UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| ☒ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20222023
or
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| ☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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| Commission File Number: | 001-32268 | Kite Realty Group Trust |
| Commission File Number: | 333-202666-01 | Kite Realty Group, L.P. |
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| KITE REALTY GROUP TRUST |
| KITE REALTY GROUP, L.P. |
| (Exact name of registrant as specified in its charter) |
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| Maryland | | Kite Realty Group Trust | | 11-3715772 |
| Delaware | | Kite Realty Group, L.P. | | 20-1453863 |
| (State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
30 S. Meridian Street, Suite 1100, Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
(317) 577-5600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock,Shares, $0.01 par value per share | | KRG | | New York Stock Exchange |
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.
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| Kite Realty Group Trust | Yes | ☒ | No | o | | Kite Realty Group, L.P. | Yes | ☒ | No | o |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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| Kite Realty Group Trust | Yes | ☒ | No | o | | Kite Realty Group, L.P. | Yes | ☒ | No | o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Kite Realty Group Trust:
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| Large accelerated filer | x | | Accelerated filer | o | | Non-accelerated filer | o | | Smaller reporting company | ☐ |
| | | | | | | | | Emerging growth company | ☐ |
Kite Realty Group, L.P.:
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| Large accelerated filer | o | | Accelerated filer | o | | Non-accelerated filer | x | | Smaller reporting company | ☐ |
| | | | | | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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| Kite Realty Group Trust | o | | Kite Realty Group, L.P. | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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| Kite Realty Group Trust | Yes | ☐ | No | x | | Kite Realty Group, L.P. | Yes | ☐ | No | x |
The number of Common Shares outstanding as of November 2, 2022August 1, 2023 was 219,098,907219,373,084 ($0.01 par value).
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended SeptemberJune 30, 20222023 of Kite Realty Group Trust, Kite Realty Group, L.P. and its subsidiaries. Unless stated otherwise or the context otherwise requires, references to “Kite Realty Group Trust” or the “Parent Company” mean Kite Realty Group Trust, and references to the “Operating Partnership” mean Kite Realty Group, L.P. and its consolidated subsidiaries. The terms “Company,” “we,” “us,” and “our” refer to the Parent Company and the Operating Partnership, collectively, and those entities owned or controlled by the Parent Company and/or the Operating Partnership.
The Operating Partnership is engaged in the ownership, operation, acquisition, development and redevelopment of high-quality, open-air shopping centers and mixed-use assets in select markets in the United States, and the Parent Company conducts substantially all of its activities through the Operating Partnership and its wholly owned subsidiaries. The Parent Company is the sole general partner of the Operating Partnership and as of SeptemberJune 30, 20222023 owned approximately 98.7%98.6% of the common partnership interests in the Operating Partnership (“General Partner Units”). The remaining 1.3%1.4% of the common partnership interests (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”) are owned by the limited partners.
We believe combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into this single report benefits investors by:
•enhancing investors’ understanding of the Parent Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
•eliminating duplicative disclosure and providing a more streamlined and readable presentation of information as a substantial portion of the Company’s disclosure applies to both the Parent Company and the Operating Partnership; and
•creating time and cost efficiencies through the preparation of one combined report instead of two separate reports.
We believe it is important to understand the few differences between the Parent Company and the Operating Partnership in the context of how we operate as an interrelated consolidated company. The Parent Company has no material assets or liabilities other than its investment in the Operating Partnership. The Parent Company issues public equity from time to time but does not have any indebtedness as all debt is incurred by the Operating Partnership. In addition, the Parent Company currently does not nor does it intend to guarantee any debt of the Operating Partnership. The Operating Partnership has numerous wholly owned subsidiaries, and it also owns interests in certain joint ventures. These subsidiaries and joint ventures own and operate retail shopping centers and other real estate assets. The Operating Partnership is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for General Partner Units, the Operating Partnership generates the capital required by the business through its operations, its incurrence of indebtedness and the issuance of Limited Partner Units to third parties.
Shareholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Parent Company and those of the Operating Partnership. In order to highlight this and other differences between the Parent Company and the Operating Partnership, there are separate sections in this report, as applicable, that separately discuss the Parent Company and the Operating Partnership, including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the Parent Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the collective Company.
