UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the quarterly period ended SeptemberJune 30, 20162017
  
OR
  
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the transition period from                  to                 
 
Commission File Number: 001-32268 (Kite Realty Group Trust)
Commission File Number: 333-202666-01 (Kite Realty Group, L.P.)
 
Kite Realty Group Trust
Kite Realty Group, L.P.
(Exact Name of Registrant as Specified in its Charter)
Maryland (Kite Realty Group Trust) 11-3715772
Delaware (Kite Realty Group, L.P.) 20-1453863
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
   
30 S. Meridian Street, Suite 1100
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip code)
   
Telephone: (317) 577-5600
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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
Yes   x
No  o
Kite Realty Group, L.P.
Yes   x
No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Kite Realty Group Trust
Yes  x
No  o
Kite Realty Group, L.P.
Yes   x
No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Kite Realty Group Trust:
xLarge accelerated fileroxAccelerated fileroNon-accelerated fileroSmaller reporting companyo
Emerging growth companyo

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. o
Kite Realty Group, L.P.:
oLarge accelerated fileroAccelerated filerxoNon-accelerated fileroxSmaller reporting companyo
Emerging growth companyo

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. 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  o
No   x
Kite Realty Group, L.P.
Yes  o
No   x
The number of Common Shares of Kite Realty Group Trust outstanding as of October 31, 2016August 2, 2017 was 83,545,98683,594,250 ($.01 par value).



EXPLANATORY NOTE


This report combines the quarterly reports on Form 10-Q for the period ended SeptemberJune 30, 20162017 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 and operation, acquisition, development and redevelopment of high-quality neighborhood and community shopping centers in select markets in the United States. The Parent Company is the sole general partner of the Operating Partnership and as of SeptemberJune 30, 20162017 owned approximately 97.7% of the common partnership interests in the Operating Partnership (“General Partner Units”). The remaining 2.3% of the common partnership interests (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”) were 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 because 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 placement 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 SEPTEMBERJUNE 30, 20162017
 
 TABLE OF CONTENTS
  Page
Part I.
FINANCIAL INFORMATION
 
   
Item 1.
Consolidated Financial Statements (Unaudited)
 
   
Kite Realty Group Trust: 
   
 Consolidated Balance Sheets as of SeptemberJune 30, 20162017 and December 31, 20152016
4
   
 Consolidated Statements of Operations and Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
5
   
 Consolidated Statement of Shareholders' Equity for the NineSix Months Ended SeptemberJune 30, 20162017
6
   
 Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
7
   
Kite Realty Group, L.P. and subsidiaries: 
   
 Consolidated Balance Sheets as of SeptemberJune 30, 20162017 and December 31, 20152016
8
   
 Consolidated Statements of Operations and Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
9
   
 Consolidated Statement of Partners' Equity for the NineSix Months Ended SeptemberJune 30, 20162017
10
   
 Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
11
   
Kite Realty Group Trust and Kite Realty Group, L.P. and subsidiaries: 
   
 Notes to Consolidated Financial Statements
12
   
Item 2.Cautionary Note About Forward-Looking Statements
2723
   
 Management's Discussion and Analysis of Financial Condition and Results of Operations
2824
   
Item 3.Quantitative and Qualitative Disclosure about Market Risk
4639
   
Item 4.Controls and Procedures
4639
   
Part II.OTHER INFORMATION 
   
Item 1.Legal Proceedings
4841
   
Item 1A.Risk Factors
4841
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
4841
   
Item 3.Defaults upon Senior Securities
4841
   
Item 4.Mine Safety Disclosures
4841
   
Item 5.Other Information
4941
   
Item 6.Exhibits
4942
   
SIGNATURES
5244


Part I. FINANCIAL INFORMATION
  
Item 1.
 
Kite Realty Group Trust
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share data)
September 30,
2016		 December 31,
2015		June 30,
2017		 December 31,
2016
Assets:      
Investment properties, at cost$3,990,208
 $3,933,140
$3,939,999
 $3,996,065
Less: accumulated depreciation(531,946) (432,295)(608,233) (560,683)
3,458,262
 3,500,845
3,331,766
 3,435,382
      
Cash and cash equivalents28,793
 33,880
27,635
 19,874
Tenant and other receivables, including accrued straight-line rent of $27,875 and
$23,809, respectively, net of allowance for uncollectible accounts		50,350
 51,101
Tenant and other receivables, including accrued straight-line rent of $29,818 and $28,703 respectively, net of allowance for uncollectible accounts52,270
 53,087
Restricted cash and escrow deposits9,585
 13,476
8,717
 9,037
Deferred costs and intangibles, net133,114
 148,274
119,699
 129,264
Prepaid and other assets10,814
 8,852
10,188
 9,727
Total Assets$3,690,918
 $3,756,428
$3,550,275
 $3,656,371
      
Liabilities and Equity: 
   
  
Mortgage and other indebtedness, net$1,732,344
 $1,724,449
$1,675,064
 $1,731,074
Accounts payable and accrued expenses93,440
 81,356
88,482
 80,664
Deferred revenue and intangibles, net and other liabilities120,550
 131,559
103,302
 112,202
Total Liabilities1,946,334
 1,937,364
1,866,848
 1,923,940
Commitments and contingencies—
 —
—
 —
Limited partners' interests in Operating Partnership and other redeemable noncontrolling interests99,478
 92,315
73,051
 88,165
Equity: 
  
 
  
Kite Realty Group Trust Shareholders' Equity: 
  
 
  
Common Shares, $.01 par value, 225,000,000 shares authorized, 83,545,486 and 83,334,865
shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		835
 833
Common Shares, $.01 par value, 225,000,000 shares authorized, 83,595,490 and 83,545,398
shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively		836
 835
Additional paid in capital and other2,049,702
 2,050,545
2,067,795
 2,062,360
Accumulated other comprehensive loss(8,738) (2,145)
Accumulated other comprehensive income (loss)736
 (316)
Accumulated deficit(397,391) (323,257)(459,689) (419,305)
Total Kite Realty Group Trust Shareholders' Equity1,644,408
 1,725,976
1,609,678
 1,643,574
Noncontrolling Interests698
 773
698
 692
Total Equity1,645,106
 1,726,749
1,610,376
 1,644,266
Total Liabilities and Equity$3,690,918
 $3,756,428
$3,550,275
 $3,656,371
  
The accompanying notes are an integral part of these consolidated financial statements.


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,		Three Months Ended
June 30,		 Six Months Ended
June 30,
2016 2015 2016 20152017 2016 2017 2016
              
Revenue:              
Minimum rent$69,518
 $66,279
 $205,436
 $196,656
$68,395
 $68,455
 $137,341
 $135,918
Tenant reimbursements17,531
 16,787
 52,691
 51,891
18,521
 17,006
 37,091
 35,161
Other property related revenue2,073
 4,081
 7,120
 9,163
5,733
 2,114
 8,330
 5,046
Total revenue89,122
 87,147
 265,247
 257,710
92,649
 87,575
 182,762
 176,125
Expenses:              
Property operating11,916
 11,994
 35,454
 36,519
12,139
 11,346
 25,091
 23,538
Real estate taxes10,690
 10,045
 32,327
 29,821
11,228
 10,503
 21,559
 21,637
General, administrative, and other5,081
 4,559
 15,228
 14,131
5,488
 4,856
 10,958
 10,147
Transaction costs—
 1,089
 2,771
 1,550
—
 2,771
 —
 2,771
Impairment charge—
 —
 7,411
 —
Depreciation and amortization45,543
 42,549
 131,625
 124,196
42,710
 43,841
 88,540
 86,082
Total expenses73,230
 70,236
 217,405
 206,217
71,565
 73,317
 153,559
 144,175
Operating income15,892
 16,911
 47,842
 51,493
21,084
 14,258
 29,203
 31,950
Interest expense(17,139) (13,881) (47,964) (40,995)(16,433) (15,500) (32,878) (30,825)
Income tax expense of taxable REIT subsidiary(15) (9) (763) (134)
Gain on settlement—
 —
 —
 4,520
Income tax (expense) benefit of taxable REIT subsidiary(3) (338) 30
 (748)
Other expense, net—
 (60) (94) (189)(80) (110) (219) (94)
(Loss) income before gain on sale of operating properties(1,262) 2,961
 (979) 14,695
Gain on sales of operating properties—
 —
 194
 3,363
Consolidated net (loss) income(1,262) 2,961
 (785) 18,058
Income (loss) from continuing operations4,568
 (1,690) (3,864) 283
Gains on sales of operating properties6,290
 194
 15,160
 194
Consolidated net income (loss)10,858
 (1,496) 11,296
 477
Net income attributable to noncontrolling interests(420) (435) (1,391) (1,626)(678) (399) (1,110) (971)
Net (loss) income attributable to Kite Realty Group Trust$(1,682) $2,526
 $(2,176) $16,432
Dividends on preferred shares—
 (2,114) —
 (6,342)
Net (loss) income attributable to common shareholders$(1,682) $412
 $(2,176) $10,090
Net income (loss) attributable to Kite Realty Group Trust common shareholders$10,180
 $(1,895) $10,186
 $(494)
        
  
    
 
  
    
Net (loss) income per common share - basic & diluted$(0.02) $0.00
 $(0.03) $0.12
Net income (loss) per common share - basic & diluted$0.12
 $(0.02) $0.12
 $(0.01)
              
Weighted average common shares outstanding - basic83,474,348
 83,325,074
 83,399,813
 83,453,660
83,585,736
 83,375,765
 83,575,587
 83,362,136
Weighted average common shares outstanding - diluted83,474,348
 83,433,379
 83,399,813
 83,566,554
83,652,627
 83,375,765
 83,640,327
 83,362,136
              
Common dividends declared per common share$0.2875
 $0.2725
 $0.8625
 $0.8175
$0.3025
 $0.2875
 $0.6050
 $0.5750
              
Consolidated net (loss) income$(1,262) $2,961
 $(785) $18,058
Consolidated net income (loss)$10,858
 $(1,496) $11,296
 $477
Change in fair value of derivatives3,185
 (3,436) (6,747) (5,153)(420) (2,619) 1,076
 (9,932)
Total comprehensive income (loss)1,923
 (475) (7,532) 12,905
10,438
 (4,115) 12,372
 (9,455)
Comprehensive income attributable to noncontrolling interests(493) (399) (1,237) (1,507)(668) (340) (1,134) (744)
Comprehensive income (loss) attributable to Kite Realty Group Trust$1,430
 $(874) $(8,769) $11,398
$9,770
 $(4,455) $11,238
 $(10,199)

The accompanying notes are an integral part of these consolidated financial statements.


Kite Realty Group Trust
Consolidated Statement of Shareholders’ Equity
(Unaudited)
(in thousands, except share data)

 
 Common Shares 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 Total
 Shares Amount    
Balances, December 31, 201583,334,865
 $833
 $2,050,545
 $(2,145) $(323,257) $1,725,976
Stock compensation activity68,392
 1
 3,640
 —
 —
 3,641
Issuance of common shares under
at-the-market plan, net		137,229
 1
 3,836
 —
 —
 3,837
Other comprehensive loss
attributable to Kite Realty Group Trust		—
 —
 —
 (6,593) —
 (6,593)
Distributions declared to common
shareholders		—
 —
 —
 —
 (71,958) (71,958)
Net loss attributable to Kite
Realty Group Trust		—
 —
 —
 —
 (2,176) (2,176)
Exchange of redeemable noncontrolling
interests for common shares		5,000
 —
 136
 —
 —
 136
Adjustment to redeemable
noncontrolling interests		—
 —
 (8,455) —
 —
 (8,455)
Balances, September 30, 201683,545,486
 $835
 $2,049,702
 $(8,738) $(397,391) $1,644,408
 Common Shares 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Accumulated
Deficit
 Total
 Shares Amount    
Balances, December 31, 201683,545,398
 $835
 $2,062,360
 $(316) $(419,305) $1,643,574
Stock compensation activity50,092
 1
 2,597
 —
 —
 2,598
Other comprehensive income attributable
to Kite Realty Group Trust		—
 —
 —
 1,052
 —
 1,052
Distributions declared to common
shareholders		—
 —
 —
 —
 (50,570) (50,570)
Net income attributable to Kite
Realty Group Trust		—
 —
 —
 —
 10,186
 10,186
Acquisition of partner's noncontrolling interest
in Fishers Station operating property		—
 —
 (3,750) —
 —
 (3,750)
Adjustment to redeemable noncontrolling
interests		—
 —
 6,588
 —
 —
 6,588
Balances, June 30, 201783,595,490
 $836
 $2,067,795
 $736
 $(459,689) $1,609,678

 
The accompanying notes are an integral part of these consolidated financial statements.




Kite Realty Group Trust
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended
September 30,		Six Months Ended
June 30,
2016 20152017 2016
Cash flows from operating activities:      
Consolidated net (loss) income$(785) $18,058
Adjustments to reconcile consolidated net (loss) income to net cash provided by operating activities: 
  
Consolidated net income$11,296
 $477
Adjustments to reconcile consolidated net income to net cash provided by operating activities: 
  
Straight-line rent(4,318) (4,408)(2,420) (2,842)
Depreciation and amortization135,369
 126,580
89,749
 87,713
Gain on sale of operating properties, net(194) (3,363)
Gains on sales of operating properties(15,160) (194)
Impairment charge7,411
 —
Provision for credit losses1,883
 2,984
1,790
 1,291
Compensation expense for equity awards3,932
 3,239
3,122
 2,573
Amortization of debt fair value adjustment(3,008) (4,641)(1,486) (2,128)
Amortization of in-place lease liabilities, net(5,822) (2,148)(1,800) (3,252)
Changes in assets and liabilities: 
  
 
  
Tenant receivables and other2,354
 1,777
(1,606) 3,456
Deferred costs and other assets(11,846) (7,310)(7,109) (5,917)
Accounts payable, accrued expenses, deferred revenue and other liabilities3,141
 8,056
(2,688) (232)
Payments on assumed earnout liability—
 (2,869)
Net cash provided by operating activities120,706
 135,955
81,099
 80,945
Cash flows from investing activities: 
  
 
  
Acquisitions of interests in properties—
 (167,831)
Capital expenditures, net(68,352) (69,792)(34,947) (44,223)
Net proceeds from sales of operating properties139
 126,460
76,076
 139
Collection of note receivable500
 —
—
 500
Change in construction payables621
 1,005
(1,598) (1,260)
Net cash used in investing activities(67,092) (110,158)
Net cash provided by (used in) investing activities39,531
 (44,844)
Cash flows from financing activities: 
  
 
  
Proceeds from issuance of common shares, net4,383
 —
Purchase of redeemable noncontrolling interests—
 (33,998)
Repurchases of common shares upon the vesting of restricted shares(1,124) (964)(780) (755)
Acquisition of partner's interest in Fishers Station operating property(3,750) —
Loan proceeds550,194
 640,895
54,200
 178,970
Loan transaction costs(7,280) (3,032)—
 (887)
Loan payments and related financing escrows(531,070) (553,255)
Loan payments(109,933) (160,597)
Distributions paid – common shareholders(70,650) (67,191)(50,553) (46,676)
Distributions paid - preferred shareholders—
 (6,342)
Distributions paid – redeemable noncontrolling interests(2,932) (2,721)(2,053) (1,941)
Distributions to noncontrolling interests(222) (64)—
 (193)
Net cash used in financing activities(58,701) (26,672)(112,869) (32,079)
Net change in cash and cash equivalents(5,087) (875)7,761
 4,022
Cash and cash equivalents, beginning of period33,880
 43,826
19,874
 33,880
Cash and cash equivalents, end of period$28,793
 $42,951
$27,635
 $37,902
   
Non-cash investing and financing activities   
Assumption of mortgages by buyer upon sale of properties$—
 $40,303
Assumption of debt in connection with acquisition of Chapel Hill Shopping Center including debt premiums of $223—
 18,473

 The accompanying notes are an integral part of these consolidated financial statements.


Kite Realty Group, L.P. and subsidiaries
Consolidated Balance Sheets
(unaudited)
(in thousands, except unit data)
September 30,
2016		 December 31,
2015		June 30,
2017		 December 31,
2016
Assets:      
Investment properties, at cost$3,990,208
 $3,933,140
$3,939,999
 $3,996,065
Less: accumulated depreciation(531,946) (432,295)(608,233) (560,683)
3,458,262
 3,500,845
3,331,766
 3,435,382
      
Cash and cash equivalents28,793
 33,880
27,635
 19,874
Tenant and other receivables, including accrued straight-line rent of $27,875 and
$23,809, respectively, net of allowance for uncollectible accounts		50,350
 51,101
Tenant and other receivables, including accrued straight-line rent of $29,818 and $28,703 respectively, net of allowance for uncollectible accounts52,270
 53,087
Restricted cash and escrow deposits9,585
 13,476
8,717
 9,037
Deferred costs and intangibles, net133,114
 148,274
119,699
 129,264
Prepaid and other assets10,814
 8,852
10,188
 9,727
Total Assets$3,690,918
 $3,756,428
$3,550,275
 $3,656,371
      
Liabilities and Equity: 
   
  
Mortgage and other indebtedness, net$1,732,344
 $1,724,449
$1,675,064
 $1,731,074
Accounts payable and accrued expenses93,440
 81,356
88,482
 80,664
Deferred revenue and intangibles, net and other liabilities120,550
 131,559
103,302
 112,202
Total Liabilities1,946,334
 1,937,364
1,866,848
 1,923,940
Commitments and contingencies—
 —
—
 —
Redeemable Limited Partners’ and other redeemable noncontrolling interests99,478
 92,315
73,051
 88,165
Partners Equity:      
Parent Company:      
Common equity, 83,545,486 and 83,334,865 units issued and outstanding
at September 30, 2016 and December 31, 2015, respectively		1,653,146
 1,728,121
Accumulated other comprehensive loss(8,738) (2,145)
Common equity, 83,595,490 and 83,545,398 units issued and outstanding at June 30, 2017
and December 31, 2016, respectively		1,608,942
 1,643,890
Accumulated other comprehensive income (loss)736
 (316)
Total Partners Equity1,644,408
 1,725,976
1,609,678
 1,643,574
Noncontrolling Interests698
 773
698
 692
Total Equity1,645,106
 1,726,749
1,610,376
 1,644,266
Total Liabilities and Equity$3,690,918
 $3,756,428
$3,550,275
 $3,656,371

The accompanying notes are an integral part of these consolidated financial statements.



