October 2022, we received notice from our joint venture partner of its exercise of their right to redeem the remaining 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 were not mandatorily redeemable unless either party had elected for the units to be redeemed. Prior to the redemption, we consolidated this joint venture because we controlled the decision-making and our joint venture partner had limited protective rights.
The redeemable noncontrolling interests in the Operating Partnership and subsidiaries for the nine months ended September 30, 2023 and 2022 were as follows (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Redeemable noncontrolling interests balance as of January 1, | $ | $ | |||||||||
| Net income allocable to redeemable noncontrolling interests | |||||||||||
| Distributions declared to redeemable noncontrolling interests | ( | ( | |||||||||
| Other, net including adjustments to redemption value | |||||||||||
Total limited partners’ interests in the Operating Partnership and other redeemable noncontrolling interests balance as of September 30, | $ | $ | |||||||||
| Limited partners’ interests in the Operating Partnership | $ | $ | |||||||||
| Other redeemable noncontrolling interests in certain subsidiaries | |||||||||||
Total limited partners’ interests in the Operating Partnership and other redeemable noncontrolling interests balance as of September 30, | $ | $ | |||||||||
Fair Value Measurements
We follow the framework established under Financial 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 valuation.
16
•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.
Effects 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 | $ | ||||||||||||||||||||||||||||
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 | $ | ||||||||||||||||||||||||||||
| April 13, 2022 | MacArthur Crossing | Dallas | Two-tenant building | |||||||||||||||||||||||||||||
| July 15, 2022 | Palms Plaza | Miami | Multi-tenant retail | |||||||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||||||||
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 | $ | $ | |||||||||||||||||||||||||||||||||
| June 8, 2023 | Pan Am Plaza & Garage | Indianapolis | Land & garage | |||||||||||||||||||||||||||||||||||
| September 11, 2023 | Reisterstown Road Plaza | Dallas | Multi-tenant retail | ( | ||||||||||||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||||||||||||||
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) | $ | $ | |||||||||||||||||||||||||||||||||
| June 16, 2022 | Plaza Del Lago | Chicago | Multi-tenant retail(2) | |||||||||||||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||||||||||||||
(1)We sold a portion of the redevelopment at Hamilton Crossing Centre.
17
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 addition, the assets 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 an executed sales contract and determined to be 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 thousands):
| September 30, 2023 | |||||
| Assets | |||||
| Investment properties, at cost | $ | ||||
| Less: accumulated depreciation | ( | ||||
| Net investment properties | |||||
| Tenant and other receivables | |||||
| Deferred costs, net | |||||
| Assets associated with investment property held for sale | $ | ||||
| Liabilities | |||||
| Accounts payable and accrued expenses | $ | ||||
| Deferred revenue and other liabilities | |||||
| Liabilities associated with investment property held for sale | $ | ||||
There were no discontinued operations for the nine months ended September 30, 2023 and 2022 as none of the dispositions 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 capitalized internal commissions incurred in connection with lease originations. Deferred leasing costs, lease intangibles and similar costs are amortized on a straight-line basis over the terms of the related leases. As of September 30, 2023 and December 31, 2022, deferred costs consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Acquired lease intangible assets | $ | $ | |||||||||
| Deferred leasing costs and other | |||||||||||
| Less: accumulated amortization | ( | ( | |||||||||
| $ | $ | ||||||||||
| Less: deferred costs associated with investment property held for sale | ( | ||||||||||
| Total | $ | $ | |||||||||
18
Amortization of deferred leasing costs, lease intangibles and other is included within “Depreciation and amortization” in the accompanying consolidated statements of operations and comprehensive income. The amortization of above-market lease intangibles is included as a reduction to “Rental income” in the accompanying consolidated statements of operations and comprehensive income. The amounts of such amortization included in the accompanying consolidated statements of operations and comprehensive income are as follows (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Amortization of deferred leasing costs, lease intangibles and other | $ | $ | |||||||||
| Amortization of above-market lease intangibles | $ | $ | |||||||||
NOTE 6. DEFERRED REVENUE, INTANGIBLES, NET AND OTHER LIABILITIES
Deferred revenue and other liabilities 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 | $ | $ | |||||||||