KITE REALTY GROUP TRUST AND KITE REALTY GROUP, L.P. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20222023
TABLE OF CONTENTS
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| Kite Realty Group Trust | | |
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| Kite Realty Group, L.P. and subsidiaries | | |
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| Kite Realty Group Trust and Kite Realty Group, L.P. and subsidiaries | | |
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KITE REALTY GROUP TRUST
Consolidated Balance Sheets
(Unaudited)
($ in thousands, except share and per share data)
| | | September 30,
2022 | | December 31,
2021 | | June 30,
2023 | | December 31,
2022 |
| Assets: | Assets: | | | | Assets: | | | |
| Investment properties, at cost | Investment properties, at cost | $ | 7,715,516 | | | $ | 7,592,348 | | Investment properties, at cost | $ | 7,670,365 | | | $ | 7,732,573 | |
| Less: accumulated depreciation | Less: accumulated depreciation | (1,093,912) | | | (884,809) | | Less: accumulated depreciation | (1,244,282) | | | (1,161,148) | |
| Net investment properties | Net investment properties | 6,621,604 | | | 6,707,539 | | Net investment properties | 6,426,083 | | | 6,571,425 | |
| | Cash and cash equivalents | Cash and cash equivalents | 88,447 | | | 93,241 | | Cash and cash equivalents | 129,254 | | | 115,799 | |
Tenant and other receivables, including accrued straight-line rent of $40,716 and $28,071, respectively | 86,593 | | | 68,444 | | |
Tenant and other receivables, including accrued straight-line rent of $51,355 and $44,460, respectively | | Tenant and other receivables, including accrued straight-line rent of $51,355 and $44,460, respectively | 109,552 | | | 101,301 | |
| Restricted cash and escrow deposits | Restricted cash and escrow deposits | 8,060 | | | 7,122 | | Restricted cash and escrow deposits | 5,700 | | | 6,171 | |
| Deferred costs, net | Deferred costs, net | 441,924 | | | 541,518 | | Deferred costs, net | 353,714 | | | 409,828 | |
| Short-term deposits | — | | | 125,000 | | |
| | Prepaid and other assets | Prepaid and other assets | 142,757 | | | 84,826 | | Prepaid and other assets | 130,485 | | | 127,044 | |
| Investments in unconsolidated subsidiaries | Investments in unconsolidated subsidiaries | 10,560 | | | 11,885 | | Investments in unconsolidated subsidiaries | 10,311 | | | 10,414 | |
| | Total assets | Total assets | $ | 7,399,945 | | | $ | 7,639,575 | | Total assets | $ | 7,165,099 | | | $ | 7,341,982 | |
| | Liabilities and Equity: | Liabilities and Equity: | | | | Liabilities and Equity: | | | |
| Liabilities: | Liabilities: | | Liabilities: | |
| Mortgage and other indebtedness, net | Mortgage and other indebtedness, net | $ | 3,012,870 | | | $ | 3,150,808 | | Mortgage and other indebtedness, net | $ | 2,937,963 | | | $ | 3,010,299 | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | 152,015 | | | 184,982 | | Accounts payable and accrued expenses | 178,227 | | | 207,792 | |
| Deferred revenue and other liabilities | Deferred revenue and other liabilities | 300,009 | | | 321,419 | | Deferred revenue and other liabilities | 289,671 | | | 298,039 | |
| | Total liabilities | Total liabilities | 3,464,894 | | | 3,657,209 | | Total liabilities | 3,405,861 | | | 3,516,130 | |
| | Commitments and contingencies | Commitments and contingencies | | Commitments and contingencies | |
| Limited Partners’ interests in Operating Partnership and other | 56,954 | | | 55,173 | | |
| Limited Partners’ interests in the Operating Partnership | | Limited Partners’ interests in the Operating Partnership | 60,927 | | | 53,967 | |
| | Equity: | Equity: | | | | Equity: | | | |
Common shares, $0.01 par value, 490,000,000 shares authorized, 219,098,394 and 218,949,569 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 2,191 | | | 2,189 | | |
Common shares, $0.01 par value, 490,000,000 shares authorized, 219,374,275 and 219,185,658 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | | Common shares, $0.01 par value, 490,000,000 shares authorized, 219,374,275 and 219,185,658 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | 2,194 | | | 2,192 | |
| Additional paid-in capital | Additional paid-in capital | 4,903,773 | | | 4,898,673 | | Additional paid-in capital | 4,894,907 | | | 4,897,736 | |
| Accumulated other comprehensive income (loss) | 72,693 | | | (15,902) | | |
| Accumulated other comprehensive income | | Accumulated other comprehensive income | 71,323 | | | 74,344 | |
| Accumulated deficit | Accumulated deficit | (1,105,845) | | | (962,913) | | Accumulated deficit | (1,275,617) | | | (1,207,757) | |
| Total shareholders’ equity | Total shareholders’ equity | 3,872,812 | | | 3,922,047 | | Total shareholders’ equity | 3,692,807 | | | 3,766,515 | |