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,		Three Months Ended
June 30,		 Six Months Ended
June 30,
2016 2015 2016 20152017 2016 2017 2016
              
Revenue:              
Minimum rent$69,518
 $66,279
 $205,436
 $196,656
$68,395
 $68,455
 $137,341
 $135,918
Tenant reimbursements17,531
 16,787
 52,691
 51,891
18,521
 17,006
 37,091
 35,161
Other property related revenue2,073
 4,081
 7,120
 9,163
5,733
 2,114
 8,330
 5,046
Total revenue89,122
 87,147
 265,247
 257,710
92,649
 87,575
 182,762
 176,125
Expenses:   
    
   
    
Property operating11,916
 11,994
 35,454
 36,519
12,139
 11,346
 25,091
 23,538
Real estate taxes10,690
 10,045
 32,327
 29,821
11,228
 10,503
 21,559
 21,637
General, administrative, and other5,081
 4,559
 15,228
 14,131
5,488
 4,856
 10,958
 10,147
Transaction costs—
 1,089
 2,771
 1,550
—
 2,771
 —
 2,771
Impairment charge—
 —
 7,411
 —
Depreciation and amortization45,543
 42,549
 131,625
 124,196
42,710
 43,841
 88,540
 86,082
Total expenses73,230
 70,236
 217,405
 206,217
71,565
 73,317
 153,559
 144,175
Operating income15,892
 16,911
 47,842
 51,493
21,084
 14,258
 29,203
 31,950
Interest expense(17,139) (13,881) (47,964) (40,995)(16,433) (15,500) (32,878) (30,825)
Income tax expense of taxable REIT subsidiary(15) (9) (763) (134)
Gain on settlement—
 —
 —
 4,520
Income tax (expense) benefit of taxable REIT subsidiary(3) (338) 30
 (748)
Other expense, net—
 (60) (94) (189)(80) (110) (219) (94)
(Loss) income before gain on sale of operating properties(1,262) 2,961
 (979) 14,695
Gain on sales of operating properties—
 —
 194
 3,363
Consolidated net (loss) income(1,262) 2,961
 (785) 18,058
Income (loss) from continuing operations4,568
 (1,690) (3,864) 283
Gains on sales of operating properties6,290
 194
 15,160
 194
Consolidated net income (loss)10,858
 (1,496) 11,296
 477
Net income attributable to noncontrolling interests(461) (410) (1,443) (1,411)(438) (461) (870) (983)
Distributions on preferred units—
 (2,114) —
 (6,342)
Net (loss) income attributable to common unitholders$(1,723) $437
 $(2,228) $10,305
Net income (loss) attributable to common unitholders$10,420
 $(1,957) $10,426
 $(506)
              
Allocation of net (loss) income:       
Allocation of net income (loss):       
Limited Partners$(41) $25
 $(52) $215
$240
 $(62) $240
 $(12)
Parent Company(1,682) 412
 (2,176) 10,090
10,180
 (1,895) 10,186
 (494)
$(1,723) $437
 $(2,228) $10,305
$10,420
 $(1,957) $10,426
 $(506)
              
              
Net (loss) income per unit - basic & diluted$(0.02) $0.00
 $(0.03) $0.12
Net income (loss) per unit - basic & diluted$0.12
 $(0.02) $0.12
 $(0.01)
              
Weighted average common units outstanding - basic85,417,753
 85,238,537
 85,336,859
 85,214,390
85,572,566
 85,320,923
 85,551,356
 85,295,968
Weighted average common units outstanding - diluted85,417,753
 85,346,842
 85,336,859
 85,327,283
85,639,457
 85,420,633
 85,616,096
 85,394,353
              
Distributions declared per common unit$0.2875
 $0.2725
 $0.8625
 $0.8175
$0.3025
 $0.2875
 $0.6050
 $0.5750
              
Consolidated net (loss) income$(1,262) $2,961
 $(785) $18,058
Consolidated net income (loss)$10,858
 $(1,496) $11,296
 $477
Change in fair value of derivatives3,185
 (3,436) (6,747) (5,153)(420) (2,619) 1,076
 (9,932)
Total comprehensive income (loss)1,923
 (475) (7,532) 12,905
10,438
 (4,115) 12,372
 (9,455)
Comprehensive income attributable to noncontrolling interests(461) (410) (1,443) (1,411)(438) (461) (870) (983)
Comprehensive income (loss) attributable to common unitholders$1,462
 $(885) $(8,975) $11,494
$10,000
 $(4,576) $11,502
 $(10,438)

The accompanying notes are an integral part of these consolidated financial statements.


Kite Realty Group, L.P. and subsidiaries
Consolidated Statements of Partners’ Equity
(Unaudited)
(in thousands)

 General Partner Total
 Common Equity 
Accumulated
Other
Comprehensive
Loss
 
      
Balances, December 31, 2015$1,728,121
 $(2,145) $1,725,976
Stock compensation activity3,641
 —
 3,641
Capital Contribution from the General Partner3,837
 —
 3,837
Other comprehensive loss attributable to Parent Company—
 (6,593) (6,593)
Distributions declared to Parent Company(71,958) —
 (71,958)
Net loss(2,176) —
 (2,176)
Conversion of Limited Partner Units to shares of the Parent Company136
 —
 136
Adjustment to redeemable noncontrolling interests(8,455) —
 (8,455)
Balances, September 30, 2016$1,653,146
 $(8,738) $1,644,408
 General Partner Total
 Common Equity 
Accumulated
Other
Comprehensive
(Loss) Income
 
Balances, December 31, 2016$1,643,890
 $(316) $1,643,574
Stock compensation activity2,598
 —
 2,598
Other comprehensive income attributable to Parent Company—
 1,052
 1,052
Distributions declared to Parent Company(50,570) —
 (50,570)
Net income10,186
 —
 10,186
Acquisition of partner's interest in Fishers Station operating property(3,750) —
 (3,750)
Adjustment to redeemable noncontrolling interests6,588
 —
 6,588
Balances, June 30, 2017$1,608,942
 $736
 $1,609,678

The accompanying notes are an integral part of these consolidated financial statements.





Kite Realty Group, L.P. and subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended
September 30,		Six Months Ended
June 30,
2016 20152017 2016
Cash flows from operating activities:      
Consolidated net (loss) income$(785) $18,058
Adjustments to reconcile consolidated net (loss) income to net cash provided by operating activities:   
Consolidated net income$11,296
 $477
Adjustments to reconcile consolidated net income to net cash provided by operating activities:   
Straight-line rent(4,318) (4,408)(2,420) (2,842)
Depreciation and amortization135,369
 126,580
89,749
 87,713
Gain on sale of operating properties, net(194) (3,363)
Gains on sales of operating properties(15,160) (194)
Impairment charge7,411
 —
Provision for credit losses1,883
 2,984
1,790
 1,291
Compensation expense for equity awards3,932
 3,239
3,122
 2,573
Amortization of debt fair value adjustment(3,008) (4,641)(1,486) (2,128)
Amortization of in-place lease liabilities, net(5,822) (2,148)(1,800) (3,252)
Changes in assets and liabilities:      
Tenant receivables and other2,354
 1,777
(1,606) 3,456
Deferred costs and other assets(11,846) (7,310)(7,109) (5,917)
Accounts payable, accrued expenses, deferred revenue and other liabilities3,141
 8,056
(2,688) (232)
Payments on assumed earnout liability—
 (2,869)
Net cash provided by operating activities120,706
 135,955
81,099
 80,945
Cash flows from investing activities: 
  
 
  
Acquisitions of interests in properties—
 (167,831)
Capital expenditures, net(68,352) (69,792)(34,947) (44,223)
Net proceeds from sales of operating properties139
 126,460
76,076
 139
Collection of note receivable500
 —
—
 500
Change in construction payables621
 1,005
(1,598) (1,260)
Net cash used in investing activities(67,092) (110,158)
Net cash provided by (used in) investing activities39,531
 (44,844)
Cash flows from financing activities: 
  
 
  
Contributions from the General Partner4,383
 —
Purchase of redeemable noncontrolling interests—
 (33,998)
Repurchases of common shares upon the vesting of restricted shares(1,124) (964)(780) (755)
Acquisition of partner's interest in Fishers Station operating property(3,750) —
Loan proceeds550,194
 640,895
54,200
 178,970
Loan transaction costs(7,280) (3,032)—
 (887)
Loan payments and related financing escrows(531,070) (553,255)
Loan payments(109,933) (160,597)
Distributions paid – common unitholders(70,650) (67,191)(50,553) (46,676)
Distributions paid - preferred unitholders—
 (6,342)
Distributions paid – redeemable noncontrolling interests - subsidiaries(2,932) (2,721)
Distributions paid – redeemable noncontrolling interests(2,053) (1,941)
Distributions to noncontrolling interests(222) (64)—
 (193)
Net cash used in financing activities(58,701) (26,672)(112,869) (32,079)
Net change in cash and cash equivalents(5,087) (875)7,761
 4,022
Cash and cash equivalents, beginning of period33,880
 43,826
19,874
 33,880
Cash and cash equivalents, end of period$28,793
 $42,951
$27,635
 $37,902
   
Non-cash investing and financing activities   
Assumption of mortgages by buyer upon sale of properties$—
 $40,303
Assumption of debt in connection with acquisition of Chapel Hill Shopping Center including debt premiums of $223—
 18,473

The accompanying notes are an integral part of these consolidated financial statements.


Kite Realty Group Trust and Kite Realty Group, L.P. and subsidiaries
Notes to Consolidated Financial Statements
SeptemberJune 30, 20162017
(Unaudited)
(in thousands, except share and per share data)
  
Note 1. Organization
 
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 and operation, acquisition, development and redevelopment of high-quality neighborhood and community shopping centers in selectedselect 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 (a “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 SeptemberJune 30, 20162017 owned approximately 97.7% of the common partnership interests in the Operating Partnership (“General Partner Units”). The remaining 2.3% of the common partnership interests (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”) were owned by the limited partners. As the sole general partner of the Operating Partnership, the Parent Company has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership. The Parent Company and the Operating Partnership are operated as one enterprise. The management of the Parent Company consists of the same members as the management of the Operating Partnership. As the sole general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have any significant assets other than its investment in the Operating Partnership.


At SeptemberJune 30, 2016,2017, we owned interests in 120117 operating and redevelopment properties consisting of 109 retail properties, nine retail redevelopment properties, one office operating property and an associated parking garage.totaling approximately 23.1 million square feet. We also owned one development propertyproject under construction as of this date.


Note 2. Basis of Presentation, Consolidation, Investments in Joint Ventures, and Noncontrolling Interests
 
We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.  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 financial statements as of SeptemberJune 30, 20162017 and for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 include all adjustments, consisting of normal recurring adjustments, necessary in the opinion of management to present fairly the financial information set forth therein.  The 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, 2015. 

2016. 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the disclosurereported amounts of contingent assets and liabilities, the reported amountsdisclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenuerevenues 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.
 
Components of Investment Properties
The composition of the Company’s investment properties as of June 30, 2017 and December 31, 2016 was as follows:


($ in thousands) Balance at
  June 30,
2017		 December 31,
2016
Investment properties, at cost:    
Land, buildings and improvements $3,830,947
 $3,885,223
Furniture, equipment and other 7,550
 7,246
Land held for development 31,981
 34,171
Construction in progress 69,521
 69,425
  $3,939,999
 $3,996,065

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 subsidiary of the Operating Partnership, subsidiaries of the Operating Partnership that are controlled and any variable interest entities (“VIEs”) in which the Operating Partnership is the primary beneficiary.  In general, a VIE is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) has equity investors that do not provide sufficient financial resources for the entity to support its activities, (b) does not have equity investors with voting rights or (c) has equity investors whose votes are disproportionate from their economics and substantially all of the activities are conducted on behalf of the investor with disproportionately fewer voting rights.   


As of January 1, 2016, we adopted Accounting Standards Update ("ASU") 2015-02, Consolidation: Amendments to the Consolidation Analysis, as required. See the below section entitled "Recently Issued Accounting Pronouncements" for further details. The Operating Partnership accounts for properties that are owned by joint ventures in accordance with the consolidation guidance.  The Operating Partnership evaluates each joint venture and determines first whether to follow the VIE or the voting interest entity ("VOE") model. Once the appropriate consolidation model is identified, the Operating Partnership then evaluates whether it should consolidate the joint venture. Under the VIE model, the Operating Partnership consolidates an entity when it has (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the VOE model, the Operating Partnership consolidates an entity when (i) it controls the entity through ownership of a majority voting interest if the entity is not a limited partnership or (ii) it controls the entity through its ability to remove the other partners or owners in the entity, at its discretion, when the entity is a limited partnership.

 
In determining whether to consolidate a VIE with the Operating Partnership, we consider all relationships between the Operating Partnership and the applicable VIE, including development agreements, management agreements and other contractual arrangements, in determining whether we have the power to direct the activities of the VIE that most significantly affect the VIE's performance.  We also periodically reassess primary beneficiary statusAs of the VIE.  Prior to the adoption of ASC 2015-02,June 30, 2017, we treated one of our consolidatedowned investments in three joint ventures as a VIE. As a result of the adoption of ASC 2015-02, we concluded that two additional previously-consolidated joint ventures of the Operating Partnership were VIEs asin which the partners did not have substantive participating rights and we were the primary beneficiary.  As a result, as of September 30, 2016, we owned investments in three joint ventures that were VIEs in which we were the primary beneficiary.  As of this date, these VIEs had total debt of $237.7$238.8 million, which were secured by assets of the VIEs totaling $498.9$497.9 million.  The Operating Partnership guarantees the debtdebts of these VIEs. These conclusions did not impact the Company's financial position or results of operations.


As part of the adoption of ASC 2015-02, the Company concluded theThe Operating Partnership wasis considered a VIE as the limited partners do not hold kick-out rights or substantive participating rights. The Parent Company consolidates the Operating Partnership as it is the primary beneficiary in accordance with the VIE model.


Beacon Hill


In June 2015, we acquired our partner's interest in our Beacon Hill operating property. The transaction was accounted for as an equity transaction as we retained our controlling financial interest.


Income Taxes and REIT Compliance

Parent Company

The Parent Company, which is considered a corporation for federal income tax purposes, has been organized and intends to continue to operate in a manner that will enable it to maintain its qualification as a REIT for federal income tax purposes. As a result, it generally will not be subject to 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 federal corporate income tax on its undistributed REIT taxable income. 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 federal income tax on its taxable income at regular corporate rates for a period of four years following the year in which qualification is lost. We may also be subject to certain federal, state and local taxes on our income and property and to federal income and excise taxes on our undistributed taxable income even if the Parent


Company does qualify as a REIT. The Operating Partnership intends to continue to make distributions to the Parent Company in amounts sufficient to assist the Parent Company in adhering to REIT requirements and maintaining its REIT status.

We have elected to treat Kite Realty Holdings, LLC as a taxable REIT subsidiary of the Operating Partnership, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. This election enables us to receive income and provide services that would otherwise be impermissible for a REIT. Deferred tax assets and liabilities are established for temporary differences between the financial reporting bases and the tax bases of assets and liabilities at the tax rates expected to be in effect when the temporary differences reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Operating Partnership

The allocated share of income and loss, other than the operations of our taxable REIT subsidiary, is included in the income tax returns of the Operating Partnership's partners. Accordingly, the only federal income taxes included in the accompanying consolidated financial statements are in connection with the Operating Partnership's taxable REIT subsidiary.

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 non-redeemable noncontrolling interests in consolidated properties for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 were as follows:

2016 20152017 2016
Noncontrolling interests balance January 1$773
 $3,364
$692
 $773
Net income allocable to noncontrolling interests,
excluding redeemable noncontrolling interests		147
 84
6
 118
Distributions to noncontrolling interests(222) (87)—
 (193)
Acquisition of partner's interest in Beacon Hill—
 (2,353)
Noncontrolling interests balance at September 30$698
 $1,008
Noncontrolling interests balance at June 30$698
 $698

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. At SeptemberJune 30, 2016 and2017, the redemption value of the redeemable noncontrolling interests did not exceed the historical book value. At December 31, 2015,2016, the redemption value of the redeemable noncontrolling interests exceeded the historical book value, and the balance was accordingly adjusted to redemption value.
  
We allocate net operating results of the Operating Partnership after preferred dividends and 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 ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, 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,		Three Months Ended
June 30,		 Six Months Ended
June 30,
2016 2015 2016 20152017 2016 2017 2016
Parent Company’s weighted average basic interest in
Operating Partnership		97.7% 97.8% 97.7% 97.9%97.7% 97.7% 97.7% 97.7%
Limited partners' weighted average basic interests in
Operating Partnership		2.3% 2.2% 2.3% 2.1%2.3% 2.3% 2.3% 2.3%
 


At SeptemberJune 30, 20162017 and December 31, 2015,2016, the Parent Company's interest and the limited partners' redeemable noncontrolling ownership interests in the Operating Partnership were 97.7% and 2.3% and 97.8% and 2.2%, respectively. as of the end of each period presented.
 

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 were grantedhave the right to redeem Limited Partner Units on or after August 16, 2005 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. For the nine months ended September 30, 2016 and 2015, respectively, 5,000 and 7,000 Limited Partner Units were exchanged for the same number of common shares of the Parent Company.
 

There were 1,942,8401,986,830 and 1,901,2781,942,340 Limited Partner Units outstanding as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. The increase in Limited Partner Units outstanding from December 31, 20152016 is due primarily to non-cash compensation awards made to our executive officers in the form of 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.  The Class B units related to two of these three joint ventures remain outstanding subsequent to the merger with Inland Diversified and are accounted for as noncontrolling interests in these properties.  TheA portion of the Class B units became redeemable at our partner’s election in March 2017, and the remaining Class B units will become redeemable at our applicable partner’spartner's election at future dates generally beginning in March 2017 or October 2022 based on the applicable joint venture and the fulfillment of certain redemption criteria.  Beginning in June 2018December 2020 and November 2022, with respect to the applicable joint venture, the Class B units can be redeemed at the election of either our partner or us for cash or Limited Partner Units in the Operating Partnership.  None of the issued Class B units have a maturity date and none are mandatorily redeemable.redeemable unless either party has elected for the units to be redeemed. We consolidate these joint ventures because we control the decision making of each of the joint ventures and our joint venture partners have limited protective rights.