| Retainages payable and other | |||||||||||
| Tenant rents received in advance | |||||||||||
| $ | $ | ||||||||||
| Less: deferred revenue associated with investment property held for sale | ( | ||||||||||
| Total | $ | $ | |||||||||
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, 2023 and December 31, 2022 (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Mortgages payable | $ | $ | |||||||||
| Senior unsecured notes | |||||||||||
| Unsecured term loans | |||||||||||
| Unsecured revolving line of credit | |||||||||||
| Unamortized discounts and premiums, net | |||||||||||
| Unamortized debt issuance costs, net | ( | ( | |||||||||
| Total mortgage and other indebtedness, net | $ | $ | |||||||||
19
Consolidated indebtedness, including weighted average interest rates and weighted average maturities as of September 30, 2023, considering the impact of interest rate swaps, is summarized below (dollars in thousands):
| Amount Outstanding | Ratio | Weighted Average Interest Rate | Weighted Average Years to Maturity | ||||||||||||||||||||
Fixed rate debt(1) | $ | % | % | ||||||||||||||||||||
Variable rate debt(2) | % | % | |||||||||||||||||||||
| Debt discounts, premiums and issuance costs, net | N/A | N/A | N/A | ||||||||||||||||||||
| Total | $ | % | % | ||||||||||||||||||||
(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.
(2)Variable rate debt includes the portion of fixed rate debt that has been hedged by interest rate swaps. As of September 30, 2023, $155.0 million in fixed rate debt is hedged to a floating rate for a weighted average of 1.9 years.
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) | $ | % | $ | % | |||||||||||||||||||||||||||||||
Variable rate mortgage payable(2) | % | % | |||||||||||||||||||||||||||||||||
| Total mortgages payable | $ | $ | |||||||||||||||||||||||||||||||||
(1)The fixed rate mortgages had interest rates ranging from 3.75 5.73
(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.
Mortgages payable, which are secured by certain real estate and, in some cases, by guarantees from the Operating Partnership, are generally due in monthly installments of principal and interest and mature over various terms through 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.
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Unsecured 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 – | September 10, 2023 | $ | — | — | % | $ | % | ||||||||||||||||||||||
Senior notes – | June 30, 2024 | % | % | ||||||||||||||||||||||||||
Senior notes – | March 15, 2025 | % | % | ||||||||||||||||||||||||||
Senior notes – SOFR + | September 10, 2025 | % | % | ||||||||||||||||||||||||||
Senior notes – | September 30, 2026 | % | % | ||||||||||||||||||||||||||
Senior notes – | October 1, 2026 | % | % | ||||||||||||||||||||||||||
Senior exchangeable notes – | April 1, 2027 | % | % | ||||||||||||||||||||||||||
Senior notes – SOFR + | September 10, 2027 | % | % | ||||||||||||||||||||||||||
Senior notes – | December 28, 2028 | % | % | ||||||||||||||||||||||||||
Senior notes – | June 28, 2029 | % | % | ||||||||||||||||||||||||||
Senior notes – | September 15, 2030 | % | % | ||||||||||||||||||||||||||
| Total senior unsecured notes | $ | $ | |||||||||||||||||||||||||||
(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 hand.
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 | $ | % | $ | % | ||||||||||||||||||||||||
Unsecured term loan due 2025 – fixed rate(2) | October 24, 2025 | % | % | ||||||||||||||||||||||||||
Unsecured term loan due 2026 – fixed rate(3) | July 17, 2026 | % | % | ||||||||||||||||||||||||||
Unsecured term loan due 2029 – fixed rate(4) | July 29, 2029 | % | % | ||||||||||||||||||||||||||
| Total unsecured term loans | $ | $ | |||||||||||||||||||||||||||
Unsecured credit facility revolving line of credit – variable rate(5) | January 8, 2026 | $ | % | $ | % | ||||||||||||||||||||||||
(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 a ratings grid ranging from 0.80 % to 1.65 % through July 17, 2024. The applicable credit spread was 1.10
(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 term 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 debt has been swapped to a fixed rate of 1.68 % plus a credit spread based on a ratings grid ranging from 0.75 % to 1.60 % through July 17, 2026. The applicable credit spread was 1.05
(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
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Unsecured Revolving Credit Facility
In July 2022, the Operating Partnership, as borrower, and the 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 “Revolving Facility”) and a seven-year $300.0 million unsecured term loan (the “$300 M Term Loan”). Under the Second Amendment, the Operating Partnership has the option, subject to certain customary conditions, to increase the Revolving Facility and/or incur additional term loans in an aggregate amount for all such increases and additional loans of up to $600.0 million, for a total 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 Operating Partnership’s option, subject to certain conditions.