| Noncontrolling interests | Noncontrolling interests | 5,285 | | | 5,146 | | Noncontrolling interests | 5,504 | | | 5,370 | |
| Total equity | Total equity | 3,878,097 | | | 3,927,193 | | Total equity | 3,698,311 | | | 3,771,885 | |
| Total liabilities and equity | Total liabilities and equity | $ | 7,399,945 | | | $ | 7,639,575 | | Total liabilities and equity | $ | 7,165,099 | | | $ | 7,341,982 | |
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, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Revenue: | Revenue: | | | | | | | | Revenue: | | | | | | | |
| Rental income | Rental income | $ | 195,675 | | | $ | 70,216 | | | $ | 582,772 | | | $ | 206,097 | | Rental income | $ | 205,836 | | | $ | 196,205 | | | $ | 408,899 | | | $ | 387,097 | |
| Other property-related revenue | Other property-related revenue | 3,013 | | | 1,054 | | | 7,932 | | | 3,133 | | Other property-related revenue | 1,883 | | | 3,729 | | | 3,799 | | | 4,919 | |
| Fee income | Fee income | 1,623 | | | 195 | | | 6,603 | | | 1,144 | | Fee income | 1,040 | | | 2,671 | | | 2,811 | | | 4,980 | |
| Total revenue | Total revenue | 200,311 | | | 71,465 | | | 597,307 | | | 210,374 | | Total revenue | 208,759 | | | 202,605 | | | 415,509 | | | 396,996 | |
| | Expenses: | Expenses: | | Expenses: | |
| Property operating | Property operating | 25,507 | | | 10,482 | | | 77,558 | | | 30,978 | | Property operating | 27,232 | | | 26,123 | | | 54,546 | | | 52,051 | |
| Real estate taxes | Real estate taxes | 25,703 | | | 8,624 | | | 80,445 | | | 26,574 | | Real estate taxes | 26,697 | | | 27,883 | | | 53,880 | | | 54,742 | |
| General, administrative and other | General, administrative and other | 14,859 | | | 8,241 | | | 41,977 | | | 23,676 | | General, administrative and other | 14,499 | | | 13,809 | | | 27,883 | | | 27,118 | |
| Merger and acquisition costs | Merger and acquisition costs | 108 | | | 9,198 | | | 1,006 | | | 9,958 | | Merger and acquisition costs | — | | | (27) | | | — | | | 898 | |
| Depreciation and amortization | Depreciation and amortization | 115,831 | | | 30,193 | | | 357,096 | | | 90,625 | | Depreciation and amortization | 109,462 | | | 119,761 | | | 217,533 | | | 241,265 | |
| | Total expenses | Total expenses | 182,008 | | | 66,738 | | | 558,082 | | | 181,811 | | Total expenses | 177,890 | | | 187,549 | | | 353,842 | | | 376,074 | |
| | Gain on sales of operating properties, net | Gain on sales of operating properties, net | — | | | 1,260 | | | 27,126 | | | 27,517 | | Gain on sales of operating properties, net | 28,440 | | | 23,958 | | | 28,440 | | | 27,126 | |
| | Operating income | Operating income | 18,303 | | | 5,987 | | | 66,351 | | | 56,080 | | Operating income | 59,309 | | | 39,014 | | | 90,107 | | | 48,048 | |
| Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
| Interest expense | Interest expense | (26,226) | | | (12,878) | | | (77,449) | | | (37,386) | | Interest expense | (27,205) | | | (25,709) | | | (52,630) | | | (51,223) | |
| Income tax benefit of taxable REIT subsidiary | — | | | 91 | | | 259 | | | 308 | | |
| Income tax (expense) benefit of taxable REIT subsidiary | | Income tax (expense) benefit of taxable REIT subsidiary | (45) | | | 188 | | | (16) | | | 259 | |
| | Equity in earnings (loss) of unconsolidated subsidiaries | Equity in earnings (loss) of unconsolidated subsidiaries | 144 | | | (196) | | | (56) | | | (758) | | Equity in earnings (loss) of unconsolidated subsidiaries | 118 | | | 114 | | | (126) | | | (200) | |
| Other income (expense), net | Other income (expense), net | 58 | | | 168 | | | (207) | | | 189 | | Other income (expense), net | 304 | | | (162) | | | 707 | | | (265) | |
| Net (loss) income | (7,721) | | | (6,828) | | | (11,102) | | | 18,433 | | |
| Net income (loss) | | Net income (loss) | 32,481 | | | 13,445 | | | 38,042 | | | (3,381) | |
| Net income attributable to noncontrolling interests | Net income attributable to noncontrolling interests | (116) | | | (132) | | | (408) | | | (1,058) | | Net income attributable to noncontrolling interests | (423) | | | (314) | | | (593) | | | (292) | |
| Net (loss) income attributable to common shareholders | $ | (7,837) | | | $ | (6,960) | | | $ | (11,510) | | | $ | 17,375 | | |
| Net income (loss) attributable to common shareholders | | Net income (loss) attributable to common shareholders | $ | 32,058 | | | $ | 13,131 | | | $ | 37,449 | | | $ | (3,673) | |
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| Net (loss) income per common share – basic | $ | (0.04) | | | $ | (0.08) | | | $ | (0.05) | | | $ | 0.21 | | |
| Net (loss) income per common share – diluted | $ | (0.04) | | | $ | (0.08) | | | $ | (0.05) | | | $ | 0.20 | | |