On February 13, 2015, we acquiredWe received notice from one of our partner’s redeemable interestpartners exercising their right to redeem $8.3 million of their Class B units for cash. The amount that will be redeemed was reclassified from temporary equity to accrued expenses in the City Center operating property for $34.0 million and other non-redeemable rights and interests held by our partner for $0.4 million.consolidated balance sheets. We funded this acquisition in part with a $30 million draw on our unsecured revolving credit facility andexpect to fund the remainder in Limited Partner Units in the Operating Partnership. As a result of this transaction, our guarantee of a $26.6 million loan on behalf of LC White Plains Retail, LLC and LC White Plains Recreation, LLC was terminated.


redemption using cash prior to December 27, 2017.

We classify the remainder of the redeemable noncontrolling interests in certain subsidiaries in the accompanying consolidated balance sheets outside of permanent equity because, under certain circumstances, we may be required to pay cash to Class B unitholders in specific subsidiaries upon redemption of their interests.  The carrying amount of these redeemable noncontrolling interests is required to be reflected at the greater of initial book value or redemption value with a corresponding adjustment to additional paid-in capital. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the redemption amounts of these interests did not exceed the fair value of each interest.  As of September 30, 2016 and December 31, 2015, the redemption value of the redeemable noncontrolling interests exceededinterest, nor did they exceed the initial book value.
 

The redeemable noncontrolling interests in the Operating Partnership and subsidiaries for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 were as follows:



2016 20152017 2016
Redeemable noncontrolling interests balance January 1$92,315
 $125,082
$88,165
 $92,315
Acquisition of partner's interest in City Center operating property—
 (33,998)
Net income allocable to redeemable noncontrolling interests1,244
 1,541
1,105
 853
Distributions declared to redeemable noncontrolling interests(2,973) (2,810)(2,066) (1,983)
Liability reclassification due to exercise of partial redemption option by joint venture partner(8,261) —
Other, net, including adjustments to redemption value8,892
 (2,858)(5,892) 8,994
Total limited partners' interests in Operating Partnership and other redeemable noncontrolling interests balance at September 30$99,478
 $86,957
Total limited partners' interests in Operating Partnership and other redeemable noncontrolling interests balance at June 30$73,051
 $100,179

      

      
Limited partners' interests in Operating Partnership$55,368
 $46,166
$40,520
 $55,743
Other redeemable noncontrolling interests in certain subsidiaries44,110
 40,791
32,531
 44,436
Total limited partners' interests in Operating Partnership and other redeemable noncontrolling interests balance at September 30$99,478
 $86,957
Total limited partners' interests in Operating Partnership and other redeemable noncontrolling interests balance at June 30$73,051
 $100,179

Fair Value Measurements
  
We follow the framework established under accounting standard FASB ASC 820 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 considersconsider counterparty creditworthiness in the valuations.

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.




Reclassifications
Certain amounts in the accompanying consolidated financial statements for 2015 have been reclassified to conform to the 2016 consolidated financial statement presentation.  The reclassifications had no impact on net income previously reported.


Recently Issued Accounting Pronouncements
  
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-9,2014-09, Revenue from Contracts with Customers (“ASU 2014-9”2014-09”). ASU 2014-92014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing GAAP revenue recognition guidance. It will also affect the existing GAAP guidance governing the sale of nonfinancial assets. The new standard’s core principle is that a company will recognize revenue when it satisfies performance obligations by transferring promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for fulfilling those performance obligations. In doing so, companies will need to exercise more judgment and make more estimates than under existing GAAP guidance.


Under this standard, entities will now generally recognize the sale, and any associated gain or loss, of a real estate property when control of the property transfers, as long as collectability of the consideration is probable. The
We have preliminarily evaluated our revenue streams and less than 1% of our recurring revenue will be impacted by this new standard also amends ASC 340-40, Other Assetsupon its initial adoption. Additionally, we have primarily disposed of property and Deferred Costs - Contractsland in all cash transactions with Customers. Under ASC 340-40, incremental costs of obtaining a contract are recognized as an asset ifno continuing future involvement in the entity expects to recover them. Other costs related to originating a revenue transaction, such as salary expense, that is based on other qualitative or quantitative metrics likelyoperations, and therefore, do not meet the criteria for capitalization because they are not directly related to obtaining a contract. Upon adoption ofexpect the new standard to significantly impact the recognition of property and land sales. During the first six months of 2017, we expect an increasedisposed of several operating properties and land parcels in general, administrative, and other expense and a decrease in amortization expense onall cash transactions with no continuing future involvement. The gains recognized were approximately 11% of our consolidated statement of operations, as well as a decrease in capitalized leasing costs on our consolidated balance sheets. We are currently evaluating the impact adopting the new accounting standard and the transition method of such adoption will have on our consolidated financial statements.total


revenue for the six months ended June 30, 2017. As we do not have any continuing involvement in the operations of the operating properties and land sold, the accounting for the transactions would have remained the same under ASC 2014-09.

ASU 2014-92014-09 is effective for public entities for annual and interim reporting periods beginning after December 15, 2017 and early adoption is not permitted.2017. ASU 2014-92014-09 allows for either recognizing the cumulative effect of application (i) at the start of the earliest comparative period presented (with the option to use any or all of three practical expedients) or (ii) as a cumulative effect adjustment as of the date of initial application, with no restatement of comparative periods presented.
In February 2015, We expect to adopt ASU 2014-09 using the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis. ASU 2015-02 makes changes to both the VIE and VOE models, amended the criteria for determining VIEs and eliminated the presumption that a general partner should consolidate a limited partnership. All reporting entities involved with limited partnerships and similar entities were required to re-evaluate whether these entities, including the Operating Partnership, are subject to the VIE or VOE model and whether they qualify for consolidation. We adopted ASU 2015-02 in the first quarter of 2016 and, although we classified two additional consolidated joint ventures of the Operating Partnership as VIEs (for a total of three consolidated VIEs as of March 31, 2016), there was no material effect on our consolidated financial statements.


In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as deferred charge assets, separate from the related debt liability. ASU 2015-03 is effective for annual and interim reporting periods beginning on or after December 15, 2015. We adopted ASU 2015-03 retrospectively in the first quarter of 2016. As a result of themodified retrospective adoption, we reclassified unamortized deferred financing costs of $9.6 million as of December 31, 2015, from deferred costs and intangibles, net to a reduction in mortgage and other indebtedness, net on our consolidated balance sheets. Other than this reclassification, the adoption of ASU 2015-03 did not have an impact on our consolidated financial statements.


In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account


for measurement-period adjustments retrospectively. ASU 2015-16 requires that an acquirer must recognize measurement-period adjustments in the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for annual and interim reporting periods beginning on or after December 15, 2015. We adopted ASU 2015-16 in the first quarter of 2016 and there was no effect on our consolidated financial statements as we did not have any business combinations during this period.

approach.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making certain changes to lessor accounting, including the accounting for sales-type and direct financing leases. ASU 2016-02 will be effective for annual and interim reporting periods beginning on or after December 15, 2018, with early adoption permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. As a result of the adoption of ASU 2016-02, we expect common area maintenance reimbursements that are of a fixed nature to be recognized on a straight line basis over the term of the lease as these tenant reimbursements will be considered a non-lease component and will be subject to ASU 2014-09. We also expect to recognize right of use assets on our balance sheet related to certain ground leases where we are currentlythe lessee. In addition to evaluating the impact adopting the new accounting standard will have on our consolidated financial statements.statements, we are performing an inventory of existing lease contracts, evaluating our current and potential system capabilities, and evaluating our current compensation structure.

The new leasing standard also amends ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers. Under ASC 340-40, incremental costs of obtaining a contract are recognized as an asset if the entity expects to recover them, which will reduce the leasing costs currently capitalized. Upon adoption of the new standard, we expect an increase in general, administrative, and other expense and a decrease in amortization expense on our consolidated statement of operations, but the magnitude of that change is dependent upon the leasing compensation structure in place at the time of adoption.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 amends the existing accounting standards for business combinations, by providing a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the assets and activities are not a business. This screen reduces the number of transactions that will likely qualify as business combinations. ASU 2017-01 will be effective for annual and interim reporting periods beginning on or after December 15, 2017, with early adoption permitted. We adopted ASU 2017-01 in the first quarter of 2017. As a result of the adoption, we expect future acquisitions of single investment properties will not result in the recognition of transaction cost expenses, as the single investment properties will likely not meet the definition of a business and all direct transaction costs will be capitalized.
 

Note 3. Earnings Per Share or Unit
  
Basic earnings per share or unit is calculated based on the weighted average number of common shares or units outstanding during the period.  Diluted earnings per share or unit is determined based on the weighted average common number of shares or units outstanding during the period combined with the incremental average common shares or units that would have been outstanding assuming the conversion of all potentially dilutive common shares or units into common shares or units as of the earliest date possible.
  
Potentially dilutive securities include outstanding options to acquire common shares; Limited Partner Units, which may be exchanged for either cash or common shares, at the Parent Company’s option and under certain circumstances; units under our Outperformance Incentive Compensation Plan; potential settlement of redeemable noncontrolling interests in certain joint ventures;Plan ("Outperformance Plan"); and deferred common share units, which may be credited to the personal accounts of non-employee trustees in lieu of the payment of cash compensation or the issuance of common shares to such trustees.  Limited Partner Units have been omitted from the Parent Company’s denominator for the purpose of computing diluted earnings per share becausesince the effect of including these amounts in the denominator would have no dilutive impact. Weighted average Limited Partner Units outstanding for the ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 were 1.92.0 million and 1.81.9 million, respectively.


Approximately 0.2 million and 0.1 million outstanding options to acquire common shares were excluded from the computations of diluted earnings per share or unit for both the three and six months ended June 30, 2017, because their impact was not dilutive for the three and nine months ended September 30, 2016 and 2015, respectively.dilutive. Due to the net loss allocable to common shareholders and Common Unit holders for the three and ninesix months ended SeptemberJune 30, 2016, no securities had a dilutive impact for these periods. 



Note 4. Mortgage and Other Indebtedness
  
Mortgage and other indebtedness consisted of the following as of SeptemberJune 30, 20162017 and December 31, 2015:



 As of September 30, 2016
 Principal Unamortized Net Premiums Unamortized Deferred Financing Costs Total
Senior unsecured notes$550,000
 $—
 $(6,349) $543,651
Unsecured revolving credit facility43,700
 —
 (2,991) 40,709
Unsecured term loans400,000
 —
 (2,309) 397,691
Mortgage notes payable - fixed rate624,064
 13,513
 (1,068) 636,509
Mortgage notes payable - variable rate114,570
 —
 (786) 113,784
Total mortgage and other indebtedness$1,732,334
 $13,513
 $(13,503) $1,732,344


2016:
 
As of December 31, 2015As of June 30, 2017
Principal Unamortized Net Premiums Unamortized Deferred Financing Costs TotalPrincipal Unamortized Net Premiums Unamortized Debt Issuance Costs Total
Senior unsecured notes$250,000
 $—
 $(2,755) $247,245
Senior unsecured notes - fixed rate$550,000
 $—
 $(5,916) $544,084
Unsecured revolving credit facility20,000
 —
 (1,727) 18,273
33,100
 —
 (2,320) 30,780
Unsecured term loans500,000
 —
 (2,985) 497,015
400,000
 —
 (1,986) 398,014
Notes payable secured by properties under construction - variable rate132,776
 —
 (133) 132,643
Mortgage notes payable - fixed rate756,494
 16,521
 (1,555) 771,460
579,105
 10,623
 (873) 588,855
Mortgage notes payable - variable rate58,268
 —
 (455) 57,813
114,005
 —
 (674) 113,331
Total mortgage and other indebtedness$1,717,538
 $16,521
 $(9,610) $1,724,449
$1,676,210
 $10,623
 $(11,769) $1,675,064

 As of December 31, 2016
 Principal Unamortized Net Premiums Unamortized Debt Issuance Costs Total
Senior unsecured notes - fixed rate$550,000
 $—
 $(6,140) $543,860
Unsecured revolving credit facility79,600
 —
 (2,723) 76,877
Unsecured term loans400,000
 —
 (2,179) 397,821
Mortgage notes payable - fixed rate587,762
 12,109
 (994) 598,877
Mortgage notes payable - variable rate114,388
 —
 (749) 113,639
Total mortgage and other indebtedness$1,731,750
 $12,109
 $(12,785) $1,731,074

Consolidated indebtedness, including weighted average maturities and weighted average interest rates as of SeptemberJune 30, 2016,2017, considering the impact of interest rate swaps, is summarized below:
 
Outstanding Amount Ratio Weighted Average
Interest Rate		 Weighted Average
Maturity (Years)		Outstanding Amount Ratio Weighted Average
Interest Rate		 Weighted Average
Maturity (Years)
Fixed rate debt1
$1,648,718
 95% 4.13% 6.7$1,589,907
 95% 4.08% 6.1
Variable rate debt83,616
 5% 2.03% 5.486,303
 5% 2.73% 4.6
Net debt premiums and issuance costs, net10
 N/A
 N/A
 N/A(1,146) N/A
 N/A
 N/A
Total$1,732,344 100% 4.03% 6.6$1,675,064 100% 4.01% 6.0
 
____________________
1Fixed rate debt includes, and variable rate debtdate excludes, the portion of such debt that has been hedged by interest rate derivatives. As of SeptemberJune 30, 2016, $474.72017, $460.8 million in variable rate debt is hedged for a weighted average 2.92.3 years.


Mortgage indebtedness is collateralized by certain real estate properties and leases.  Mortgage indebtednessleases, and is generally due in monthly installments of interest and principal and maturematures over various terms through 2030.
  
Variable interest rates on mortgage indebtedness are based on LIBOR plus spreads ranging from 160 to 225 basis points.  At SeptemberJune 30, 2016,2017, the one-month LIBOR interest rate was 0.53%1.22%.  Fixed interest rates on mortgage indebtedness range from 3.78% to 6.78%.

Debt Issuance Costs



Seven-Year Unsecured Term LoanDebt issuance costs are amortized on a straight-line basis over the terms of the respective loan agreements.


The accompanying consolidated statements of operations include amortization of debt issuance costs as a component of interest expense as follows:
On June 29, 2016, we drew the remaining $100 million on our $200 million seven-year unsecured term loan and used the proceeds to pay down the unsecured revolving credit facility. We had $200 million outstanding on our seven-year unsecured term loan as of September 30, 2016.


($ in thousands) Six Months Ended
June 30,
  2017 2016
Amortization of debt issuance costs $1,350
 $1,631
Unsecured Revolving Credit Facility and Unsecured Term LoanLoans
 

On July 28, 2016, the Operating Partnership entered intoWe have an amended and restated credit agreement (the “amended credit agreement”) with respect to our $500 million unsecured revolving credit facility maturingwith a total commitment of $500 million that matures in July 28, 2020 (with(inclusive of two six-month extension options), oura $200 million unsecured term loan maturing in July 1, 2019 ("2021("Term Loan A"Loan") and oura $200 million seven-year unsecured term loan maturing July 28, 2021 ("Term Loan B"). As noted below, we paid off Term Loan A during the quarter with the proceeds from the issuance of our 4.00% Senior Notes duein October 1, 2026.

2022.

The Operating Partnership has the option to increase the borrowing availability of the unsecured revolving credit facility to $1 billion and the option to increase the Term Loan B to provide for an additional $200 million, in each case subject to certain conditions, including obtaining commitments from any one or more lenders. 


Borrowings under the amended credit agreement with respect to (i) the unsecured revolving credit facility bear interest at a rate of LIBOR plus an applicable margin of 135 to 195 basis points, (ii) Term Loan A (prior to its payoff) bore interest at a rate of LIBOR plus an applicable margin of 135 to 190 basis points, and (iii) Term Loan B bear interest at a rate of LIBOR plus an applicable margin of 130 to 190 basis points, in each case depending on the Operating Partnership’s leverage ratio and subject to certain exceptions.


The Operating Partnership is required to pay a quarterly facility fee on the unused portion of the unsecured revolving credit facility ranging from 15 to 25 basis points.


As of SeptemberJune 30, 2016, $43.72017, $33.1 million was outstanding under the unsecured revolving credit facility.  Additionally, we had letters of credit outstanding which totaled $12.2$5.4 million, against which no amounts were advanced as of SeptemberJune 30, 2016.

2017.

The amount that we may borrow under our unsecured revolving credit facility is limited by the value of the assets in our unencumbered asset pool.  As of SeptemberJune 30, 2016,2017, the value of the assets in our unencumbered asset pool was $413.2$426.7 million. Taking into account outstanding borrowings and letters of credit, we had $401$388.2 million available under our unsecured revolving credit facility for future borrowings as of SeptemberJune 30, 2016.2017.    


Our ability to borrow under the unsecured revolving credit facility is subject to our compliance with various restrictive and financial covenants, including with respect to liens, indebtedness, investments, dividends, mergers and asset sales.  As of SeptemberJune 30, 2016,2017, we were in compliance with all such covenants.


Senior Unsecured Notes


On September 26, 2016, theThe Operating Partnership completed a $300has $550 million public offering of 4.00% Senior Notes due October 1, 2026 ("the Notes"senior unsecured notes maturing at various dates through September 2027 (the "Notes").  The net proceeds from the issuance of the Notes were utilized to retire the $200 million Term Loan A and retire the $75.9 million construction loan secured by our Parkside Town Commons operating property and to pay down our unsecured revolving credit facility.  The Notes contain a number of customary financial and restrictive covenants. As of SeptemberJune 30, 2016,2017, we were in compliance with all such covenants.
  