Borrowings under the Revolving Facility bear interest at a rate per annum equal to SOFR plus a margin based on the Operating Partnership’s leverage ratio or credit rating, respectively, plus a facility fee based on the Operating Partnership’s leverage ratio or credit rating, respectively. The SOFR rate is also subject to an additional 0.10 % spread adjustment as specified in the Second Amendment. The Revolving Facility is currently priced on the leverage-based pricing grid. In accordance with the Credit Agreement, the credit spread set forth in the leverage grid resets quarterly based on the Company’s leverage, as calculated at the previous quarter end. The Company may irrevocably elect to convert to the ratings-based pricing grid at any time. As of 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 | ||||||||||||||||||||||||||||||||||||||||||
$ | 1/8/2026 | |||||||||||||||||||||||||||||||||||||||||||||||||
The Operating Partnership’s ability to borrow under the Credit Agreement is subject to ongoing compliance by the Operating Partnership and its subsidiaries with various restrictive covenants, including with respect to liens, transactions with affiliates, dividends, mergers and asset sales. In addition, the Credit Agreement requires that the Operating Partnership satisfy certain financial covenants, including (i) a maximum leverage ratio; (ii) a minimum fixed charge coverage ratio; (iii) a maximum secured indebtedness ratio; (iv) a maximum unsecured leverage ratio; and (v) a minimum unencumbered interest coverage ratio. As of September 30, 2023, we were in compliance with all such covenants.
As of September 30, 2023, we had letters of credit outstanding totaling $0.3 million, against which no amounts were advanced as of September 30, 2023.
Unsecured Term Loans
As of September 30, 2023, the Operating Partnership has the following unsecured term loans: (i) a $120.0 million unsecured term loan due July 2024 (the “$120 M Term Loan”), (ii) a $250.0 million unsecured term loan due October 2025 (the “$250 M Term Loan”), (iii) a $150.0 million unsecured term loan due July 2026 (the “$150 M Term Loan”), and (iv) the $300 M Term Loan that matures in July 2029, each of which bears interest at a rate of SOFR plus a credit spread. The $120 M Term Loan, $150 M Term Loan and $300 M Term Loan are each priced on a ratings-based pricing grid while the $250 M Term Loan is priced on a leverage-based pricing grid. The agreements related to the $150 M Term Loan and $300 M Term Loan include a sustainability metric based on targeted greenhouse gas emission reductions, which results in a reduction of the otherwise applicable interest rate margin by one
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The following table summarizes the key terms of the unsecured term loans as of September 30, 2023 (dollars in thousands):
Unsecured Term Loans | Maturity Date | Leverage-Based Pricing Credit Spread | Investment Grade Pricing Credit Spread | SOFR Adjustment | ||||||||||||||||||||||
$ | 7/17/2024 | |||||||||||||||||||||||||
$ | 10/24/2025(1) | |||||||||||||||||||||||||
$ | 7/17/2026 | |||||||||||||||||||||||||
$ | 7/29/2029 | N/A | ||||||||||||||||||||||||
(1)The maturity date may be extended for up to three additional periods of one year each at the Operating Partnership’s option, subject to certain conditions.
Under the agreement related to the $120 M Term Loan and the $150 M Term Loan, the Operating Partnership has the option to increase each of the term loans to $250.0 120 M Term Loan and $150 M Term Loan, in whole or in part, at any time without being subject to a prepayment fee.