| Net income (loss) per common share – basic and diluted | | Net income (loss) per common share – basic and diluted | $ | 0.15 | | | $ | 0.06 | | | $ | 0.17 | | | $ | (0.02) | |
| | | Weighted average common shares outstanding – basic | Weighted average common shares outstanding – basic | 219,103,669 | | | 84,556,689 | | | 219,053,320 | | | 84,468,519 | | Weighted average common shares outstanding – basic | 219,354,275 | | | 219,073,778 | | | 219,294,255 | | | 219,027,729 | |
| Weighted average common shares outstanding – diluted | Weighted average common shares outstanding – diluted | 219,103,669 | | | 84,556,689 | | | 219,053,320 | | | 85,383,849 | | Weighted average common shares outstanding – diluted | 220,032,366 | | | 219,744,300 | | | 219,999,440 | | | 219,027,729 | |
| | Dividends declared per common share | $ | 0.21 | | | $ | 0.18 | | | $ | 0.60 | | | $ | 0.50 | | |
| | Net (loss) income | $ | (7,721) | | | $ | (6,828) | | | $ | (11,102) | | | $ | 18,433 | | |
| | Net income (loss) | | Net income (loss) | $ | 32,481 | | | $ | 13,445 | | | $ | 38,042 | | | $ | (3,381) | |
| Change in fair value of derivatives | Change in fair value of derivatives | 33,131 | | | 1,919 | | | 89,628 | | | 8,653 | | Change in fair value of derivatives | 8,642 | | | 17,559 | | | (3,003) | | | 56,497 | |
| Total comprehensive income (loss) | 25,410 | | | (4,909) | | | 78,526 | | | 27,086 | | |
| Total comprehensive income | | Total comprehensive income | 41,123 | | | 31,004 | | | 35,039 | | | 53,116 | |
Comprehensive income attributable to noncontrolling interests | Comprehensive income attributable to noncontrolling interests | (511) | | | (173) | | | (1,441) | | | (1,302) | | Comprehensive income attributable to noncontrolling interests | (529) | | | (727) | | | (611) | | | (930) | |
| Comprehensive income (loss) attributable to the Company | $ | 24,899 | | | $ | (5,082) | | | $ | 77,085 | | | $ | 25,784 | | |
| Comprehensive income attributable to the Company | | Comprehensive income attributable to the Company | $ | 40,594 | | | $ | 30,277 | | | $ | 34,428 | | | $ | 52,186 | |
The accompanying notes are an integral part of these consolidated financial statements.
KITE REALTY GROUP TRUST
Consolidated Statements of Shareholders’ Equity
(Unaudited)
(in thousands, except share data)
| | | | Common Shares | | Additional
Paid-in Capital | | Accumulated
Other
Comprehensive
(Loss) Income | | Accumulated
Deficit | | Total | | Common Shares | | Additional
Paid-in Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated
Deficit | | Total |
| | | Shares | | Amount | | | Shares | | Amount | |
| Balance at December 31, 2021 | 218,949,569 | | | $ | 2,189 | | | $ | 4,898,673 | | | $ | (15,902) | | | $ | (962,913) | | | $ | 3,922,047 | | |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | 219,185,658 | | | $ | 2,192 | | | $ | 4,897,736 | | | $ | 74,344 | | | $ | (1,207,757) | | | $ | 3,766,515 | |
| Stock compensation activity | Stock compensation activity | 93,334 | | | 1 | | | 1,821 | | | — | | | — | | | 1,822 | | Stock compensation activity | 140,240 | | | 1 | | | 2,134 | | | — | | | — | | | 2,135 | |
| Other comprehensive income | — | | | — | | | — | | | 38,713 | | | — | | | 38,713 | | |
| Distributions declared to common shareholders | — | | | — | | | — | | | — | | | (41,600) | | | (41,600) | | |
| Net loss attributable to common shareholders | — | | | — | | | — | | | — | | | (16,804) | | | (16,804) | | |
| | Adjustment to redeemable noncontrolling interests | — | | | — | | | (5,597) | | | — | | | — | | | (5,597) | | |
| Balance at March 31, 2022 | 219,042,903 | | | $ | 2,190 | | | $ | 4,894,897 | | | $ | 22,811 | | | $ | (1,021,317) | | | $ | 3,898,581 | | |
| Stock compensation activity | 58,095 | | | 1 | | | 2,850 | | | — | | | — | | | 2,851 | | |
| Other comprehensive income | — | | | — | | | 17,146 | | | — | | | 17,146 | | |
| Distributions declared to common shareholders | — | | | — | | | — | | | — | | | (43,808) | | | (43,808) | | |
| Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | (11,557) | | | — | | | (11,557) | |
| Distributions to common shareholders | | Distributions to common shareholders | — | | | — | | | — | | | — | | | (52,659) | | | (52,659) | |
| Net income attributable to common shareholders | Net income attributable to common shareholders | — | | | — | | | — | | | — | | | 13,131 | | | 13,131 | | Net income attributable to common shareholders | — | | | — | | | — | | | — | | | 5,391 | | | 5,391 | |
| | Adjustment to redeemable noncontrolling interests | Adjustment to redeemable noncontrolling interests | — | | | — | | | 3,239 | | | — | | | — | | | 3,239 | | Adjustment to redeemable noncontrolling interests | — | | | — | | | (3,821) | | | — | | | — | | | (3,821) | |