Other Debt Activity
  
For the ninesix months ended SeptemberJune 30, 2016,2017, we had total new borrowings of $550.2$54.2 million and total repayments of $531.1$109.9 million.  In addition to the items mentioned above, the remaining components of this activity were as follows:
In the first nine months of 2016, weWe retired the $16.3$6.7 million loan secured by our Cool CreekPleasant Hill Commons operating property the $23.6 million loan secured bythrough a draw on our Sunland Towne Centre operating property, the $20.3 million loan secured by our Mullins Crossing operating property, the $16.5 million loan secured by our Pine Ridge Crossing operating property, the $9.9 million loan secured by our Riverchase Plaza operating property and the $42.2 million loan secured by our Traders Point operating property; 
We borrowed $150.2 million on the unsecured revolving credit facility (the "Credit Facility"); 
We borrowed $47.5 million on the Credit Facility to fund development activities, redevelopment activities, and tenant improvement costs;
We used the above retirements$76.1 million net proceeds from the sale of secured debt and for general business purposes;
Infour operating properties to pay down the third quarter of 2016, we refinanced the $56.9 million construction loan secured by our Delray Marketplace operating property and extended the maturity of the loan to February 2022;
In the third quarter of 2016, we incurred $6.5 million of debt issuance costs related to amending the unsecured term loans and completing the issuance of our senior unsecured notes.
In the third quarter of 2016, we recorded $1.2 million in non-cash accelerated amortization of debt issuance costs as a result of amending the unsecured revolving credit facility, the unsecured term loans, retiring Term Loan A, retiring the Parkside Town Commons construction loan and refinancing the Delray Marketplace construction loan;Credit Facility; and
We made scheduled principal payments on indebtedness totaling $4.3 million in the first nine months of 2016.

See Note 13 for indebtedness transactions occurring subsequent to September 30, 2016.

$2.4 million.

Fair Value of Fixed and Variable Rate Debt
  
As of SeptemberJune 30, 2016,2017, the estimated fair value of our fixed rate debt was $1.3$1.2 billion compared to the book value of $1.2$1.1 billion.  The fair value was estimated using Level 2 and 3 inputs with cash flows discounted at current borrowing rates for similar instruments, which ranged from 3.78% to 6.78%.  As of SeptemberJune 30, 2016,2017, the fair value of variable rate debt was $601.1$583.0 million


compared to the book value of $558.3$547.1 million.  The fair value was estimated using Level 2 and 3 inputs with cash flows discounted at current borrowing rates for similar instruments, which ranged from 1.83%2.52% to 2.78%3.47%.
 
 
Note 5. Derivative Instruments, Hedging Activities and Other Comprehensive Income
  
In order to manage potential future volatility relating to variable interest rate risk, we enter into interest rate hedgingderivative agreements from time to time.  We do not use derivatives for trading or speculative purposes, nor do we have any derivatives thatAll such agreements are not designated as cash flow hedges. We do not use interest rate derivative agreements for trading or speculative purposes.  The agreements with each of our derivative counterparties provide that, in the event of default on any of our indebtedness, we could also be declared in default on our derivative obligations.  


As of SeptemberJune 30, 2016,2017, we were party to various cash flow hedgederivative agreements with notional amounts totaling $474.7$460.8 million.  These hedgederivative agreements effectively fix the interest rate underlying certain variable rate debt instruments over terms ranging from 2017expiration dates through 2021.  Utilizing a weighted average interest rate spread over LIBOR on all variable rate debt resulted in fixing the weighted average interest rate at 3.17%3.12%.


In January 2016, we entered into two forward-starting interest rate swaps that effectively fixed the interest rate on $150 million of previously unhedged variable rate debt at 3.208%. The effective date of the swaps was June 30, 2016, and they will expire on July 1, 2021.




These interest rate hedgederivative agreements are the only assets or liabilities that we record at fair value on a recurring basis.  The valuation of these assets and liabilities is determined using widely accepted techniques including discounted cash flow analysis.  These techniques consider the contractual terms of the derivatives (including the period to maturity) and use observable market-based inputs such as interest rate curves and implied volatilities.  We also incorporate credit valuation adjustments into the fair value measurements to reflect nonperformance risk on both our part and that of the respective counterparties.

 We determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, although the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties.  As of SeptemberJune 30, 20162017 and December 31, 2015,2016, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined the credit valuation adjustments were not significant to the overall valuation of our derivatives.  As a result, we determined our derivative valuations were classified within Level 2 of the fair value hierarchy.
 

As of SeptemberJune 30, 2016,2017, the estimated fair value of our interest rate hedges wasderivatives represented a net liability of $11.0$0.5 million, including accrued interest of $0.4$0.2 million.  As of SeptemberJune 30, 2016, $11.02017, $1.1 million was reflected in prepaid and other assets and $1.6 million was reflected in accounts payable and accrued expenses on the accompanying consolidated balance sheets.  At December 31, 2015,2016, the estimated fair value of our interest rate hedges was a net liability of $4.8$2.2 million, including accrued interest of $0.4 million.  As of December 31, 2015, $0.22016, $0.9 million was reflected in prepaid and other assets and $5.0$3.1 million was reflected in accounts payable and accrued expenses on the accompanying consolidated balance sheets.
 

 Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to earnings over time as the hedged items are recognized in earnings.  During the nine months ended September 30, 2016 and 2015, $3.5Approximately $1.7 million and $4.2$2.1 million respectively, werewas reclassified as a reduction to earnings.earnings during the six months ended June 30, 2017 and 2016, respectively. As the interest payments on our hedges are made over the next 12 months, we estimate the impactincrease to interest expense to be $3.7 million.$0.6 million, assuming the current LIBOR curve. 


Our share of net unrealizedUnrealized gains and losses on our interest rate hedgederivative agreements are the only components of the change in accumulated other comprehensive loss.  
  
Note 6. Shareholders’ Equity
 

Distribution Payments
  

Our Board of Trustees declared a cash distribution of $0.2875$0.3025 for the thirdsecond quarter of 20162017 to common shareholders and Common Unit holders of record as of OctoberJuly 6, 2016.2017. The distribution was paid on OctoberJuly 13, 2016.


Outperformance Plan


In January 2016, the Compensation Committee of our Board of Trustees adopted the 2016 Outperformance Incentive Compensation Plan for members of executive management and certain other employees, pursuant to which participants are eligible to earn profits interests ("LTIP Units") in the Operating Partnership based on the achievement of certain performance criteria related to the Company’s common shares. Participants in the 2016 Outperformance Incentive Compensation Plan were awarded the right to earn, in the aggregate, up to $6 million of share-settled awards (the “bonus pool”) if, and only to the extent of which, performance measures based on our total shareholder return (“TSR”) are achieved for the three-year period beginning January 4, 2016 and ending December 31, 2018.  Awarded interests not earned based on the TSR measures are forfeited.


If the TSR performance measures are achieved at the end of the three-year performance period, participants will receive their percentage interest in the bonus pool as LTIP Units in the Operating Partnership. Such LTIP Units vest over an additional


two-year service period.  The compensation cost of the 2016 Outperformance Plan was fixed as of the grant date and will be recognized regardless of whether the LTIP Units are ultimately earned assuming the service requirement is met.


Restricted Award Grants


In February 2016, a total of 103,685 restricted awards were granted to members of executive management and certain other employees. The restricted awards will vest ratably over periods ranging from three to five years.


Performance Awards


In February 2016, the Compensation Committee awarded each of our four named executive officers a three-year performance award in the form of restricted performance share units ("PSUs").  These PSUs may be earned over a three-year performance period from January 1, 2016 to December 31, 2018.  The performance criteria are based on the relative total shareholder return achieved by the Company measured against a peer group over the three-year measurement period.  Any PSUs earned at the end of the three-year period will be fully vested at that date.  The total number of PSUs issued to the executive officers was based on a target value of $1.0 million but may be earned in a range from 0% to 200% of the target value depending on our TSR over the measurement period in relation to the peer group.


At-the-Market Equity Program


During the third quarter of 2016, we issued 137,229 of our common shares at an average price per share of $29.52 pursuant to our at-the-market equity program, generating gross proceeds of approximately $4.1 million and, after deducting commissions and other costs, net proceeds of approximately $3.8 million. The proceeds from these offerings were contributed to the Operating Partnership and used to pay down our unsecured revolving credit facility.

2017.

Note 7. Deferred Costs and Intangibles, net
  
Deferred costs consist primarily of acquired lease intangible assets, broker fees and capitalized salaries and related benefits incurred in connection with lease originations.  Deferred leasing costs, lease intangibles and similar costs are amortized on a straight-line basis over the terms of the related leases.  At SeptemberJune 30, 20162017 and December 31, 2015,2016, deferred costs consisted of the following:
 September 30,
2016		 December 31,
2015
Acquired lease intangible assets$126,515
 $138,796
Deferred leasing costs and other63,116
 55,332
 189,631
 194,128
Less—accumulated amortization(56,517) (45,854)
Total$133,114
 $148,274
The accompanying consolidated statements of operations include amortization expense as follows:
 Nine Months Ended
September 30,
 2016 2015
Amortization of deferred leasing costs, lease intangibles and other$19,177
 $17,538
Amortization of above market lease intangibles4,803
 4,523



 June 30,
2017		 December 31,
2016
Acquired lease intangible assets$114,432
 $125,144
Deferred leasing costs and other66,662
 63,810
 181,094
 188,954
Less—accumulated amortization(61,395) (59,690)
Total$119,699
 $129,264
 Amortization of deferred leasing costs, leasing intangibles and other is included in depreciation and amortization expense.expense in the accompanying consolidated statements of operations. The amortization of above market lease intangibles is included as a reduction to revenue. The amounts of such amortization included in the accompanying consolidated statements of operations are as follows:
 Six Months Ended
June 30,
 2017 2016
Amortization of deferred leasing costs, lease intangibles and other$12,113
 $13,242
Amortization of above market lease intangibles2,199
 3,796
  
Note 8. Deferred Revenue, Intangibles, Net and Other Liabilities
  
Deferred revenue and other liabilities consist of the unamortized fair value of in-place lease liabilities recorded in connection with purchase accounting, potential earnout payments related to property acquisitions, retainage payables for development and redevelopment projects, and tenant rent payments received in advance.advance of the month in which they are due.  The amortization of in-place lease liabilities is recognized as revenue over the remaining life of the leases (including option periods for leases with below market renewal options) through 2046.  Tenant rent payments received in advance are recognized as revenue in the period to which they apply, which is typically the month following their receipt.
   

At SeptemberJune 30, 20162017 and December 31, 2015,2016, deferred revenue, intangibles, net and other liabilities consisted of the following:
 
September 30,
2016		 December 31,
2015		June 30,
2017		 December 31,
2016
Unamortized in-place lease liabilities$100,972
 $112,405
$86,815
 $95,360
Retainage payables and other6,589
 5,636
5,030
 5,437
Assumed earnout liability (Note 9)1,285
 1,380
Tenant rent payments received in advance11,704
 12,138
11,457
 11,405
Total$120,550
 $131,559
$103,302
 $112,202


The amortization of below market lease intangibles was $10.6 million and $6.7 million for the nine months ended September 30, 2016 and 2015, respectively. The amortization of below market lease intangibles is included as an increase to revenue.

a component of minimum rent in the accompanying consolidated statements and was $4.0 million and $7.0 million for the six months ended June 30, 2017 and 2016, respectively.
 
Note 9. Commitments and Contingencies
  
Other Commitments and Contingencies
  
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 routine litigation, claims, and administrative proceedingsmatters will not have a material adverse impact on our consolidated financial statements.
condition, results of operations or cash flows taken as a whole.
  
We are obligated under various completion guarantees with certain lenders and lease agreements with tenants to complete all or portions of the development and redevelopment projects.  We believe we currently have sufficient financing in place to fund these projects and expect to do so primarily through borrowings on our unsecured revolving credit facility.
   
As of SeptemberJune 30, 2016,2017, we had outstanding letters of credit totaling $12.2$5.4 million.  At that date, there were no amounts advanced against these instruments.

Earnout Liability


We are a party to an earnout arrangement with the former seller of one of our operating properties, whereby we were required to pay the seller additional consideration based on whether the seller satisfied certain post-sale obligations. The estimated potential earnout liability was $1.3 million at September 30, 2016 and $1.4 million at December 31, 2015.


On October 6, 2016, we paid $1.3 million related to the remaining earnout liability. We do not have any further earnout obligations after this date.

  
Note 10. Disposals of Operating Properties and Related Recording of Impairment Charge
 

During the three months ended June 30, 2016,2017, we sold our Shops at OttyClay Marketplace operating property in Portland, OregonBirmingham, Alabama, our Shops at Village Walk operating property in Fort Myers, Florida, and our Wheatland Towne Crossing operating property in Dallas, Texas, for aggregate gross proceeds of $54.6 million and a net gain of $0.2$6.3 million.

During the three months ended March 31, 2017, we sold our Cove Center operating property in Stuart, Florida for gross proceeds of $23.1 million and a net gain of $8.9 million.

In connection with the fourth quarterpreparation and review of 2015,the March 31, 2017 financial statements, we wrote offevaluated an operating property for impairment due to the book valueshortening of this property and recorded a non-cash impairment charge of $1.6 million, asthe intended holding period. We concluded the estimated undiscounted cash flows over the remainingexpected holding period did not exceed the carrying value of the asset.


During The Company estimated the fourth quarterfair value of 2015, we sold our Four Corner operatingthe property in Seattle, Washington, and our Cornelius Gateway operating property in Portland, Oregon, for aggregate proceeds of $44.9to be $26.0 million and a net gain of $0.6 million.


In March 2015, we sold seven properties for aggregate net proceeds of $103.0 million and a net gain of $3.4 million. 

The results of these operating properties are not included in discontinued operationsusing Level 3 inputs within the fair value hierarchy, primarily using the market approach. We compared the fair value measurement to the carrying value, which resulted in the accompanying statementsrecording of operations as nonea non-cash impairment charge of $7.4 million for the operating properties individually, nor in the aggregate, represent a strategic shift that has had or will have a material effect on our operations or financial results. 


Note 11. Acquisitions and Transaction Costs
During the ninethree months ended September 30, 2016, we incurred $2.8 million of terminated transaction costs. We record transaction costs as they are incurred, regardless of whether the transaction is ultimately completed or terminated. Transaction costs generally consist of legal, lender, due diligence, and other expenses for professional services.March 31, 2017.


In 2015, we acquired four operating properties for total consideration of $185.8 million, including the assumption of an $18.3 million loan, which are summarized below:

Property NameMSAAcquisition DateOwned GLA
Colleyville DownsDallas, TXApril 2015191,126
Belle Isle StationOklahoma City, OKMay 2015164,362
Livingston Shopping Center
New York - Newark
July 2015139,605
Chapel Hill Shopping CenterFort Worth / Dallas, TXAugust 2015126,755


Note 12. Gain on Settlement


In June 2015, we received $4.75 million to settle a dispute related to eminent domain and related damages at one of our operating properties. The settlement agreement did not restrict our use of the proceeds. These proceeds, net of certain costs, are included in gain on settlement within the statement of operations. We used the net proceeds to pay down the secured loan at this operating property.




Note 13. Subsequent Events
Retirement of Secured Debt


On November 1, 2016, we retired the $25 million loan secured by our Colonial Square and Village Walk operating properties using a draw on our unsecured revolving credit facility.


On November 1, 2016, we retired the $10.4 million loan secured by our Geist Pavilion operating property, which included a release of a $1.6 million letter of credit, using a draw on our unsecured revolving credit facility.


Item 2.
 
Cautionary Note About Forward-Looking Statements
 
 

This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by us, containcontains 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, real estate and other market conditions, particularly in light of low growth in the U.S. economy as well as economic uncertainty caused by fluctuations in the prices of oil and other energy sources;
financing risks, including the availability of, and costs associated with, sources of liquidity;
our ability to refinance, or extend the maturity dates of, our indebtedness;
the level and volatility of interest rates;
the financial stability of tenants, including their ability to pay rent and the risk of tenant bankruptcies;
the competitive environment in which we operate;
acquisition, disposition, development and joint venture risks;
property ownership and management risks;
our ability to maintain our status as a real estate investment trust for federal income tax purposes;
potential environmental and other liabilities;
impairment in the value of real estate property we own;
the impact of online retail and the perception that such retail has on the value of shopping center assets;
risks related to the geographical concentration of our properties in Florida, Indiana and Texas;
insurance costs and coverage;
risks related toassociated 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, 2015.

2016.

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




Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

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



Our Business and Properties
  
Kite Realty Group Trust is a publicly-held real estate investment trust which, through its majority-owned subsidiary, Kite Realty Group, L.P., owns interests in various operating subsidiaries and joint ventures engaged in the ownership, operation, acquisition, development, and redevelopment of high-quality neighborhood and community shopping centers in selectedselect markets in the United States.  We derive revenues primarily from activities associated with the collection of contractual rents and reimbursement payments from tenants at our properties.  Our operating results therefore depend materially on, among other things, the ability of our tenants to make required lease payments, the health and resilience of the United States retail sector, interest rate volatility, job growth and overall economic and real estate market conditions.
  
At June 30, 2017, we owned interests in 117 operating and redevelopment properties totaling approximately 23.1 million square feet. We also owned one development project under construction as of this date.

At SeptemberJune 30, 2016, we owned interests in 120 operating and redevelopment properties consisting of 109 retail properties, nine retail redevelopment properties, one office operating property and an associated parking garage.totaling approximately 23.5 million square feet. We also owned one development property under construction as of this date.


At September 30, 2015, we owned interests in 121 operating and redevelopment properties consisting of 113 retail properties, six retail redevelopment properties, one office operating property and an associated parking garage. We also owned three development propertiesproject under construction as of this date.
   
Current Quarter ActionsActivities
 

Development and Redevelopment Activities
 

We believe that continually evaluating our operating properties for development and redevelopment opportunities enhances shareholder value as it will make themthe properties more attractive for leasing to new tenants and it improves long-term values and economic returns. We initiated, advanced, and advancedcompleted a number of development and redevelopment activities during the second quarter of 2017, including the following:

Parkside Town Commons – Phase II near Raleigh, North Carolina – Phase II of this development is anchored by Frank CineBowl and Grille, Golf Galaxy, Stein Mart, and Hobby Lobby. We transitioned Parkside Town Commons –Phase II to the operating portfolio at the end of the second quarter of 2017 at which date the property was 95.4% leased.

Holly Springs Towne Center – Phase II near Raleigh, North Carolina – This property was substantially completed in June 2016 and transitioned to the operating portfolio. The remaining anchor, Carmike Theatres, opened in October 2016 to join anchors DSW andPhase II of this development is anchored by Bed Bath & Beyond, which openedDSW, and Carmike Theatres. We transitioned Phase II to the operating portfolio in March 2016the second quarter of 2016. Subsequently, we began construction on an expansion of Phase II in the fourth quarter of 2016. We have a signed lease for 23,000 square feet with O2 Fitness for this expansion, and December 2015, respectively.we expect to deliver the space in the fourth quarter of 2017.