The Operating Partnership has the option to increase the $250 M Term Loan to $300.0 million, subject 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 $250 M 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 $300 M 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 term loan agreements contain representations, financial and other affirmative and negative covenants and events of default that are substantially similar to those contained in the Credit Agreement. The unsecured term loan agreements all rank pari passu with the Operating Partnership’s Revolving Facility and other unsecured indebtedness of the Operating Partnership.
Debt Issuance Costs
Debt issuance costs are amortized over the terms of the respective loan agreements. The following amounts of amortization of debt issuance costs are included as a component of “Interest expense” in the accompanying consolidated statements of operations and comprehensive income (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Amortization of debt issuance costs | $ | $ | |||||||||
Fair Value of Fixed and Variable Rate Debt
As of September 30, 2023, the estimated fair value of fixed rate debt was $1.8 billion compared to the book value of $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 6.22 % to 8.20 %. As of September 30, 2023, the estimated fair value of variable rate debt was $880.2 million compared to the book value of $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 6.47 % to 7.42 %.
NOTE 8. DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND OTHER COMPREHENSIVE INCOME
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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):
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 | $ | SOFR | % | 12/1/2022 | 10/24/2025 | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Cash Flow | SOFR | % | 8/1/2022 | 8/1/2025 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cash Flow | SOFR | % | 8/3/2022 | 11/22/2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cash Flow | SOFR | % | 8/15/2022 | 7/17/2024 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cash Flow | SOFR | % | 8/15/2022 | 7/17/2026 | ||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value(2) | $ | SOFR | SOFR + | 4/23/2021 | 9/10/2025 | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||||
Forward-Starting Cash Flow | $ | SOFR | % | 11/22/2023 | 8/1/2025 | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
(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.
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NOTE 9. SHAREHOLDERS’ EQUITY
Distributions
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. For the nine months ended September 30, 2023, we declared cash distributions totaling $0.72 per common share and Common 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 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 its 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 or redevelopment of properties, although there are currently no understandings, commitments or agreements to do so. As of September 30, 2023, the Company has no t sold any common shares under the ATM Program.
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 no t repurchased any shares under the Share Repurchase Program.
NOTE 10. 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 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 earliest 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 non-employee trustees in lieu 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 the purpose of computing diluted earnings per share since the effect of including those amounts in the denominator would have no dilutive impact. Weighted average Limited Partner Units outstanding were 3.3 million and 3.1 million for the three and nine months ended September 30, 2023, and 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
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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.
NOTE 12. RELATED PARTY TRANSACTIONS
NOTE 13. SUBSEQUENT EVENTS
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction 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.
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 connection with low or negative growth in the U.S. economy as well as economic uncertainty (including a potential economic slowdown or recession, rising interest rates, inflation, unemployment, or limited growth in 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;
•the competitive environment in which we operate, including potential oversupplies of and reduction in demand for rental space;
•acquisition, disposition, development and joint venture risks;
•property ownership and management 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 e-commerce on the value of shopping center 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 our 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;
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•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 consumer behavior due to COVID-19 and 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, 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.
Overview
Our Business and Properties
Kite Realty Group Trust is a 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, open-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 our revenue primarily from the collection of contractual rents and reimbursement payments from tenants under existing lease agreements at each of our properties. Therefore, our operating results depend materially on, among other things, the ability of our tenants to make required lease payments, the health and resilience of the U.S. retail sector, interest rate volatility, stability in the banking sector, job growth, the real estate market and overall economic conditions.
As of September 30, 2023, we owned interests in 180 operating retail properties totaling approximately 28.3 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 and an additional two properties with future redevelopment opportunities.
Inflation
Prior to 2021, inflation was relatively low and had a minimal impact on our operating and financial 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, with escalation clauses in certain leases. Most of our leases also include clauses that allow us to collect additional rent based on a percentage of tenants’ gross sales over stated thresholds, which sales generally increase as prices 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 evaluate 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 and financial performance.
Historically, economic indicators such as GDP growth, consumer confidence and employment have been correlated with demand for certain of our tenants’ products and services. If an economic recession returns, it could increase the number of our tenants that are unable to meet their lease obligations to us and could limit the demand for space in our properties from new tenants.