| Balance at June 30, 2022 | 219,100,998 | | | $ | 2,191 | | | $ | 4,900,986 | | | $ | 39,957 | | | $ | (1,051,994) | | | $ | 3,891,140 | | |
| Balance at March 31, 2023 | | Balance at March 31, 2023 | 219,325,898 | | | $ | 2,193 | | | $ | 4,896,049 | | | $ | 62,787 | | | $ | (1,255,025) | | | $ | 3,706,004 | |
| Stock compensation activity | Stock compensation activity | (2,604) | | | — | | | 2,881 | | | — | | | — | | | 2,881 | | Stock compensation activity | 48,377 | | | 1 | | | 2,959 | | | — | | | — | | | 2,960 | |
| Other comprehensive income | Other comprehensive income | — | | | — | | | — | | | 32,736 | | | — | | | 32,736 | | Other comprehensive income | — | | | — | | | — | | | 8,536 | | | — | | | 8,536 | |
| Distributions declared to common shareholders | — | | | — | | | — | | | — | | | (46,014) | | | (46,014) | | |
| Net loss attributable to common shareholders | — | | | — | | | — | | | — | | | (7,837) | | | (7,837) | | |
| Distributions to common shareholders | | Distributions to common shareholders | — | | | — | | | — | | | — | | | (52,650) | | | (52,650) | |
| Net income attributable to common shareholders | | Net income attributable to common shareholders | — | | | — | | | — | | | — | | | 32,058 | | | 32,058 | |
| | Adjustment to redeemable noncontrolling interests | Adjustment to redeemable noncontrolling interests | — | | | — | | | (94) | | | — | | | — | | | (94) | | Adjustment to redeemable noncontrolling interests | — | | | — | | | (4,101) | | | — | | | — | | | (4,101) | |
| Balances, September 30, 2022 | 219,098,394 | | | $ | 2,191 | | | $ | 4,903,773 | | | $ | 72,693 | | | $ | (1,105,845) | | | $ | 3,872,812 | | |
| Balance at June 30, 2023 | | Balance at June 30, 2023 | 219,374,275 | | | $ | 2,194 | | | $ | 4,894,907 | | | $ | 71,323 | | | $ | (1,275,617) | | | $ | 3,692,807 | |
|
| | | | Balance at December 31, 2020 | 84,187,999 | | | $ | 842 | | | $ | 2,085,003 | | | $ | (30,885) | | | $ | (824,306) | | | $ | 1,230,654 | | |
| Stock compensation activity | 182,486 | | | 2 | | | 1,464 | | | — | | | — | | | 1,466 | | |
| Other comprehensive income | — | | | — | | | — | | | 6,537 | | | — | | | 6,537 | | |
| Distributions declared to common shareholders | — | | | — | | | — | | | — | | | (12,992) | | | (12,992) | | |
| Net income attributable to common shareholders | — | | | — | | | — | | | — | | | 24,577 | | | 24,577 | | |
| Purchase of capped calls | — | | | — | | | (9,800) | | | — | | | — | | | (9,800) | | |
| Exchange of redeemable noncontrolling interests for common shares | 115,697 | | | 1 | | | 2,061 | | | — | | | — | | | 2,062 | | |
| Adjustment to redeemable noncontrolling interests | — | | | — | | | (10,633) | | | — | | | — | | | (10,633) | | |
| Balance at March 31, 2021 | 84,486,182 | | | $ | 845 | | | $ | 2,068,095 | | | $ | (24,348) | | | $ | (812,721) | | | $ | 1,231,871 | | |
| Stock compensation activity | 35,467 | | | — | | | 1,977 | | | — | | | — | | | 1,977 | | |
| Other comprehensive loss | — | | | — | | | — | | | (6) | | | — | | | (6) | | |
| Distributions declared to common shareholders | — | | | — | | | — | | | — | | | (14,363) | | | (14,363) | | |
| Net loss attributable to common shareholders | — | | | — | | | — | | | — | | | (242) | | | (242) | | |
| Exchange of redeemable noncontrolling interests for common shares | 25,000 | | | — | | | 530 | | | — | | | — | | | 530 | | |
| Adjustment to redeemable noncontrolling interests | — | | | — | | | (6,292) | | | — | | | — | | | (6,292) | | |
| Balance at June 30, 2021 | 84,546,649 | | | $ | 845 | | | $ | 2,064,310 | | | $ | (24,354) | | | $ | (827,326) | | | $ | 1,213,475 | | |
| Balance at December 31, 2021 | | Balance at December 31, 2021 | 218,949,569 | | | $ | 2,189 | | | $ | 4,898,673 | | | $ | (15,902) | | | $ | (962,913) | | | $ | 3,922,047 | |
| Stock compensation activity | Stock compensation activity | 2,254 | | | — | | | 1,989 | | | — | | | — | | | 1,989 | | Stock compensation activity | 93,334 | | | 1 | | | 1,821 | | | — | | | — | | | 1,822 | |
| Other comprehensive income | Other comprehensive income | — | | | — | | | — | | | 1,878 | | | — | | | 1,878 | | Other comprehensive income | — | | | — | | | — | | | 38,713 | | | — | | | 38,713 | |
| Distributions to common shareholders | Distributions to common shareholders | — | | | — | | | — | | | — | | | (15,221) | | | (15,221) | | Distributions to common shareholders | — | | | — | | | — | | | — | | | (41,600) | | | (41,600) | |
| Net loss attributable to common shareholders | Net loss attributable to common shareholders | — | | | — | | | — | | | — | | | (6,960) | | | (6,960) | | Net loss attributable to common shareholders | — | | | — | | | — | | | — | | | (16,804) | | | (16,804) | |
| Exchange of redeemable noncontrolling interests for common shares | 26,538 | | | 1 | | | 536 | | | — | | | — | | | 537 | | |