Under Construction Redevelopment, Reposition, and Repurpose (“3-R”) Projects. Our Redevelopment, Reposition and Repurpose (“3-R”)3-R initiative, which includes a total of 24 existing and potential14 projects under construction or active evaluation for modification, continued to progress duringin the thirdsecond quarter of 2016. We commenced construction on four additional 3-R projects, for2017. There are a total of twelveseven projects currently under construction. These twelve projectsconstruction, which have an estimated incrementalcombined annualized return averagingof approximately 9%8% to 10%9%, with aggregate costs for all of these projects expected to range between $58.1$68.5 million and $67.0to $74.0 million.

We completed the following three 3-R projects during the second quarter of 2017:
Operational Activities
◦
Centennial Gateway in Las Vegas, Nevada – We completed the recapture of an existing anchor space and executed a lease with Trader Joe's, which opened in June 2017. Total costs were $1.1 million and the projected annual return is 30.0%.
◦
Market Street Village in Fort Worth, Texas – We completed the recapture of a 15,000 square foot anchor space and executed a lease with Party City, which opened in April 2017. Total costs were $0.8 million and the projected annual return is 30.9%.


◦
Northdale Promenade in Tampa, Florida – We completed the rightsizing and demolition of small shop space to add Ulta Beauty, which opened in 2016, and Tuesday Morning, which opened in July 2017. Total costs were $4.2 million and the projected annual return is 14.4%.
We commenced construction on the following 3-R project during the second quarter of 2017:
◦
RampartCommons in Las Vegas, Nevada – This project will be anchored by Williams Sonoma, Pottery Barn, Ann Taylor, North Italia, Flower Child, Honey Salt and P.F. Chang's. We expect total costs for this project to range between $16 million to $17 million, with an estimated annualized return of approximately 7.0% to 7.5%.

Operations 

During the thirdsecond quarter of 2016,2017, we executed 96 new and renewal leases on 110 individual spaces totaling 627,925624,317 square feet.  New leases were signed on 4951 individual spaces for 208,320164,214 square feet of GLA, while renewal leases were signed on 6145 individual spaces for 419,605460,103 square feet of GLA.  


For comparable signednew leases, which are defined as leases signedthose for which therethe space was occupied by a former tenant within the last 12 months, we achieved a blended rent spread of 9.7%9.8% while incurring $18.05$10.02 per square foot of incremental capital improvement costs. The average rent for the 23 new comparable leases signed on individual spaces in the thirdsecond quarter of 20162017 was $23.95$25.27 per square foot compared to average expiring rent of $21.17$21.52 per square foot in that quarter.foot. The average rent for the 61 renewals45 renewal leases signed on individual spaces in the thirdsecond quarter of 20162017 was $17.08$15.20 per square foot compared to average expiring rent of $15.72$14.07 per square foot in that quarter.

foot.

Results of Operations
   
The comparability of results of operations for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 is affected by our development, redevelopment and operating property acquisition and disposition activities during these periods.  Therefore, we believe it is useful to review the comparisons of our results of operations for these periods in conjunction with the discussion of our activities during those periods, which is set forth below.


Property Acquisitions
The following operating properties were acquired between January 1, 2015 and September 30, 2016 and, therefore, our consolidated statements of operations include the results of partial periods for these properties:


Property NameMSAAcquisition DateOwned GLA
Colleyville DownsDallas, TXApril 2015191,126
Belle Isle StationOklahoma City, OKMay 2015164,362
Livingston Shopping Center
New York - Newark
July 2015139,605
Chapel Hill Shopping CenterFort Worth / Dallas, TXAugust 2015126,755


Property Dispositions
  
In 2015 andSince January 1, 2016, we sold the following operating properties:

Property Name MSA Disposition Date Owned GLA
Sale of seven operating properties
Various1
March 2015740,034
Cornelius GatewayPortland, ORDecember 201521,326
Four Corner SquareSeattle, WADecember 2015107,998
Shops at Otty Portland, OR June 2016 9,845

Publix at St. CloudSt. Cloud, FLDecember 201678,820
Cove CenterStuart, FLMarch 2017155,063
____________________Clay MarketplaceBirmingham, ALJune 201763,107
1The Shops at Village WalkShortly after the merger with Inland Diversified, we identified and sold certain properties located in multiple MSAs that were not consistent with the Company's strategic plan.Fort Myers, FLJune 201778,533
Wheatland Towne CrossingDallas, TXJune 2017194,727

 


Development Activities
 
The following development properties became partially operational at various times from January 1, 20152016 through SeptemberJune 30, 2016 :2017:
 

Property Name MSA 
Economic Occupancy Date1
Transition to Operating Portfolio		 Owned GLA
Tamiami CrossingNaples, FLJune 2016121,705
Holly Springs Towne Center – Phase II Raleigh, NC December 2015June 2016 122,032122,009
Tamiami CrossingParkside Town Commons – Phase II Naples, FLRaleigh, NC March 2016June 2017 121,949291,681
 
____________________
1Represents the earlier of the date on which we started receiving rental payments at the property or a tenant took possession of its space.


Redevelopment Activities
  


The following properties were under active redevelopment at various times during the period from January 1, 20152016 through SeptemberJune 30, 2016:2017:

Property Name MSA 
Transition to
Redevelopment1
 Transition to Operations Owned GLA
Gainesville PlazaGainesville, FLJune 2013December 2015162,693
Cool Springs MarketNashville, TNJuly 2015December 2015230,988
Courthouse Shadows2,32
 Naples, FL June 2013 Pending 8,160124,802
Hamilton Crossing Centre2
 Indianapolis, IN June 2014 Pending 93,83992,283
City Center2
 White Plains, NY December 2015 Pending 313,139384,651
Fishers Station2
 Indianapolis, IN December 2015 Pending 175,290175,229
Beechwood Promenade2
 Athens, GA December 2015 Pending 353,970348,815
The Corner2
 Indianapolis, IN December 2015 Pending 26,500
Rampart Commons2
 Las Vegas, NV March 2016 Pending 81,292
Northdale Promenade23
 Tampa, FL March 2016 PendingJune 2017 179,680
Burnt Store2
 Punta Gorda, FL June 2016 Pending 95,787

____________________
1Transition date represents the date the property was transferred from our operating portfolio into redevelopment status.
2These operating properties haveThis property has been identified as a redevelopment propertiesproperty and they areis not included in the operating portfolio or the same property pool.
3Our redevelopment plan isThis property was transitioned to demolish the site to add a large format single tenant ground lease with projected total GLA atoperating portfolio as of June 30, 2017; however, it remains excluded from the site of 140,710 square feet.same property pool because it has not been in the operating portfolio for the full period presented (12 months).

Comparison of Operating Results for the Three Months Ended SeptemberJune 30, 20162017 to the Three Months Ended SeptemberJune 30, 20152016
 


The following table reflects income statement line items from our consolidated statements of operations for the three months ended SeptemberJune 30, 20162017 and 2015.  The comparability of the periods is impacted by acquisitions, dispositions, and redevelopments previously described.2016.  



($ in thousands)2016 2015 Net change 2015 to 20162017 2016 Net change 2016 to 2017
Revenue:          
Rental income (including tenant reimbursements)$87,049
 $83,066
 $3,983
$86,916
 $85,461
 $1,455
Other property related revenue2,073
 4,081
 (2,008)5,733
 2,114
 3,619
Total revenue89,122
 87,147
 1,975
92,649
 87,575
 5,074
Expenses:          
Property operating11,916
 11,994
 (78)12,139
 11,346
 793
Real estate taxes10,690
 10,045
 645
11,228
 10,503
 725
General, administrative, and other5,081
 4,559
 522
5,488
 4,856
 632
Transaction costs—
 1,089
 (1,089)—
 2,771
 (2,771)
Depreciation and amortization45,543
 42,549
 2,994
42,710
 43,841
 (1,131)
Total expenses73,230
 70,236
 2,994
71,565
 73,317
 (1,752)
Operating income15,892
 16,911
 (1,019)21,084
 14,258
 6,826
Interest expense(17,139) (13,881) (3,258)(16,433) (15,500) (933)
Income tax expense of taxable REIT subsidiary(15) (9) (6)(3) (338) 335
Other expense, net—
 (60) 60
(80) (110) 30
(Loss) income before gain on sale of operating properties(1,262) 2,961
 (4,223)
Gain on sales of operating properties—
 —
 —
Consolidated net (loss) income(1,262) 2,961
 (4,223)
Income (loss) from continuing operations4,568
 (1,690) 6,258
Gains on sales of operating properties6,290
 194
 6,096
Consolidated net income (loss)10,858
 (1,496) 12,354
Net income attributable to noncontrolling interests(420) (435) 15
(678) (399) (279)
Net (loss) income attributable to Kite Realty Group Trust(1,682) 2,526
 (4,208)
Dividends on preferred shares—
 (2,114) 2,114
Net (loss) income attributable to common shareholders$(1,682) $412
 $(2,094)
Net income (loss) attributable to Kite Realty Group Trust common shareholders$10,180
 $(1,895) $12,075
          
Property operating expense to total revenue ratio13.4% 13.8%  13.1% 13.0%  
  
Rental income (including tenant reimbursements) increased $4.0$1.5 million, or 4.8%1.7%, due to the following:

 
($ in thousands)Net change 2015 to 2016
Properties acquired during 2015$855
Development properties that became operational or were partially operational in 2015 and/or 20161,170
Properties sold during 2015 and 2016(780)
Properties under redevelopment during 2015 and/or 20161,458
Properties fully operational during 2015 and 2016 and other1,280
Total$3,983
($ in thousands)Net change 2016 to 2017
Properties sold during 2016 and 2017$(1,014)
Properties under redevelopment during 2016 and/or 2017(818)
Properties fully operational during 2016 and 2017 and other3,287
Total$1,455
  
The net increase of $0.9 million in rental income at properties acquired during 2015 is attributable to the acquisitions of Livingston Shopping Center and Chapel Hill Shopping Center in the third quarter of 2015. The net decrease of $0.8 million in rental income at properties sold during 2015 and 2016 is due to the sale of two operating properties in December 2015 and one operating property in June 2016. The net increase of $1.3$3.3 million in rental income for properties fully operational during 20152016 and 20162017 is primarily attributable to an increase in rental rates.



rates and an increase in economic occupancy percentage, which leads to more tenants paying rent. The increase in the economic occupancy percentage is primarily due to multiple anchor and small shop tenants opening as we completed various developments and redevelopments including Petco at Hitchcock Plaza, Petsmart at Tarpon Bay Plaza, Buy Buy Baby and DSW at Cool Springs Market, Five Below at Shops at Moore and new small shop buildings at Castleton Crossing and Portofino Shopping Center subsequent to June 30, 2016.

The increase in rental rates is evidenced by the average rent for new comparable leases signed in the thirdsecond quarter of 2016 was $23.952017 increasing to $25.27 per square foot compared to average expiring rent of $21.17$21.52 per square foot in that quarter.foot. The average rent for renewals signed in the thirdsecond quarter of 20162017 was $17.08$15.20 per square foot compared to average expiring rent of $15.72$14.07 per square foot in that quarter. Our same property economic occupancy improved to 93.8% for the three months ended June 30, 2017 from 92.7% for the three months ended June 30, 2016. For our total retail operating portfolio, annualized base rent per square foot improved to $15.42$15.95 per square foot as of SeptemberJune 30, 2016,2017, up from $15.24$15.27 as of SeptemberJune 30, 2015.

2016.

Other property related revenue primarily consists of parking revenues, overage rent, lease termination income and gains on sales of undepreciated assets.  This revenue decreasedincreased by $2.0$3.6 million, primarily as a result of lowerhigher gains on sales of undepreciated assets of $2.9$3.8 million (including the effect of a $4.9 million gain on the sale of an outlot at Cove Center during the second quarter of 2017), partially offset by an increasea decrease of $0.7$0.3 million in lease termination income.


  
Property operating expenses decreased $0.1increased $0.8 million, or 0.7%7.0%, due to the following:
 
($ in thousands)Net change 2015 to 2016
Properties acquired during 2015$303
Development properties that became operational or were partially operational in 2015 and/or 2016335
Properties sold during 2015 and 2016(202)
Properties under redevelopment during 2015 and/or 2016(145)
Properties fully operational during 2015 and 2016 and other(369)
Total$(78)

($ in thousands)Net change 2016 to 2017
Properties sold during 2016 and 2017$(158)
Properties under redevelopment during 2016 and/or 201743
Properties fully operational during 2016 and 2017 and other908
Total$793
 
The net increase of $0.3$0.9 million in property operating expenses at properties acquired during 2015 is attributable to the acquisitions of Livingston Shopping Center and Chapel Hill Shopping Center in the third quarter of 2015. The net decrease of $0.2 million in property operating expenses at properties sold during 2015 and 2016 is due to the sale of two operating properties in December 2015 and one operating property in June 2016. The net $0.4 million decrease for properties fully operational during 20152016 and 20162017 is primarily due to a combination of a decreasean increase of $0.8$0.5 million in bad debt expense andprimarily related to certain tenant bankruptcies, $0.2 million in insurance costs as we generated efficiencies with our larger operating platform. These decreases were offset by an increase of $0.4 million in general building repair and landscaping costs at certain properties, and $0.2$0.1 million in legal expenses.utility expense and $0.1 million in security expense.


Property operating expenses asAs a percentage of total revenue, for the three months ended September 30, 2016 was 13.4% comparedproperty operating expenses increased between periods from 13.0% to 13.8%, or a change of approximately $0.1 million, over the same period in the prior year. The decrease was mostly due to an improvement in expense control and an improvement in operating expense recoveries from tenants.

13.1%.

Real estate taxes increased $0.6$0.7 million, or 6.4%6.9%, due to the following:
  
($ in thousands)Net change 2015 to 2016
Properties acquired during 2015$308
Development properties that became operational or were partially operational in 2015 and/or 2016112
Properties sold during 2015 and 2016(87)
Properties under redevelopment during 2015 and/or 201628
Properties fully operational during 2015 and 2016 and other284
Total$645

($ in thousands)Net change 2016 to 2017
Properties sold during 2016 and 2017$(199)
Properties under redevelopment during 2016 and/or 201720
Properties fully operational during 2016 and 2017 and other904
Total$725
 
The $0.3net $0.9 million increase in real estate taxes for properties fully operational during 2016 and 2017 is primarily due to an increase in current year tax assessments at certain operating properties compared to the same period in 2016. The majority of real estate tax expense is recoverable from tenants and such recovery is reflected in tenant reimbursement revenue.

General, administrative and other expenses increased $0.6 million, or 13.0%. The increase is due primarily to higher personnel costs and company overhead expenses.

Transaction costs decreased by $2.8 million, as we did not incur any transaction costs for the three months ended June 30, 2017. 

Depreciation and amortization expense decreased $1.1 million, or 2.6%, due to the following:

($ in thousands)Net change 2016 to 2017
Properties sold during 2016 and 2017$(865)
Properties under redevelopment during 2016 and/or 2017954
Properties fully operational during 2016 and 2017 and other(1,220)
Total$(1,131)
The $1.0 million net increase in depreciation and amortization for properties under redevelopment during 2016 and 2017 is primarily due to $1.0 million of accelerated depreciation due to the demolition of a building at our Fishers Station redevelopment property in preparation for the construction of the space for the replacement anchor tenant. The net decrease of $1.2 million in depreciation and amortization at properties acquiredfully operational during 2015 2016 and 2017 is attributableprimarily due to accelerated depreciation and amortization on tenant-specific assets caused by tenants vacating prior to their lease expiration in 2016, compared to the acquisitionssame period in 2017.
Interest expense increased $0.9 million or 6.0%. The increase is due to securing longer-term fixed rate debt through the issuance of Livingston Shopping Center and Chapel Hill Shopping Centersenior unsecured notes in the third quarter of 20152016 that carried higher interest rates than the variable rate on our


unsecured revolving credit facility, which was paid down with the proceeds. The increase is also due to certain development projects, including Tamiami Crossing, Parkside Town Commons - Phase II and Holly Springs Towne Center - Phase II becoming operational throughout 2016. As a portion of a development project becomes operational, we cease capitalization of the related interest expense.

Income tax expense of our taxable REIT subsidiary decreased $0.3 million primarily due to the decrease in gains on sales of residential units at Eddy Street Commons. The last of the units in Phase I were sold in 2016.

We recorded a net gain of $6.3 million from the sales of our Clay Marketplace, The Shops at Village Walk and Wheatland Towne Crossing operating properties during the three months ended June 30, 2017.

Comparison of Operating Results for the Six Months Ended June 30, 2017 to the Six Months Ended June 30, 2016.
The following table reflects income statement line items from our consolidated statements of operations for the six months ended June 30, 2017 and 2016.  

($ in thousands)2017 2016 Net change 2016 to 2017
Revenue:     
  Rental income (including tenant reimbursements)$174,432
 $171,079
 $3,353
  Other property related revenue8,330
 5,046
 3,284
Total revenue182,762
 176,125
 6,637
Expenses:     
  Property operating25,091
 23,538
 1,553
  Real estate taxes21,559
 21,637
 (78)
  General, administrative, and other10,958
 10,147
 811
  Transaction costs—
 2,771
 (2,771)
  Impairment charge7,411
 —
 7,411
  Depreciation and amortization88,540
 86,082
 2,458
Total expenses153,559
 144,175
 9,384
Operating income29,203
 31,950
 (2,747)
  Interest expense(32,878) (30,825) (2,053)
  Income tax benefit (expense) of taxable REIT subsidiary30
 (748) 778
  Other expense, net(219) (94) (125)
(Loss) income from continuing operations(3,864) 283
 (4,147)
  Gains on sales of operating properties15,160
 194
 14,966
Consolidated net income11,296
 477
 10,819
  Net income attributable to noncontrolling interests(1,110) (971) (139)
Net income (loss) attributable to Kite Realty Group Trust common shareholders$10,186
 $(494) $10,680
      
Property operating expense to total revenue ratio13.7% 13.4%  
Rental income (including tenant reimbursements) increased $3.4 million, or 2.0%, due to the following:
($ in thousands)Net change 2016 to 2017
Properties sold during 2016 and 2017$(1,720)
Properties under redevelopment during 2016 and/or 2017(119)
Properties fully operational during 2016 and 2017 and other5,192
Total$3,353


The net $0.3increase of $5.2 million in rental income for properties fully operational during 2016 and 2017 is primarily attributable to an increase in rental rates and an increase in economic occupancy percentage. The increase in the economic occupancy percentage is primarily due to multiple anchor and small shop tenants opening as we completed various developments and redevelopments including Petco at Hitchcock Plaza, Petsmart at Tarpon Bay Plaza, Buy Buy Baby and DSW at Cool Springs Market, Five Below at Shops at Moore and new small shop buildings at Castleton Crossing and Portofino Shopping Center subsequent to June 30, 2016.