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Operating Activity
During the third quarter of 2023, we executed new and renewal leases on 214 individual spaces totaling 1,398,695 square feet (14.2% cash leasing spread on 165 comparable leases). New leases were signed on 67 individual spaces for 226,593 square feet of gross leasable area (“GLA”) (36.0% cash leasing spread on 33 comparable leases), while non-option renewal leases were signed on 83 individual spaces for 329,048 square feet of GLA (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 were 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.
Results of Operations
The comparability of results of operations for the three and nine months ended September 30, 2023 and 2022 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.
Acquisitions
The following operating properties were acquired at various times during the period from January 1, 2022 through September 30, 2023:
| Property Name | Metropolitan 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.
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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 Redevelopment(1) | Transition to Operating Portfolio | GLA | ||||||||||||||||||||||
Hamilton Crossing Centre(2)(3) | Indianapolis, IN | June 2014 | Pending | 92,283 | ||||||||||||||||||||||
The Corner(2) | Indianapolis, IN | December 2015 | Pending | 24,000 | ||||||||||||||||||||||
| Eddy Street Commons – Phase III | South Bend, IN | September 2020 | March 2022 | 18,600 | ||||||||||||||||||||||
| The Landing at Tradition – Phase II | Port St. Lucie, FL | September 2021 | June 2023 | 39,900 | ||||||||||||||||||||||
Carillon MOB(2) | 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.
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Comparison of Operating Results for the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022
The following table reflects changes in the components of our consolidated statements of operations for the three months ended September 30, 2023 and 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 | % | |||||||||||||
Rental income (including tenant reimbursements) increased $8.3 million, or 4.2%, due to the following (in thousands):
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 $8.7 million in rental income for properties that were fully operational during 2022 and 2023 is primarily due to increases in the following: (i) base minimum rent of $3.6 million, (ii) tenant reimbursements due to higher recoverable common area maintenance expenses of $2.3 million, and (iii) overage rent of $0.2 million due to improved tenant 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, 2022 to 91.6% for the three months ended September 30, 2023.
Other property-related revenue primarily consists of parking revenues, gains on the sale of land and other miscellaneous activity. This revenue decreased by $0.8 million primarily as a result of lower gains on sales of undepreciated assets recognized during the three months ended September 30, 2023 and a decrease in parking revenue due to the sale of Pam Am Plaza Garage in June 2023.
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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 fee income is primarily related to a decrease in development fees earned related to the development of a corporate campus for Republic Airways at Hamilton Crossing Centre.
Property operating expenses increased $2.1 million, or 8.4%, due to the following (in thousands):
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 $2.7 million in property operating expenses for properties that were fully operational during 2022 and 2023 is primarily due to increases in the following: (i) $2.0 million in non-recoverable operating expenses, (ii) $0.2 million in landscaping and repairs and maintenance expense, and (iii) $0.2 million in utilities. As a percentage of revenue, property operating expenses increased from 12.7% to 13.3% due to an increase in expenses in 2023.
Real estate taxes increased $0.8 million, or 2.9%, due to the following (in thousands):
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 increase of $0.6 million in real estate taxes for properties that were fully operational during 2022 and 2023 is primarily due to higher real estate tax assessments at certain properties in the portfolio in 2023. The majority of real estate tax expense is recoverable from tenants and such recovery is reflected within rental income.
General, administrative and other expenses decreased $0.9 million, or 6.3%, primarily due to lower incremental head count and the timing of backfills, partially offset by an increase in 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 $9.9 million, or 8.5%, due to the following (in thousands):
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 net decrease of $9.1 million in depreciation and amortization at properties that were fully operational during 2022 and 2023 is primarily due to the timing 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 located 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.
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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 higher interest costs related to our variable rate debt.
Comparison of Operating Results for the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022
The following table reflects changes in the components of our consolidated statements of operations for the nine months ended September 30, 2023 and 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 | % | |||||||||||||
Rental income (including tenant reimbursements) increased $30.1 million, or 5.2%, due to the 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 | $ | (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 $24.7 million in rental income for properties that were fully operational during 2022 and 2023 is primarily due to increases in the following: (i) base minimum rent of $13.5 million due to an increase in occupancy, (ii) tenant reimbursements of $4.9 million due to higher recoverable common area maintenance expenses, (iii) overage rent of $1.8 million due to improved tenant performance, and (iv) lease termination income of $1.7 million, along with a decrease in bad debt expense of $1.2 million. These variances were partially offset by a decrease in ancillary income of $0.4 million.