| | Adjustment to redeemable noncontrolling interests | Adjustment to redeemable noncontrolling interests | — | | | — | | | 3,148 | | | — | | | — | | | 3,148 | | Adjustment to redeemable noncontrolling interests | — | | | — | | | (5,597) | | | — | | | — | | | (5,597) | |
| Balance at September 30, 2021 | 84,575,441 | | | $ | 846 | | | $ | 2,069,983 | | | $ | (22,476) | | | $ | (849,507) | | | $ | 1,198,846 | | |
| Balance at March 31, 2022 | | Balance at March 31, 2022 | 219,042,903 | | | $ | 2,190 | | | $ | 4,894,897 | | | $ | 22,811 | | | $ | (1,021,317) | | | $ | 3,898,581 | |
| Stock compensation activity | | Stock compensation activity | 58,095 | | | 1 | | | 2,850 | | | — | | | — | | | 2,851 | |
| Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | 17,146 | | | — | | | 17,146 | |
| Distributions to common shareholders | | Distributions to common shareholders | — | | | — | | | — | | | — | | | (43,808) | | | (43,808) | |
| Net income attributable to common shareholders | | Net income attributable to common shareholders | — | | | — | | | — | | | — | | | 13,131 | | | 13,131 | |
| | Adjustment to redeemable noncontrolling interests | | Adjustment to redeemable noncontrolling interests | — | | | — | | | 3,239 | | | — | | | — | | | 3,239 | |
| Balance at June 30, 2022 | | Balance at June 30, 2022 | 219,100,998 | | | $ | 2,191 | | | $ | 4,900,986 | | | $ | 39,957 | | | $ | (1,051,994) | | | $ | 3,891,140 | |
|
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, |
| | | 2022 | | 2021 | | 2023 | | 2022 |
| Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
| Net (loss) income | $ | (11,102) | | | $ | 18,433 | | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
| Net income (loss) | | Net income (loss) | $ | 38,042 | | | $ | (3,381) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| Depreciation and amortization | Depreciation and amortization | 359,265 | | | 92,587 | | Depreciation and amortization | 219,315 | | | 242,634 | |
| Gain on sales of operating properties, net | Gain on sales of operating properties, net | (27,126) | | | (27,517) | | Gain on sales of operating properties, net | (28,440) | | | (27,126) | |
| | Straight-line rent | Straight-line rent | (12,653) | | | (1,215) | | Straight-line rent | (6,958) | | | (8,359) | |
| Compensation expense for equity awards | Compensation expense for equity awards | 8,209 | | | 5,667 | | Compensation expense for equity awards | 5,133 | | | 5,603 | |
| Amortization of debt fair value adjustments | Amortization of debt fair value adjustments | (10,204) | | | (333) | | Amortization of debt fair value adjustments | (6,688) | | | (6,835) | |
| Amortization of in-place lease liabilities | Amortization of in-place lease liabilities | (3,143) | | | (1,432) | | Amortization of in-place lease liabilities | (5,375) | | | (1,915) | |
| Changes in assets and liabilities: | Changes in assets and liabilities: | | | Changes in assets and liabilities: | | |
| Tenant receivables | Tenant receivables | (7,021) | | | 8,449 | | Tenant receivables | 268 | | | (1,447) | |
| Deferred costs and other assets | Deferred costs and other assets | (15,691) | | | (1,951) | | Deferred costs and other assets | (14,074) | | | (4,257) | |
| Accounts payable, accrued expenses, deferred revenue and other liabilities | Accounts payable, accrued expenses, deferred revenue and other liabilities | (18,105) | | | 11,143 | | Accounts payable, accrued expenses, deferred revenue and other liabilities | (20,798) | | | (40,595) | |
| Net cash provided by operating activities | Net cash provided by operating activities | 262,429 | | | 103,831 | | Net cash provided by operating activities | 180,425 | | | 154,322 | |
| | Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
| Acquisitions of interests in properties | Acquisitions of interests in properties | (100,142) | | | — | | Acquisitions of interests in properties | — | | | (65,765) | |
| Capital expenditures | Capital expenditures | (106,536) | | | (36,935) | | Capital expenditures | (67,767) | | | (58,731) | |
| Net proceeds from sales of land | Net proceeds from sales of land | 3,680 | | | 47,706 | | Net proceeds from sales of land | 917 | | | 1,935 | |
| Net proceeds from sales of operating properties | Net proceeds from sales of operating properties | 65,408 | | | 2,484 | | Net proceeds from sales of operating properties | 78,556 | | | 65,408 | |
| Investment in short-term deposits | Investment in short-term deposits | 125,000 | | | (125,000) | | Investment in short-term deposits | — | | | 125,000 | |
| Small business loan repayments | Small business loan repayments | 513 | | | 541 | | Small business loan repayments | 287 | | | 372 | |