The average rent for new comparable leases signed in the first six months of 2017 was $19.98 per square foot compared to average expiring rent of $15.77 per square foot in that period. The average rent for renewals signed in the first six months of 2017 was $15.98 per square foot compared to average expiring rent of $15.03 per square foot in that quarter. Our same property economic occupancy improved to 93.9% for the six months ended June 30, 2017 from 93.0% for the six months ended June 30, 2016. For our total retail operating portfolio, annualized base rent per square foot improved to $15.95 per square foot as of June 30, 2017, up from $15.27 as of June 30, 2016.

Other property related revenue primarily consists of parking revenues, overage rent, lease termination income and gains on sales of undepreciated assets.  This revenue increased by $3.3 million, primarily as a result of higher gains on sales of undepreciated assets of $2.1 million (including the effect of a $4.9 million gain on the sale of an outlot at Cove Center during the second quarter of 2017) and increases of $0.8 million in lease termination income and $0.1 million in overage rent.
Property operating expenses increased $1.6 million, or 6.6%, due to the following:
($ in thousands)Net change 2016 to 2017
Properties sold during 2016 and 2017$(353)
Properties under redevelopment during 2016 and/or 201734
Properties fully operational during 2016 and 2017 and other1,872
Total$1,553
The net increase of $1.9 million in property operating expenses for properties fully operational during 2016 and 2017 is primarily due to a combination of increases of $0.7 million in general building repair and landscaping costs at certain properties, $0.6 million in bad debt expense, $0.2 million in marketing expense and $0.2 million in utility expense. The increases were partially offset by a decrease of $0.2 million in insurance expense.

As a percentage of revenue, property operating expenses increased between years from 13.4% to 13.7%. The increase was mostly due to an increase in bad debt expense, non-recoverable utility expense at several of our properties and marketing expenses, the majority of which are not recoverable from our tenants.

Real estate taxes decreased $0.1 million, or 0.4%, due to the following:
($ in thousands)Net change 2016 to 2017
Properties sold during 2016 and 2017$(248)
Properties under redevelopment during 2016 and/or 201772
Properties fully operational during 2016 and 2017 and other98
Total$(78)
The net $0.1 million increase in real estate taxes


for properties fully operational during 20152016 and 20162017 is primarily due to higheran increase in current year tax assessments at certain operating properties. The majority of changes in our real estate tax expense is recoverable from tenants and therefore,such recovery is reflected in tenant reimbursement revenue.


General, administrative and other expenses increased $0.5$0.8 million, or 11.4%8.0%. The increase is due primarily to higher payrollpersonnel costs and company overhead expenses, which are partially offset by the severance charge of $0.4 million.

$0.5 million in 2016.

Transaction costs generally consist of legal, lender, due diligence, and other expenses for professional services. Such costs decreased $1.1by $2.8 million, as we had nodid not incur any transaction activity duringcosts for the six months ended June 30, 2017. 



During the three months ended September 30, 2016.March 31, 2017, we recorded an impairment charge of $7.4 million related to one of our operating properties.  In connection with the preparation and review of the March 31, 2017 financial statements, we evaluated this property for impairment due to the shortening of the intended holding period. We concluded the estimated undiscounted cash flows over the expected holding period did not exceed the carrying value of the asset. Our assessment of this property resulted in the recording of a non-cash impairment charge for the three months ended March 31, 2017. See additional discussion in Note 10 to the consolidated financial statements.

Depreciation and amortization expense increased $3.0$2.5 million, or 7.0%2.9%, due to the following:

($ in thousands)Net change 2015 to 2016
Properties acquired during 2015$415
Development properties that became operational or were partially operational in 2015 and/or 20162,375
Properties sold during 2015 and 2016(409)
Properties under redevelopment during 2015 and/or 20161,747
Properties fully operational during 2015 and 2016 and other(1,134)
Total$2,994
($ in thousands)Net change 2016 to 2017
Properties sold during 2016 and 2017$(1,122)
Properties under redevelopment during 2016 and/or 20173,640
Properties fully operational during 2016 and 2017 and other(60)
Total$2,458
 
The net increase of $0.4 million in depreciation and amortization expense at properties acquired during 2015 is attributable to the acquisitions of Livingston Shopping Center and Chapel Hill Shopping Center in the third quarter of 2015. The net decrease of $0.4 million in depreciation and amortization expense at properties sold during 2015 and 2016 is due to the sale of two operating properties in December 2015 and one operating property in June 2016. The net increase of $1.7$3.6 million in properties under redevelopment during 20152016 and 20162017 is primarily due to an increase$3.4 million of $1.7 million in accelerated depreciation and amortization from the demolition of a portion of a building at one of our Fishers Station redevelopment properties. The net decrease of $1.1 millionproperty in depreciation at properties fully operational during 2015 and 2016 is primarily due to a decrease in accelerated depreciation and amortization related to multiple tenants vacating at several operating properties in 2016 compared topreparation for the same period in 2015 and a decrease in depreciation related to tenant-specific assets becoming fully depreciated in 2016.
replacement anchor tenant.
  
Interest expense increased $3.3$2.1 million or 23.5%6.7%. The increase is partially due to recording $1.0 million in accelerated amortization of debt issuance costs from amending the unsecured term loans and retiring Term Loan A. In addition, we securedsecuring longer-term fixed rate debt inthrough the second halfissuance of 2015 andsenior unsecured notes in the third quarter of 2016 that carried higher interest rates than the variable rate on our unsecured revolving credit facility, which was paid down with the proceeds. We also redeemed all of our outstanding preferred stock in the fourth quarter of 2015 using the proceeds from the fixed rate debt. The increase wasis also due to certain development projects, including Tamiami Crossing, Parkside Town Commons - Phase III and Holly Springs Towne Center - Phase II, becoming operational.operational or partially operational throughout 2016. As a portion of thea development project becomes operational, we cease capitalization of the related interest expense.


ComparisonWe recorded an income tax benefit of Operating Resultsour taxable REIT subsidiary of less than $0.1 million compared to an income tax expense of our taxable REIT subsidiary of $0.7 million for the Nine Months Ended September 30, 2016 to the Nine Months Ended September 30, 2015


The following table reflects our consolidated statements of operations for the ninesix months ended SeptemberJune 30, 2016 and 2015 .  The comparability of the periods is impacted by acquisitions, dispositions, and redevelopments previously described.


($ in thousands)2016 2015 Net change 2015 to 2016
Revenue:     
  Rental income (including tenant reimbursements)$258,127
 $248,547
 $9,580
  Other property related revenue7,120
 9,163
 (2,043)
Total revenue265,247
 257,710
 7,537
Expenses:     
  Property operating35,454
 36,519
 (1,065)
  Real estate taxes32,327
 29,821
 2,506
  General, administrative, and other15,228
 14,131
 1,097
  Transaction costs2,771
 1,550
 1,221
  Depreciation and amortization131,625
 124,196
 7,429
Total expenses217,405
 206,217
 11,188
Operating income47,842
 51,493
 (3,651)
  Interest expense(47,964) (40,995) (6,969)
  Income tax expense of taxable REIT subsidiary(763) (134) (629)
  Gain on settlement—
 4,520
 (4,520)
  Other expense, net(94) (189) 95
Income before gain on sale of operating properties(979) 14,695
 (15,674)
  Gain on sales of operating properties194
 3,363
 (3,169)
Consolidated net income(785) 18,058
 (18,843)
  Net income attributable to noncontrolling interests(1,391) (1,626) 235
Net (loss) income attributable to Kite Realty Group Trust(2,176) 16,432
 (18,608)
  Dividends on preferred shares—
 (6,342) 6,342
Net (loss) income attributable to common shareholders$(2,176) $10,090
 $(12,266)
      
Property operating expense to total revenue ratio13.4% 14.2%  


Rental income (including tenant reimbursements) increased $9.6 million, or 3.9%, due to the following:

($ in thousands)Net change 2015 to 2016
Properties acquired during 2015$7,418
Development properties that became operational or were partially operational in 2015 and/or 20163,580
Properties sold during 2015 and 2016(5,165)
Properties under redevelopment during 2015 and/or 2016794
Properties fully operational during 2015 and 2016 and other2,953
Total$9,580
The net increase of $7.4 million in rental income at properties acquired during 2015 is attributable to the acquisitions of Colleyville Downs, Belle Isle Station, Livingston Shopping Center, and Chapel Hill Shopping Center in the second and third quarters of 2015. The net decrease of $5.2 million in rental income at properties sold during 20152017 and 2016, respectively. The decrease is primarily due to the sale of seven operating properties in March 2015, two operating properties in December 2015, and one operating property in June 2016.


The net increase of $3.0 million in rental income for properties fully operational during 2015 and 2016 is primarily attributable to an increase in rental rates, and an increase in expense recoveries through year end reconciliations of common area maintenance, insurance and real estate tax expense.


The average rent for new comparable leases signed in the first nine months of 2016 was $22.17 per square foot compared to average expiring rent of $19.38 per square foot in that period. The average rent for renewals signed in the first nine months of 2016 was $16.24 per square foot compared to average expiring rent of $15.08 per square foot in that period. For our full operating portfolio, annualized base rent per square foot improved to $15.42 per square foot as of September 30, 2016, up from $15.24 as of September 30, 2015.


Other property related revenue primarily consists of parking revenues, overage rent, lease termination income and gains on sales of undepreciated assets.  This revenue decreased by $2.0 million, primarily as a result lower gains on sales of undepreciated assets of $0.9 million and decreases of $0.7 million in lease termination income and fluctuations in other miscellaneous activities.

Property operating expenses decreased $1.1 million, or 2.9%, due to the following:
($ in thousands)Net change 2015 to 2016
Properties acquired during 2015$1,655
Development properties that became operational or were partially operational in 2015 and/or 2016709
Properties sold during 2015 and 2016(981)
Properties under redevelopment during 2015 and/or 2016(459)
Properties fully operational during 2015 and 2016 and other(1,989)
Total$(1,065)

The net increase of $1.7 million in property operating expensesresidential units at properties acquired during 2015 is attributable to the acquisitions of Colleyville Downs, Belle Isle Station, Livingston Shopping Center, and Chapel Hill Shopping Center in the second and third quarter of 2015. The net decrease of $1.0 million in property operating expenses at properties sold during 2015 and 2016 is due to the sale of seven operating properties in March 2015, two operating properties in December 2015, and one operating property in June 2016. The net $2.0 million decrease for properties fully operational during 2015 and 2016 is primarily due to a combination of a decrease of $1.0 million in bad debt expense, $0.5 million in insurance costs as we generated efficiencies with our larger operating platform, $0.4 million in general building repair costs at certain properties, $0.4 million in utility expense, and $0.2 million in landscaping expense. The decreases were offset by an increase of $0.2 million in security expense, $0.2 million in advertising expense and $0.1 million in association fees.


Property operating expenses as a percentage of total revenueEddy Street Commons for the ninesix months ended SeptemberJune 30, 2016 was 13.4%2017, compared to 14.2%, or a change of approximately $0.3 million, over the same period in the prior year. The decrease was mostly due to an improvement in expense control and an improvement in operating expense recoveries from tenants as a result of higher occupancy rates.


Real estate taxes increased $2.5 million, or 8.4%, due to the following:


($ in thousands)Net change 2015 to 2016
Properties acquired during 2015$1,605
Development properties that became operational or were partially operational in 2015 and/or 2016249
Properties sold during 2015 and 2016(514)
Properties under redevelopment during 2015 and/or 2016(37)
Properties fully operational during 2015 and 2016 and other1,203
Total$2,506

The $1.6 million increase in real estate taxes at properties acquired during 2015 is attributable to the acquisitions of Colleyville Downs, Belle Isle Station, Livingston Shopping Center, and Chapel Hill Shopping Center in the second and third quarter of 2015. The net decrease of $0.5 million in real estate taxes at properties sold during 2015 and 2016 is due to the sale of seven operating properties in March 2015, two operating properties in December 2015, and one operating property in June 2016. The net $1.2 million increaselast of the units in real estate taxes for properties fully operational during 2015 and 2016 is due to higher tax assessments at certain operating properties. The majority of changes in our real estate tax expense is recoverable from tenants and, therefore, reflected in tenant reimbursement revenue.


General, administrative and other expenses increased $1.1 million, or 7.8%. The increase is due primarily to a severance charge of $0.5 million in the first quarter of 2016 and higher payroll costs and company overhead expenses of $0.6 million.


Transaction costs generally consist of legal, lender, due diligence, and other expenses for professional services. Such costs increased $1.2 million as we had terminated transaction costs of $2.8 million for the nine months ended September 30, 2016, compared to property acquisition costs of $1.6 million for the nine months ended September 30, 2015.

Depreciation and amortization expense increased $7.4 million, or 6.0%, due to the following:

($ in thousands)Net change 2015 to 2016
Properties acquired during 2015$3,923
Development properties that became operational or were partially operational in 2015 and/or 20163,286
Properties sold during 2015 and 2016(1,202)
Properties under redevelopment during 2015 and/or 20162,067
Properties fully operational during 2015 and 2016 and other(644)
Total$7,430
The net increase of $3.9 million in depreciation and amortization expense at properties acquired during 2015 is attributable to the acquisitions of Colleyville Downs, Belle Isle Station, Livingston Shopping Center, and Chapel Hill Shopping Center in the second and third quarter of 2015. The net decrease of $1.2 million in depreciation and amortization expense at properties sold during 2015 and 2016 is due to the sale of seven operating properties in March 2015, two operating properties in December 2015, and one operating property in June 2016. The net increase of $2.1 million in properties under redevelopment during 2015 and 2016 is primarily due to an increase of $1.7 million in accelerated depreciation and amortization from the demolition of a portion of a building at one of our redevelopment properties. The net decrease of $0.6 million in depreciation at properties fully operational during 2015 and 2016 is due to a decrease in accelerated depreciation and amortization on tenant-specific assets from multiple tenants vacating at several operating properties in the first nine months of 2016, compared to the accelerated depreciation and amortization on tenant-specific assets recorded in the same period in 2015.


Interest expense increased $7.0 million or 17.0%. The increase is due to recording $1.0 million in accelerated amortization of debt issuance costs from amending the unsecured term loans, retiring Term Loan A and securing longer-term fixed rate debt in the second half of 2015 and in the third quarter of 2016 that carried higher interest rates than the variable rate on our unsecured revolving credit facility, which was paid down with the proceeds. We also redeemed all of our outstanding preferred stock in the fourth quarter of 2015 using the proceeds from the fixed rate debt. The increase is also due to certain development projects, including Parkside Town Commons - Phase I and Holly Springs Towne Center - Phase II becoming operational. As a portion of the project becomes operational, we cease capitalization of the related interest expense.

were sold in 2016.

We recorded a net gain of $15.2 million on settlementthe sale of $4.5 millionour Cove Center, Clay Marketplace, The Shops at Village Walk and Wheatland Towne Center operating properties for the ninesix months ended SeptemberJune 30, 2015. See additional discussion in Note 12 to the consolidated financial statements.2017.


Net Operating Income and Same Property Net Operating Income
  
The Company believesWe 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. We believe that Net Operating Income ("NOI")NOI is helpful to investors as a measure of itsour operating performance because it excludes various items included in net income that do not relate to or are not indicative of itsour operating performance, such as depreciation and amortization, interest expense, and impairment, if any.  The Company believes

We also use same property NOI ("Same Property NOI"), a non-GAAP financial measure, to evaluate the performance of our properties. Same Property NOI excludes properties that have not been owned for the full period presented. It also excludes net gains from outlot sales, straight-line rent revenue, bad debt expense and recoveries, lease termination fees, amortization of lease intangibles and significant prior period expense recoveries and adjustments, if any. We believe that Same Property NOI is helpful to investors as a measure of itsour operating performance because it includes only the NOI of properties that have been owned for the full period presented, which eliminates disparities in net income due to the redevelopment, acquisition or disposition of properties during the particular period presented and thus provides a more consistent metric for the comparison of our properties. The year to date results represent the Company's properties.  sum of the individual quarters, as reported.

NOI and Same Property NOI should not, however, be considered as alternatives to net income (calculated in accordance with GAAP) as indicators of the Company'sour financial performance. The Company’sOur 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 twelve months afterwhen there is a full quarter of operations in both years subsequent to the acquisition date. A development property isDevelopment and redevelopment properties are included in the same property pool twelve months after construction is substantially complete, which is typically between six and twelve monthsfour full quarters after the first date a tenant is open for business. A redevelopment property is included inproperties have been transferred to the same property pool twelve months after the construction of the redevelopment property is substantially complete.operating portfolio. A redevelopment property is first excluded from the same property pool when the execution of a redevelopment plan is likely and we begin recapturing space from tenants. For the three and six months ended SeptemberJune 30, 2017 and 2016, we excluded nine currenteight redevelopment properties and the recently completed Northdale Promenade from the same property pool that met these criteria and were owned in all periods compared.both comparable periods.