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Other property-related revenue primarily consists of parking revenues, gains on the sale of land and other miscellaneous activity. This revenue decreased by $2.0 million primarily as a result of lower gains on sales of undepreciated assets recognized during the nine months ended September 30, 2023 and a decrease in parking revenue due to the sale of Pam Am Plaza Garage in June 2023.
We recorded fee income of $3.9 million and $6.6 million during the nine 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 a corporate campus for Republic Airways at Hamilton Crossing Centre.
Property operating expenses increased $4.6 million, or 6.0%, due to the 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 | $ | (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 $4.8 million in property operating expenses for properties that were fully operational during 2022 and 2023 is primarily due to increases of $2.8 million in non-recoverable operating expenses, $1.3 million in landscaping and repairs and maintenance expense, and $0.3 million in utilities, partially offset by a $0.3 million decrease in insurance expense. As a percentage of revenue, property operating expenses increased from 13.0% to 13.2% due to an increase in expenses in 2023.
Real estate taxes decreased $0.1 million, or 0.1%, due to the 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 | $ | (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 decrease of $0.1 million in real estate taxes for properties that were fully operational during 2022 and 2023 is primarily due to a decrease in real estate tax assessments at certain 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 within rental income.
General, administrative and other expenses decreased $0.2 million, or 0.4%, primarily due to lower incremental head count and the timing of backfills, partially offset by an increase in executive transportation expenses.
The Company did not incur any significant merger and acquisition costs related to the merger with RPAI during the nine months ended September 30, 2023. The Company incurred $1.0 million of merger and acquisition costs during the nine months ended September 30, 2022, primarily consisting of professional fees and technology costs.
Depreciation and amortization expense decreased $33.6 million, or 9.4%, due to the 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) | |||
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The net decrease of $30.7 million in depreciation and amortization at properties that were fully operational during 2022 and 2023 is primarily due to certain assets with shorter useful lives that became fully depreciated during the prior year.
Based on the results of our evaluations for impairment, we recorded a $0.5 million impairment charge during the nine months ended September 30, 2023 on Eastside, a retail operating property located in the Dallas MSA that qualified for held-for-sale accounting treatment as of September 30, 2023. No impairment charges were recorded during the nine months ended September 30, 2022.
We recorded a net gain on sales of operating properties of $22.5 million for the nine months ended September 30, 2023 on the sale of Kingwood Commons, the undeveloped land and related parking garage at Pan Am Plaza, and Reisterstown Road Plaza compared to a net gain of $27.1 million on the sale of Plaza Del Lago and a portion of Hamilton Crossing Centre for the nine months ended September 30, 2022.
Interest expense increased $0.7 million, or 0.9%, primarily due to higher interest costs related to our variable rate debt, including borrowings on the $1.1 billion unsecured revolving credit facility (the “Revolving Facility”) that were used to repay mortgages payable at 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, 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”), a non-GAAP financial measure, to evaluate the performance of our properties. Same Property NOI is net income excluding properties that have not been owned for the full periods presented. Same Property NOI also excludes (i) net gains from outlot sales, (ii) straight-line rent revenue, (iii) lease termination 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 periods presented. We believe such presentation eliminates disparities in net income due to the acquisition or disposition of properties during the particular periods presented, and thus provides a more consistent metric for the comparison of our properties. Same Property NOI includes the results of properties that have been owned for the entire current and prior year 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 or (b) the contemplated plan significantly impacts the operations of the property.
For the three and nine months ended September 30, 2023, the same property pool excludes 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 reclassified from active redevelopment into our operating portfolio in June 2022, September 2022 and June 2023, respectively;
•two active development and redevelopment projects;
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•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 presents Same Property NOI and a reconciliation to net income (loss) attributable to common shareholders for the three and nine months ended September 30, 2023 and 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 | % | |||||||||||||||||||||||||||
| 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.