| Change in construction payables | Change in construction payables | (2,636) | | | 2,141 | | Change in construction payables | (3,980) | | | (717) | |
| Distribution from unconsolidated joint venture | Distribution from unconsolidated joint venture | 1,144 | | | — | | Distribution from unconsolidated joint venture | — | | | 1,144 | |
| Capital contribution to unconsolidated joint venture | (125) | | | — | | |
| Net cash used in investing activities | (13,694) | | | (109,063) | | |
| | Net cash provided by investing activities | | Net cash provided by investing activities | 8,013 | | | 68,646 | |
| | Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
| Proceeds from issuance of common shares, net | Proceeds from issuance of common shares, net | 20 | | | 31 | | Proceeds from issuance of common shares, net | 40 | | | 20 | |
| Repurchases of common shares upon the vesting of restricted shares | Repurchases of common shares upon the vesting of restricted shares | (1,144) | | | (458) | | Repurchases of common shares upon the vesting of restricted shares | (731) | | | (1,144) | |
| Purchase of capped calls | — | | | (9,800) | | |
| Debt and equity issuance costs | Debt and equity issuance costs | (4,922) | | | (6,017) | | Debt and equity issuance costs | (54) | | | (662) | |
| Loan proceeds | Loan proceeds | 445,000 | | | 175,000 | | Loan proceeds | 293,095 | | | 120,000 | |
| Loan payments | Loan payments | (558,151) | | | (52,096) | | Loan payments | (361,162) | | | (255,766) | |
| | Distributions paid – common shareholders | Distributions paid – common shareholders | (131,422) | | | (42,576) | | Distributions paid – common shareholders | (105,243) | | | (85,408) | |
| Distributions paid – redeemable noncontrolling interests | Distributions paid – redeemable noncontrolling interests | (1,972) | | | (1,639) | | Distributions paid – redeemable noncontrolling interests | (1,399) | | | (1,219) | |
| Net cash (used in) provided by financing activities | (252,591) | | | 62,445 | | |
| Net cash used in financing activities | | Net cash used in financing activities | (175,454) | | | (224,179) | |
| | Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | (3,856) | | | 57,213 | | Net change in cash, cash equivalents and restricted cash | 12,984 | | | (1,211) | |
| Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | 100,363 | | | 46,586 | | Cash, cash equivalents and restricted cash, beginning of period | 121,970 | | | 100,363 | |
| Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | $ | 96,507 | | | $ | 103,799 | | Cash, cash equivalents and restricted cash, end of period | $ | 134,954 | | | $ | 99,152 | |
| | Non-cash investing and financing activities | | |
| Exchange of redeemable noncontrolling interests for common shares | $ | — | | | $ | 3,129 | | |
|
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,
2022 | | December 31,
2021 | | June 30,
2023 | | December 31,
2022 |
| Assets: | Assets: | | | | Assets: | | | |
| Investment properties, at cost | Investment properties, at cost | $ | 7,715,516 | | | $ | 7,592,348 | | Investment properties, at cost | $ | 7,670,365 | | | $ | 7,732,573 | |
| Less: accumulated depreciation | Less: accumulated depreciation | (1,093,912) | | | (884,809) | | Less: accumulated depreciation | (1,244,282) | | | (1,161,148) | |
| Net investment properties | Net investment properties | 6,621,604 | | | 6,707,539 | | Net investment properties | 6,426,083 | | | 6,571,425 | |
| | Cash and cash equivalents | Cash and cash equivalents | 88,447 | | | 93,241 | | Cash and cash equivalents | 129,254 | | | 115,799 | |
Tenant and other receivables, including accrued straight-line rent of $40,716 and $28,071, respectively | 86,593 | | | 68,444 | | |
Tenant and other receivables, including accrued straight-line rent of $51,355 and $44,460, respectively | | Tenant and other receivables, including accrued straight-line rent of $51,355 and $44,460, respectively | 109,552 | | | 101,301 | |
| Restricted cash and escrow deposits | Restricted cash and escrow deposits | 8,060 | | | 7,122 | | Restricted cash and escrow deposits | 5,700 | | | 6,171 | |
| Deferred costs, net | Deferred costs, net | 441,924 | | | 541,518 | | Deferred costs, net | 353,714 | | | 409,828 | |
| Short-term deposits | — | | | 125,000 | | |
| | Prepaid and other assets | Prepaid and other assets | 142,757 | | | 84,826 | | Prepaid and other assets | 130,485 | | | 127,044 | |
| Investments in unconsolidated subsidiaries | Investments in unconsolidated subsidiaries | 10,560 | | | 11,885 | | Investments in unconsolidated subsidiaries | 10,311 | | | 10,414 | |
| | Total assets | Total assets | $ | 7,399,945 | | | $ | 7,639,575 | | Total assets | $ | 7,165,099 | | | $ | 7,341,982 | |
| | Liabilities and Equity: | Liabilities and Equity: | | | Liabilities and Equity: | | |