The following table reflects same property net operating income (andSame Property NOI and a reconciliation to net income attributable to common shareholders)shareholders for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015:


2016:

Three Months Ended
September 30,		 Nine Months Ended
September 30,		Three Months Ended
June 30,		 Six Months Ended
June 30,
($ in thousands)2016 2015 % Change 2016 2015 % Change2017 2016 % Change 2017 2016 % Change
Number of properties for the quarter1
103
 103
   

 

  102
 102
   

 

  
                   
Leased percentage95.3% 95.4%   95.3% 95.2%  
Leased percentage at period end94.3% 95.1%   94.3% 95.1%  
Economic Occupancy percentage2
93.6% 93.7%   93.8% 93.6%  93.8% 92.7%   93.9% 93.0%  
                   
Net operating income - same properties3
$53,662
 $52,579
 2.1% $158,368
 $154,220
 2.7%
Net operating income - same properties excluding the impact of the 3-R initiative4
    2.9%      
Same Property NOI3
$54,492
 $52,782
 3.2% $110,587
 $107,197
 3.2%
Same Property NOI - excluding the impact of the 3-R initiative    3.8%     3.9%
                   
Reconciliation of Same Property NOI to Most Directly Comparable GAAP Measure:  
  
  
  
  
  
 
  
    
  
  
Net operating income - same properties$53,662
 $52,579
  
 $158,368
 $154,220
  
$54,492
 $52,782
   $110,587
 $107,197
  
Net operating income - non-same activity5
12,854
 12,529
  
 39,098
 37,150
  
Net operating income - non-same activity4
14,790
 12,944
   25,525
 23,753
  
Other expense, net(15) (69)  
 (857) (323)  
(83) (448)   (189) (842)  
General, administrative and other(5,081) (4,559)  
 (15,228) (14,131)  
(5,488) (4,856)   (10,958) (10,147)  
Transaction costs—
 (1,089)  
 (2,771) (1,550)  
—
 (2,771)   —
 (2,771)  
Depreciation expense(45,543) (42,549)  
 (131,625) (124,196)  
Impairment charge—
 —
 (7,411) —
 
Depreciation and amortization expense(42,710) (43,841)   (88,540) (86,082)  
Interest expense(17,139) (13,881)  
 (47,964) (40,995)  
(16,433) (15,500)   (32,878) (30,825)  
Gain on settlement—
 —
   —
 4,520
  
Gains on sales of operating properties—
 —
  
 194
 3,363
  
6,290
 194
   15,160
 194
  
Net income attributable to noncontrolling interests(420) (435)  
 (1,391) (1,626)  
(678) (399)   (1,110) (971)  
Dividends on preferred shares—
 (2,114)  
 —
 (6,342)  
Net (loss) income attributable to common shareholders$(1,682) $412
  
 $(2,176) $10,090
  
Net income (loss) attributable to common shareholders$10,180
 $(1,895)   $10,186
 $(494)  
 
____________________
1Same property analysisProperty NOI excludes operatingeight properties in redevelopment, the recently completed Northdale Promenade as well as office properties (Thirty South Meridian and Eddy Street Commons).
2Excludes 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.
3Same property net operating incomeProperty NOI excludes net gains from outlot sales, straight-line rent revenue, bad debt expense and recoveries, lease termination fees, amortization of lease intangibles and significant prior yearperiod expense recoveries and adjustments, if any.
4See pages 27 and 28 of the Quarterly Financial Supplemental for further detail of the properties included in the 3-R initiative.
5Includes non-cash activity across the portfolio as well as net operating income from properties not included in the same property pool.


Our same property net operating incomeSame Property NOI increased 2.1% and 2.7%3.2% for both the three and ninesix months ended SeptemberJune 30, 20162017 compared to the same period of the prior year. These increases wereThis increase was primarily due to increases in rental rates and improvedan improvement in economic occupancy caused by the completion of several 3-R projects since the second quarter of 2016. We also realized a $0.1 million improvement from expense control and operating expense recovery resulting in an improvement in net recoveries of $0.2 million and $1.4 million for the three and ninesix months ended SeptemberJune 30, 2016.  Excluding the properties in the 3-R initiative, same property net operating income increased 2.9% in the three months ended September 30, 2016.

2017.

Liquidity and Capital Resources

 
Overview
  
Our primary finance and capital strategy is to maintain a strong balance sheet with sufficient flexibility to fund our operating and investment activities in a cost-effective manner. We consider a number of factors when evaluating our level of indebtedness


and when making decisions regarding additional borrowings or equity offerings, including the estimated value of properties to be developed or acquired, the estimated market value of our properties and the Company as a whole upon placement of the borrowing or offering, and the ability of particular properties to generate cash flow to cover debt service. We will continue to monitor the


capital markets and may consider raising additional capital through the issuance of our common or preferred shares, unsecured debt securities, preferred shares, or other securities.
  
Our Principal Capital Resources
  
For a discussion of cash generated from operations, see “Cash Flows,” beginning on page 43.36.  In addition to cash generated from operations, we discuss below our other principal capital resources.
  
The increased asset base and operating cash flows of the Company have substantially enhanced our liquidity position and reduced our borrowing costs. We continue to focus on a balanced approach to growth and staggering debt maturities in order to retain our financial flexibility.


On September 26, 2016, the Operating Partnership completed a $300 million public offering of 4.00% Senior Notes due October 1, 2026.  The net proceeds from the issuance of the Notes were utilized to retire the $200 million Term Loan A and retire the $75.9 million construction loan secured by our Parkside Town Commons operating property and pay down our unsecured revolving credit facility.
As of SeptemberJune 30, 2016,2017, we had approximately $401$388.2 million available under our unsecured revolving credit facility for future borrowings based on the unencumbered property pool allocated to the unsecured revolving credit facility.  We also had $28.8$27.6 million in cash and cash equivalents as of SeptemberJune 30, 2016.
2017.
  
We were in compliance with all applicable financial covenants under our unsecured revolving credit facility, our unsecured term loans and our senior unsecured notes as of SeptemberJune 30, 2016.

2017.

We have on file with the SEC a shelf registration statement on Form S-3 relating to the offer and sale, from time to time, of an indeterminate amount of equity and debt securities. Equity securities may be offered and sold by the Parent Company, and the net proceeds of any such offerings would be contributed to the Operating Partnership in exchange for additional General Partner Units. Debt securities may be offered and sold by the Operating Partnership with the Operating Partnership receiving the proceeds. From time to time, we may issue securities under this shelf registration statement to fund the repayment of long-term debt upon maturity and for other general corporate purposes.


We currently have an at the marketat-the-market equity program that allows the Parent Company to issue new common shares from time to time, with an aggregate offering price of up to $250.0 million. During the nine months ended September 30, 2016, we issued 137,229 common shares at an average price per share of $29.52 pursuant to our at-the-market offering program, generating gross proceeds of approximately $4.1 million and, after deducting commissions and other costs, net proceeds of approximately $3.8 million. We have $245.9 million remaining available for future common share issuances under our current at-the-market equity program.
  
In the future, we will continue to monitor the capital markets and may consider raising additional capital through the issuance of our common shares, preferred shares or other securities. We may also raise capital by disposing of properties, land parcels or other assets that are no longer core components of our growth strategy.  The sale price may differ from our carrying value at the time of sale.

We derive the majority of our revenue from tenants who lease space from us at our properties. Therefore, our ability to generate cash from operations is dependent on the rents that we are able to charge and collect from our tenants. While we believe that the nature of the properties in which we typically invest—primarilyinvest-primarily neighborhood and community shopping centers—providescenters-provides a relatively stable revenue flow in uncertain economic times, the recent economic downturn adversely affected the ability of some of our tenants to meet their lease obligations.




Our Principal Liquidity Needs


Short-Term Liquidity Needs
  
Near-Term Debt Maturities. As of SeptemberJune 30, 2016,2017, we had $17.1 million ofdo not have any secured debt scheduled to mature prior to SeptemberJune 30, 2017,2018, excluding scheduled monthly principal payments. On November 1, 2016, we retired the $10.4 million loan secured by our Geist Pavilion operating property, which included a release of a $1.6 million letter of credit that was scheduled to mature on January 1, 2017. On November 1, 2016, we retired the $25 million loan secured by our Colonial Square and Village Walk operating properties that was scheduled to mature on January 1, 2018.
  
Other Short-Term Liquidity Needs.  The requirements for qualifying as a REIT and for a tax deduction for some or all of the dividends paid to shareholders necessitate that we distribute at least 90% of our taxable income on an annual basis. Such requirements cause us to have substantial liquidity needs over both the short term and the long term. Our short-term liquidity needs consist primarily of funds necessary to pay operating expenses associated with our operating properties, interest expense and scheduled principal payments on our debt, expected dividend payments to our common shareholders and to Common Unit holders, and recurring capital expenditures.



In September 2016,May 2017, our Board of Trustees declared a cash distribution of $0.2875$0.3025 per common share and Common Unit for the thirdsecond quarter of 2016.2017. This distribution was paid on OctoberJuly 13, 20162017 to common shareholders and Common Unit holders of record as of OctoberJuly 6, 2016.2017. Future distributions, if any, are at the discretion of the Board of Trustees.

Other short-term liquidity needs include expenditures for tenant improvements, external leasing commissions and recurring capital expenditures.  During the ninesix months ended SeptemberJune 30, 2016,2017, we incurred $1.0$1.2 million of costs for recurring capital expenditures on operating properties and also incurred $7.6$11.1 million of costs for tenant improvements and external leasing commissions (excluding first generation space and development and redevelopment properties). We currently anticipate incurring approximately $9$14 million to $11$16 million of additional major tenant improvements and renovation costs within the next twelve12 months at a number of our operating properties, excluding those properties in our "3-R" initiative.  properties.

We currently have 12 properties that are considered under construction as partreceived notice from one of our "3-R" initiative. Total estimated costsjoint venture partners exercising its right to redeem $8.3 million of these properties are expectedits noncontrolling interests that became redeemable in March 2017. We expect to befund the redemption using cash prior to December 27, 2017. See further discussion in Note 2 to the range of $58.1 million and $67.0 million.consolidated financial statements.
 

As of SeptemberJune 30, 2016,2017, we had one development project under construction.  The total estimated cost of this project is approximately $83.5$2.7 million, of which $80.2$0.2 million had been incurred as of SeptemberJune 30, 2016.2017.  We currently anticipate incurring the majority of the remaining $3.3$2.5 million of costs over the next nine12 months.  We believe we currently have sufficient financing in place to fund the project and expect to do so primarily through cash flow from operations or borrowings on our unsecured revolving credit facility.


We have seven properties in our 3-R initiative that are currently under construction. Total estimated costs of this construction are expected to be in the range of $68.5 million to $74.0 million and are expected to be incurred through the middle of 2018. We expect to be able to fund the majority of these costs from operating cash flows.
Long-Term Liquidity Needs
  
Our long-term liquidity needs consist primarily of funds necessary to pay for theany new development of new properties,projects, redevelopment of existing properties, non-recurring capital expenditures, acquisitions of properties, and payment of indebtedness at maturity.
  
Potential Redevelopment, Reposition, Repurpose Opportunities. We are currently evaluating additional redevelopment, repositioning, and repurposing of several other operating properties as part of our "3-R"3-R initiative. Total estimated costs of these properties are currently expected to be in the range of $85$65 million and $105to $85 million. We believe we currentlywill have sufficient financing in place to fund our investment in any existing or futurefunding for these projects through cash flow from operations and borrowings on our unsecured revolving credit facility. 



 
Selective Acquisitions, Developments and Joint Ventures. We may selectively pursue the acquisition and development of other properties, which would require additional capital.  It is unlikely that we would have sufficient funds on hand to meet these long-term capital requirements.  We would have to satisfy these needs through additional borrowings, sales of common or preferred shares, issuance of Operating Partnership units, cash generated through property dispositions or future property acquisitions and/or participation in joint venture arrangements.  We cannot be certain that we would have access to these sources of capital on satisfactory terms, if at all, to fund our long-term liquidity requirements.  We evaluate all future opportunities against pre-established criteria including, but not limited to, location, demographics, expected return, tenant credit quality, tenant relationships, and amount of existing retail space.  Our ability to access the capital markets will be dependent on a number of factors, including general capital market conditions.


Capitalized Expenditures on Consolidated Properties


The following table summarizes cash capital expenditures for our development and redevelopment properties and other capital expenditures for the ninesix months ended SeptemberJune 30, 20162017 and on a cumulative basis since the project’s inception:



 Year to Date – Cumulative –
 
($ in thousands)
September 30,
2016		 September 30,
2016
Developments$3,767
 $80,213
Redevelopments23,027
 N/A
Recently completed developments/redevelopments1
29,063
 N/A
Miscellaneous other activity, net3,889
 N/A
Recurring operating capital expenditures (primarily tenant improvement payments)8,606
 N/A
Total$68,352
 $80,213
 Year to Date – Cumulative –
 
($ in thousands)
June 30,
2017		 June 30,
2017
Development Project$240
 $240
Under Construction 3-R Projects15,850
 N/A
3-R Opportunities1,866
 N/A
Recently completed developments/redevelopments and other1
5,703
 N/A
Recurring operating capital expenditures (primarily tenant improvement payments)11,288
 N/A
Total$34,947
 $240
 
____________________
1This classification includes Tamiami Crossing,Parkside Town Commons - Phase II, Holly Springs Towne Center – Phase I and- Phase II, Parkside Town Commons – Phase I, Bolton Plaza, Gainesville Plaza,Centennial Gateway, Market Street Village and Cool Springs.Northdale Promenade.
 

We capitalize certain indirect costs such as interest, payroll, and other general and administrative costs related to these development activities.  If we were to experience a 10% reduction in development and redevelopment activities, without a corresponding decrease in indirect project costs, we would have recorded additional expense of $0.1 million and $0.3$0.2 million for the three and ninesix months ended SeptemberJune 30, 2016, respectively.
2017.
  
Debt Maturities
  
The following table below presents scheduled principal repayments (including scheduled monthly principal payments) onmaturities of mortgage debt and other indebtednesscorporate debt as of SeptemberJune 30, 2016:2017:
  


($ in thousands)
Scheduled Principal Payments 
Term Maturity1
 TotalScheduled Principal Payments 
Term Maturity1
 Total
2016$954
 $—
 $954
20175,103
 17,025
 22,128
$2,560
 $—
 $2,560
20185,635
 62,584
 68,219
5,635
 37,584
 43,219
20195,975
 —
 5,975
5,975
 —
 5,975
20205,920
 42,339
 48,259
5,920
 42,338
 48,258
20214,627
 392,974
 397,601
Thereafter12,976
 1,573,823
 1,586,799
8,349
 1,170,248
 1,178,597
$36,563
 $1,695,771
 $1,732,334
$33,066
 $1,643,144
 $1,676,210
Unamortized net debt premiums and issuance costs, net 
  
 10
 
  
 (1,146)
Total 
  
 $1,732,344
 
  
 $1,675,064
 
____________________
1This presentation reflects the Company's exercise of its option to extend the maturity date by one year to July 28, 2021 for the Company's unsecured credit facility.


Failure to comply with our obligations under our indebtedness agreements (including our payment obligations) could cause an event of default under such debt, which, among other things, could result in the loss of title to assets securing such debt, the acceleration of principal and interest payments or the termination of the debt facilities, or exposure to the risk of foreclosure.  In addition, certain of our variable rate loans contain cross-default provisions which provide that a violation by us of any financial covenant set forth in our unsecured revolving credit facility agreement will constitute an event of default under the loans, which could allow the lenders to accelerate the amounts due under our indebtedness agreements if we fail to satisfy these financial covenants.  See “Item 1.A Risk Factors – Risks Related to Our Operations” in Kite Realty Group Trust's Annual Report on Form 10-K for the year ended December 31, 20152016 for more information related to the risks associated with our indebtedness.


Impact of Changes in Credit Ratings on Our Liquidity


In 2014, we were
We have been assigned investment grade corporate credit ratings from two nationally recognized credit rating agencies. These ratings remain unchanged as of SeptemberJune 30, 2016.2017.


TheIn the future, the ratings could change based upon, among other things, the impact that prevailing economic conditions may have on our results of operations and financial condition. A reduction in our creditCredit rating reductions by one or bothmore rating agencies could also adversely affect our access to funding sources, the cost and other terms of future financing,obtaining funding, as well as our overall financial condition, operating results and cash flow.


Cash Flows
  
As of SeptemberJune 30, 2016,2017, we had cash and cash equivalents on hand of $28.8$27.6 million. We may be subject to concentrations of credit risk with regard to our cash and cash equivalents.  We place our cash and short-term cash investments with high-credit-qualityhighly rated financial institutions.  While we attempt to limit our exposure at any point in time, occasionally, such cash and investments may temporarily be in excess of FDIC and SIPC insurance limits.  We also maintain certain compensating balances in several financial institutions in support of borrowings from those institutions.  Such compensating balances were not material to the consolidated balance sheets.

    
Comparison of the NineSix Months Ended SeptemberJune 30, 20162017 to the NineSix Months Ended SeptemberJune 30, 20152016
  


Cash provided by operating activities was $120.7$81.1 million for the ninesix months ended SeptemberJune 30, 2016, a decrease2017, an increase of $15.2$0.2 million from the same period of 2015.2016.  The decreaseincrease was primarily due to an improvement in the timingcollection of real estate tax paymentsoutstanding account receivables, the completion of several 3-R projects, and annual insurance payments and an increasehigher revenue on sales of undepreciated assets in leasing costs.
2017, partially offset by a decrease in cash provided by operating activities due to our 2017 property sales.
  
Cash used inprovided by investing activities was $67.1$39.5 million for the ninesix months ended SeptemberJune 30, 2016,2017, as compared to cash used in investing activities of $110.2$44.8 million in the same period of 2015.2016.  Highlights of significant cash sources and uses in investing activities are as follows:
  
Net proceeds of $0.1$76.1 million related to the sale of Cove Center in March 2017 and Clay Marketplace, The Shops at OttyVillage Walk and Wheatland Towne Crossing in June 2016,2017, compared to net proceeds of $126.5$0.1 million related to the sale of seven operating properties in March 2015;

There were no property acquisitions in the first nine months of 2016, while there was a net cash outflow of $167.8 million related to acquisitions over the same period in 2015;2016;

Decrease in capital expenditures of $1.4$9.3 million, partially offset by an increasea decrease in construction payables of $0.6$1.6 million.  In the first nine months of 2016,2017, we substantially completedincurred additional construction costs at our Tamiami CrossingParkside Towne Commons - Phase II and Holly Springs Towne Center - Phase II development properties,projects, and incurred additional construction costs at several of our redevelopment properties.


Cash used in financing activities was $58.7$112.9 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to cash used in financing activities of $26.7$32.1 million in the same period of 2015.2016.  Highlights of significant cash sources and uses in financing activities induring the first ninesix months of 20162017 are as follows:
  
We retired the $16.3$6.7 million loan secured by our Cool CreekPleasant Hill Commons operating property the $23.6 million loan secured by our Sunland Towne Centre operating property, the $20.3 million loan secured by our Mullins Crossing operating property, the $16.5 million loan secured by our Pine Ridge Crossing operating property, the $9.9 million loan secured by our Riverchase Plaza operating property and the $42.2 million loan secured by our Traders Point operating property using drawsa draw on the unsecured revolving credit facility;

We issued $300borrowed $47.5 million of senior unsecured notes in a public offering.  The net proceeds of which were utilized to retireon the $200 million Term Loan A and the $75.9 million construction loan secured by our Parkside Town Commons operating property and to pay down our unsecured revolving credit facility;facility to fund development activities, redevelopment activities, and tenant improvement costs;

We drew the remaining $100 million on our $200 million seven-year unsecured term loan and used the $76.1 million proceeds from the sale of four operating properties to pay down the unsecured revolving credit facility; and

We made distributions to common shareholders and Common Unit holders of $73.6$52.6 million.