(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 4.7% for the three months ended September 30, 2023 compared to the same period of the prior year primarily due to higher base rent driven by positive new and renewal leasing spreads, contractual rent growth, an increase in overage rent, and lower bad debt expense.
Funds From Operations
Funds From Operations (“FFO”) is a widely used performance measure for real estate companies and is provided here as a supplemental measure of 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”), as restated in 2018. The NAREIT white paper defines FFO as net income (calculated in accordance with GAAP),
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excluding (i) depreciation and amortization related to real estate, (ii) gains and losses from the sale of certain real estate assets, (iii) gains and 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, the 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. FFO (a) should not be considered as an alternative to net income (calculated in accordance with GAAP) for the purpose of measuring our financial performance, (b) is not an alternative to cash flows from operating activities (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 FFO and reconciliation to net income and FFO, as adjusted, for the three and nine months ended September 30, 2023 and 2022 (unaudited) are as 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.
Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”)
We define EBITDA, a non-GAAP financial measure, as net income before interest expense, income tax expense of the taxable REIT subsidiary, and depreciation and amortization. For informational purposes, we also provide 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, (v) noncontrolling interest Adjusted EBITDA, and (vi) other non-recurring activity or items impacting comparability from period to period. Annualized Adjusted
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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 also provide 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 net income (the most directly comparable GAAP measure) and a calculation of Net Debt to Adjusted EBITDA (in thousands):
| 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 | ||||
| Loss on sales of operating properties, net | 5,972 | ||||
| Other 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(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 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.
(2)Partner share of consolidated joint venture debt is calculated based upon the partner’s pro rata ownership of the joint 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
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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 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.
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Our Principal Liquidity Needs
Short-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 our 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.
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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 | |||||||||||||||||||||
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Failure to comply with the obligations under our debt agreements, including payment obligations, could cause an event of default under such debt, which, among other things, could result in the loss of title to the assets securing the debt, acceleration of the payment of all principal and interest and/or termination of the agreements, or exposure to the risk of foreclosure. In addition, certain of our variable rate loans contain cross-default provisions whereby a violation by the Company of any financial covenant set forth in the Revolving Facility will constitute an “Event of Default” under the loans, which could allow the lenders to accelerate the amounts due under our debt agreements if we fail to satisfy these financial covenants. See “Item 1A. Risk Factors – Risks Related to Our Operations” in our Annual Report on Form 10-K for the year ended December 31, 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
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•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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Related to Fixed and Variable Rate Debt
As of September 30, 2023, we had $2.9 billion of outstanding consolidated indebtedness (inclusive of net unamortized debt discounts, premiums and issuance costs of $25.6 million). In addition, we were party to various consolidated interest rate hedge agreements totaling $975.0 million with maturities over various terms through 2026. Reflecting the effects of these hedge agreements, our fixed and variable rate debt would have been $2.6 billion (93%) and $211.6 million (7%), respectively, of our total consolidated indebtedness as of September 30, 2023.
As of September 30, 2023, we had $269.6 million of fixed rate debt scheduled to mature within the next 12 months. A 100-basis point change in interest rates on this debt as of September 30, 2023 would change our annual cash flow by $2.7 million. A 100-basis point change in interest rates on our unhedged variable rate debt as of September 30, 2023 would change our annual cash flow by $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.
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’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.
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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, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Kite Realty Group, L.P.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Operating Partnership’s management, including the 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’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, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
During the three months ended September 30, 2023, certain of our employees surrendered 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 the Company’s 2013 Equity Incentive 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, 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Trading Arrangements
During the three months ended September 30, 2023, none
45
ITEM 6. EXHIBITS
| Exhibit No. | 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 28, 2022 | |||||||||||||
| 3.2 | 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 28, 2022 | |||||||||||||
| 31.1 | Filed herewith | |||||||||||||
| 31.2 | Filed herewith | |||||||||||||
| 31.3 | Filed herewith | |||||||||||||
| 31.4 | Filed herewith | |||||||||||||
| 32.1 | Filed herewith | |||||||||||||
| 32.2 | Filed herewith | |||||||||||||
| 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 | ||||||||||||
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants 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 | |||||||||||
| 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) | ||||||||||||||
| 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) | ||||||||||||||
47