Funds From Operations
  
Funds from Operations (FFO)("FFO") is a widely used performance measure for real estate companies and is provided here as a supplemental measure of operating performance. We calculate FFO, 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), which we refer to as the White Paper.("NAREIT"). The White PaperNAREIT white paper defines FFO as net income (determined in accordance with generally accepted accounting principles (GAAP))GAAP), excluding gains (or


losses) from sales and impairments of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.


Considering the nature of our business as a real estate owner and operator, we believe that FFO is helpful to investors in measuring our operational performance because it excludes various items included in net income that do not relate to or are not indicative of our operating performance, such as gains or losses from sales of depreciated property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. For informational purposes, we have also provided FFO adjusted for transaction costs and a severance charge accelerated amortization of debt issuance costs and transaction costs


in 2016 and a gain on settlement and transaction costs in 2015.2016. We believe this supplemental information provides a meaningful measure of our operating performance. We believe our presentation of FFO, as adjusted, provides investors with another financial measure that may facilitate comparison of operating performance between periods and among our peer companies. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance, is not an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, and is not indicative of funds available to 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.

Our calculations of FFO1 (andand reconciliation to consolidated net income as applicable) and FFO, as adjusted for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 (unaudited) are as follows:
 

($ in thousands)Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2016 2015 2016 2015
Consolidated net (loss) income$(1,262) $2,961
 $(785) $18,058
Less: cash dividends on preferred shares—
 (2,114) —
 (6,342)
Less: net income attributable to noncontrolling interests in properties(461) (415) (1,383) (1,416)
Less: gains on sales of operating properties—
 —
 (194) (3,363)
Add: depreciation and amortization of consolidated entities, net of noncontrolling interests45,310
 42,387
 130,909
 123,812
   Funds From Operations of the Operating Partnership1
43,587
 42,819
 128,547
 130,749
Less: Limited Partners' interests in Funds From Operations(918) (967) (2,708) (2,698)
Funds From Operations attributable to Kite Realty Group Trust common shareholders1
$42,669
 $41,852
 $125,839
 $128,051
        
Funds From Operations of the Operating Partnership1
$43,587
 $42,819
 $128,547
 $130,749
Less: gain on settlement—
 —
 —
 (4,520)
Add: accelerated amortization of debt issuance costs (non-cash)2
1,121
 —
 1,121
 —
Add: transaction costs—
 1,089
 2,771
 1,550
Add: severance charge—
 —
 500
 —
Funds From Operations of the Operating Partnership, as adjusted$44,708
 $43,908
 $132,939
 $127,779
($ in thousands)Three Months Ended
June 30,		 Six Months Ended
June 30,
 2017 2016 2017 2016
Consolidated net income (loss)$10,858
 $(1,496) $11,296
 $477
Less: net income attributable to noncontrolling interests in properties(438) (461) (870) (922)
Less: gains on sales of operating properties(6,290) (194) (15,160) (194)
Add: impairment charge—
 —
 7,411
 —
Add: depreciation and amortization of consolidated entities, net of noncontrolling interests42,050
 43,545
 87,416
 85,599
   FFO of the Operating Partnership1
46,180
 41,394
 90,093
 84,960
Less: Limited Partners' interests in FFO(1,056) (809) (2,045) (1,790)
Funds From Operations attributable to Kite Realty Group Trust common shareholders1
$45,124
 $40,585
 $88,048
 $83,170
        
FFO of the Operating Partnership1
$46,180
 $41,394
 $90,093
 $84,960
Add: transaction costs—
 2,771
 —
 2,771
Add: severance charge—
 —
 —
 500
FFO, as adjusted, of the Operating Partnership$46,180
 $44,165
 $90,093
 $88,231
 
____________________
1“Funds From OperationsFFO of the Kite Portfolio"Operating Partnership" measures 100% of the operating performance of the Operating Partnership’s real estate properties and construction and service subsidiaries in which the Company owns an interest. “Funds From Operationsproperties. “FFO attributable to Kite Realty Group Trust common shareholders” reflects a reduction for the redeemable noncontrolling weighted average diluted interest in the Operating Partnership.
2Primarily related to the debt extinguished with the proceeds from our inaugural public debt offering.


Earnings before Interest, Tax, Depreciation, and Amortization
  
We define EBITDA, a non-GAAP financial measure, as net income before depreciation and amortization, interest expense and income tax expense of taxable REIT subsidiary. For informational purposes, we have also provided Adjusted EBITDA, which we define as EBITDA less (i) EBITDA from unconsolidated entities, (ii) gains on sales of operating properties or impairment charges, (iii) other income and (ii)expense, (iv) noncontrolling interest EBITDA.EBITDA and (v) other non-recurring activity or items impacting comparability from period to period. Annualized Adjusted EBITDA is Adjusted EBITDA for the most recent quarter multiplied by four. Net Debt to Adjusted EBITDA is our share of net debt divided by Annualized Adjusted EBITDA. EBITDA, Adjusted EBITDA, Annualized Adjusted EBITDA and Net Debt to Adjusted EBITDA, as calculated by us, are not comparable to EBITDA and EBITDA relatedEBITDA-related measures reported by other REITs that do not define EBITDA and EBITDA-related measures exactly as we


exactly as we do. EBITDA, Adjusted EBITDA and Annualized Adjusted EBITDA do not represent cash generated from operating activities in accordance with GAAP, and should not be considered alternatives to net income as an indicator of performance or as alternatives to cash flows from operating activities as an indicator of liquidity.


Considering the nature of our business as a real estate owner and operator, we believe that EBITDA, Adjusted EBITDA and the ratio of Net Debt to Adjusted EBITDA are helpful to investors in measuring our operational performance because they exclude various items included in net income that do not relate to or are not indicative of our operating performance, such as gains or losses from sales of depreciated property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. For informational purposes, we have also provided Annualized Adjusted EBITDA, adjusted as described above. We believe this supplemental information provides a meaningful measure of our operating performance. We believe presenting EBITDA and the related measures in this manner allows investors and other interested parties to form a more meaningful assessment of our operating results.

  
The following table presents a reconciliation of our EBITDA, Adjusted EBITDA and Annualized Adjusted EBITDA to consolidated net income (the most directly comparable GAAP measure) and a calculation of Net Debt to Adjusted EBITDA.
 

($ in thousands)Three Months Ended
September 30, 2016		Three Months Ended
June 30, 2017
Consolidated net loss$(1,262)
Adjustments to net loss 
Consolidated net income$10,858
Adjustments to net income 
Depreciation and amortization45,543
42,710
Interest expense17,139
16,433
Income tax expense of taxable REIT subsidiary15
Income tax benefit of taxable REIT subsidiary3
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)61,435
70,004
Adjustments to EBITDA: 
Unconsolidated EBITDA34
34
Gain on sale of operating property(6,290)
Pro-forma adjustments1
(3,369)
Other income and expense, net80
Noncontrolling interest(461)(432)
Adjusted EBITDA61,008
60,027
  
Annualized Adjusted EBITDA1
$244,032
Annualized Adjusted EBITDA2
$240,108
  
Company share of net debt: 
 
Mortgage and other indebtedness1,732,344
1,675,064
Less: Partner share of consolidated joint venture debt2
(13,741)
Less: Cash, Cash Equivalents, and Restricted Cash(38,378)
Less: Partner share of consolidated joint venture debt3
(13,373)
Less: Cash, cash equivalents, and restricted cash(36,352)
Less: Net debt premiums and issuance costs, net(10)1,146
Company Share of Net Debt2
1,680,215
Company Share of Net Debt to EBITDA6.9x
Company Share of Net Debt1,626,485
Net Debt to Adjusted EBITDA6.77x


____________________
1Relates to (a) a reduction reflecting the second quarter GAAP operating income of $0.8 million for properties sold during the second quarter of 2017, which adjustment to EBITDA (an income measure) corresponds with the use of proceeds from such sales to pay down the Credit Facility, as reflected in the change in net debt (a balance sheet measure) for the period ending June 30, 2017, and (b) a reduction of approximately $2.6 million in other property related revenue to normalize the impact on comparability of a $4.9 million net gain from the sale of an outlot at Cove Center during the second quarter of 2017 to the Company's quarterly average of other property related revenue.
2Represents Adjusted EBITDA for the three months ended SeptemberJune 30, 20162017 (as shown in the table above) multiplied by four. 
23Partner 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. In all cases, this debt is the responsibility of the consolidated joint venture.


Off-Balance Sheet Arrangements
  


We do not currently have any off-balance sheet arrangements that in our opinion have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.  We do, however, have certain obligations related to some of the projects in our operating and development properties.


Contractual Obligations
  
Except with respect to our debt maturities as discussed on page 42,35, there have been no significant changes to our contractual obligations disclosed in the Annual Report on Form 10-K for the year ended December 31, 2015.2016.  


Item 3.Quantitative and Qualitative Disclosures About Market Risk

 
Market Risk Related to Fixed and Variable Rate Debt
  
We had $1.7 billion of outstanding consolidated indebtedness as of SeptemberJune 30, 20162017 (exclusive of net premiums and issuance costs, net of $10 thousand$1.1 million on acquired indebtedness). As of this date, we were party to various consolidated interest rate hedge agreements totaling $474.7$460.8 million, with maturityexpiration dates ranging from 2017 through 2021.  Reflecting these hedge agreements, our fixed and variable rate debt was $1.6 billion (95%) and $0.1 billion (5%), respectively, of our total consolidated indebtedness at SeptemberJune 30, 2016.
2017.
 
As of SeptemberJune 30, 2016,2017, we had $17.1 million ofdo not have any fixed rate debt maturing within the next twelve months.  A 100 basis point change in market interest rates would not materially impact the annual cash flows associated with this hedged debt.  A 100 basis point change in interest rates on our unhedged variable rate debt as of SeptemberJune 30, 20162017 would change our annual cash flow by $0.8$0.9 million.  


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.
  
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 SeptemberJune 30, 20162017 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 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 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 SeptemberJune 30, 20162017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Part II. Other Information
  
Item 1.Legal Proceedings
  
We are partynot subject to various legalany 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 which arisearising in the ordinary course of business.  None of these actions are expected toManagement believes that such matters will not have a material adverse effectimpact on our consolidated financial condition, results of operations or cash flows taken as a whole.
  
Item 1A.Risk Factors
 
Not Applicable
 

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

Issuer Repurchases; Unregistered Sales of Securities
  
During the three months ended SeptemberJune 30, 2016,2017, certain of our employees surrendered common shares owned by them to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common shares of beneficial interest issued under our 2013 Equity Incentive Plan.
Plan ("2013 Plan").
  
The following table summarizes all of these repurchases during the three months ended SeptemberJune 30, 2016:2017:

Period 
Total number
of shares
purchased1
 
Average price
paid per share
 
Total number of
shares purchased
as part of publicly
announced plans
or programs
 
Maximum number
of shares that may
yet be purchased
under the plans or
programs
July 1 - July 31 891
 $28.07
 —
 N/A
August 1 - August 31 715
 $28.60
 —
 N/A
September 1 - September 30 —
 —
 N/A
 N/A
Total 1,606
      
Period 
Total number
of shares
purchased1
 
Average price
paid per share
 
Total number of
shares purchased
as part of publicly
announced plans
or programs
 
Maximum number
of shares that may
yet be purchased
under the plans or
programs
April 1 - April 30 —
 —
 N/A
 N/A
May 1 - May 31 3,779
 $19.98
 —
 N/A
June 1 - June 30 —
 ���
 N/A
 N/A
Total 3,779
      

____________________
1The number of shares purchased represents common shares surrendered by certain of our employees to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common shares of beneficial interest issued under our 2013 Plan. With respect to these shares, the price paid per share is based on the closing price of our common shares as of the date of the determination of the statutory minimum federal and state tax obligations.


Item 3.Defaults Upon Senior Securities

Not Applicable
  
Item 4.Mine Safety Disclosures


  
Not Applicable

 
Item 5.Other Information
 
 Not Applicable


 
 
Item 6.Exhibits

Exhibit No. Description Location
3.1 Articles of Amendment and Restatement of Declaration of Trust of the Company, as supplemented and amended Incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K of Kite Realty Group Trust filed with the SEC on February 27, 2015
     
3.2 
Articles of Amendment to the Articles of Amendment and Restatement of Declaration of Trust of the Company, as supplemented and amended

 Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on May 28, 2015
     
3.3 Second Amended and Restated Bylaws of the Company, as amended  Incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K of Kite Realty Group Trust filed with the SEC on February 27, 2015
     
3.4 
First Amendment to the Second Amended and Restated Bylaws of Kite Realty Group Trust, as amended

 Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on May 28, 2015
     
4.1 Form of Common Share Certificate  Incorporated by reference to Exhibit 4.1 to Kite Realty Group Trust's registration statement on Form S-11 (File No. 333-114224) declared effective by the SEC on August 10, 2004
     
4.2 Indenture, dated September 26, 2016, between Kite Realty Group, L.P., as issuer, and U.S. Bank National Association, as trustee Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on September 27, 2016
     


4.3 First Supplemental Indenture, dated September 26, 2016, among Kite Realty Group, L.P., Kite Realty Group Trust, as possible future guarantor, and U.S. Bank National Association Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on September 27, 2016
     


4.4 Form of Global Note representing the Notes Incorporated by reference to Exhibits 4.2 and 4.3 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on September 27, 2016
10.1Fifth Amended and Restated Credit Agreement, dated as of July 28, 2016, by and among Kite Realty Group, L.P., KeyBank National Association, as Administrative Agent, and the other lenders party theretoIncorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on July 29, 2016
10.2First Amended and Restated Springing Guaranty, dated as of July 28, 2016, by Kite Realty Group TrustIncorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on July 29, 2016
10.3First Amendment to Term Loan Agreement, dated as of July 28, 2016, by and among Kite Realty Group, L.P., Kite Realty Group Trust, KeyBank National Association, as Administrative Agent, and the other lenders party theretoIncorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on July 29, 2016
     
31.1 Certification of principal executive officer of the Parent Company required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
31.2 Certification of principal financial officer of the Parent Company required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
31.3 Certification of principal executive officer of the Operating Partnership required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
31.4 Certification of principal financial officer of the Operating Partnership required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
32.1 Certification of Chief Executive Officer and Chief Financial Officer of the Parent Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
32.2 Certification of Chief Executive Officer and Chief Financial Officer of the Operating Partnership pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
     


101.INS XBRL Instance Document Filed herewith
     
101.SCH XBRL Taxonomy Extension Schema Document Filed herewith
     
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith
     
101.DEF XBRL Taxonomy Extension Definition Linkbase Document Filed herewith
     
101.LAB XBRL Taxonomy Extension Label Linkbase Document Filed herewith
     
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith





SIGNATURES
  
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  
 KITE REALTY GROUP TRUST
   
November 8, 2016August 4, 2017By:/s/ John A. Kite
(Date) John A. Kite
  Chairman and Chief Executive Officer
  (Principal Executive Officer)
   
   
November 8, 2016August 4, 2017By:/s/ Daniel R. Sink
(Date) Daniel R. Sink
  Chief Financial Officer
  (Principal Financial Officer)


EXHIBIT INDEX

Exhibit No. Description Location
3.1 Articles of Amendment and Restatement of Declaration of Trust of the Company, as supplemented and amended Incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K of Kite Realty Group Trust filed with the SEC on February 27, 2015
     
3.2 Articles of Amendment to the Articles of Amendment and Restatement of Declaration of Trust of the Company, as supplemented and amended
 Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on May 28, 2015
     
3.3 Second Amended and Restated Bylaws of the Company, as amended  Incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K of Kite Realty Group Trust filed with the SEC on February 27, 2015
     
3.4 First Amendment to the Second Amended and Restated Bylaws of Kite Realty Group Trust, as amended
 Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on May 28, 2015
     
4.1 Form of Common Share Certificate  Incorporated by reference to Exhibit 4.1 to Kite Realty Group Trust's registration statement on Form S-11 (File No. 333-114224) declared effective by the SEC on August 10, 2004
     
4.2 Indenture, dated September 26, 2016, between Kite Realty Group, L.P., as issuer, and U.S. Bank National Association, as trustee Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on September 27, 2016
     
4.3 First Supplemental Indenture, dated September 26, 2016, among Kite Realty Group, L.P., Kite Realty Group Trust, as possible future guarantor, and U.S. Bank National Association Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on September 27, 2016
     
4.4 Form of Global Note representing the Notes Incorporated by reference to Exhibits 4.2 and 4.3 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on September 27, 2016


10.1Fifth Amended and Restated Credit Agreement, dated as of July 28, 2016, by and among Kite Realty Group, L.P., KeyBank National Association, as Administrative Agent, and the other lenders party theretoIncorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on July 29, 2016
10.2First Amended and Restated Springing Guaranty, dated as of July 28, 2016, by Kite Realty Group TrustIncorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on July 29, 2016
10.3First Amendment to Term Loan Agreement, dated as of July 28, 2016, by and among Kite Realty Group, L.P., Kite Realty Group Trust, KeyBank National Association, as Administrative Agent, and the other lenders party theretoIncorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on July 29, 2016
31.1 Certification of principal executive officer of the Parent Company required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
31.2 Certification of principal financial officer of the Parent Company required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
31.3 Certification of principal executive officer of the Operating Partnership required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
31.4 Certification of principal financial officer of the Operating Partnership required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
32.1 Certification of Chief Executive Officer and Chief Financial Officer of the Parent Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
32.2 Certification of Chief Executive Officer and Chief Financial Officer of the Operating Partnership pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
     
101.INS XBRL Instance Document Filed herewith
     
101.SCH XBRL Taxonomy Extension Schema Document Filed herewith
     
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith
     
101.DEF XBRL Taxonomy Extension Definition Linkbase Document Filed herewith
     
101.LAB XBRL Taxonomy Extension Label Linkbase Document Filed herewith
     


101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith



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