| Liabilities: | Liabilities: | | Liabilities: | |
| Mortgage and other indebtedness, net | Mortgage and other indebtedness, net | $ | 3,012,870 | | | $ | 3,150,808 | | Mortgage and other indebtedness, net | $ | 2,937,963 | | | $ | 3,010,299 | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | 152,015 | | | 184,982 | | Accounts payable and accrued expenses | 178,227 | | | 207,792 | |
| Deferred revenue and other liabilities | Deferred revenue and other liabilities | 300,009 | | | 321,419 | | Deferred revenue and other liabilities | 289,671 | | | 298,039 | |
| | Total liabilities | Total liabilities | 3,464,894 | | | 3,657,209 | | Total liabilities | 3,405,861 | | | 3,516,130 | |
| | Commitments and contingencies | Commitments and contingencies | | Commitments and contingencies | |
| Limited Partners’ interests in Operating Partnership and other | 56,954 | | | 55,173 | | |
| Limited Partners’ interests in the Operating Partnership | | Limited Partners’ interests in the Operating Partnership | 60,927 | | | 53,967 | |
| | Partners’ Equity: | Partners’ Equity: | | Partners’ Equity: | |
Common equity, 219,098,394 and 218,949,569 units issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 3,800,119 | | | 3,937,949 | | |
| Accumulated other comprehensive income (loss) | 72,693 | | | (15,902) | | |
Common equity, 219,374,275 and 219,185,658 units issued and outstanding at June 30, 2023 and December 31, 2022, respectively | | Common equity, 219,374,275 and 219,185,658 units issued and outstanding at June 30, 2023 and December 31, 2022, respectively | 3,621,484 | | | 3,692,171 | |
| Accumulated other comprehensive income | | Accumulated other comprehensive income | 71,323 | | | 74,344 | |
| Total Partners’ equity | Total Partners’ equity | 3,872,812 | | | 3,922,047 | | Total Partners’ equity | 3,692,807 | | | 3,766,515 | |
| Noncontrolling interests | Noncontrolling interests | 5,285 | | | 5,146 | | Noncontrolling interests | 5,504 | | | 5,370 | |
| Total equity | Total equity | 3,878,097 | | | 3,927,193 | | Total equity | 3,698,311 | | | 3,771,885 | |
| Total liabilities and equity | Total liabilities and equity | $ | 7,399,945 | | | $ | 7,639,575 | | Total liabilities and equity | $ | 7,165,099 | | | $ | 7,341,982 | |
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, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Revenue: | Revenue: | | | | | | | | Revenue: | | | | | | | |
| Rental income | Rental income | $ | 195,675 | | | $ | 70,216 | | | $ | 582,772 | | | $ | 206,097 | | Rental income | $ | 205,836 | | | $ | 196,205 | | | $ | 408,899 | | | $ | 387,097 | |
| Other property-related revenue | Other property-related revenue | 3,013 | | | 1,054 | | | 7,932 | | | 3,133 | | Other property-related revenue | 1,883 | | | 3,729 | | | 3,799 | | | 4,919 | |
| Fee income | Fee income | 1,623 | | | 195 | | | 6,603 | | | 1,144 | | Fee income | 1,040 | | | 2,671 | | | 2,811 | | | 4,980 | |
| Total revenue | Total revenue | 200,311 | | | 71,465 | | | 597,307 | | | 210,374 | | Total revenue | 208,759 | | | 202,605 | | | 415,509 | | | 396,996 | |
| | Expenses: | Expenses: | | | | | | Expenses: | | | | | |
| Property operating | Property operating | 25,507 | | | 10,482 | | | 77,558 | | | 30,978 | | Property operating | 27,232 | | | 26,123 | | | 54,546 | | | 52,051 | |
| Real estate taxes | Real estate taxes | 25,703 | | | 8,624 | | | 80,445 | | | 26,574 | | Real estate taxes | 26,697 | | | 27,883 | | | 53,880 | | | 54,742 | |
| General, administrative and other | General, administrative and other | 14,859 | | | 8,241 | | | 41,977 | | | 23,676 | | General, administrative and other | 14,499 | | | 13,809 | | | 27,883 | | | 27,118 | |
| Merger and acquisition costs | Merger and acquisition costs | 108 | | | 9,198 | | | 1,006 | | | 9,958 | | Merger and acquisition costs | — | | | (27) | | | — | | | 898 | |
| Depreciation and amortization | Depreciation and amortization | 115,831 | | | 30,193 | | | 357,096 | | | 90,625 | | Depreciation and amortization | 109,462 | | | 119,761 | | | 217,533 | | | 241,265 | |
| | Total expenses | Total expenses | 182,008 | | | 66,738 | | | 558,082 | | | 181,811 | | Total expenses | 177,890 | | | 187,549 | | | 353,842 | | | 376,074 | |
| | Gain on sales of operating properties, net | Gain on sales of operating properties, net | — | | | 1,260 | | | 27,126 | | | 27,517 | | Gain on sales of operating properties, net | 28,440 | | | 23,958 | | | 28,440 | | | 27,126 | |
| | Operating income | Operating income | 18,303 | | | 5,987 | | | 66,351 | | | 56,080 | | Operating income | 59,309 | | | 39,014 | | | 90,107 | | | 48,048 | |
| Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
| Interest expense | Interest expense | (26,226) | | | (12,878) | | | (77,449) | | | (37,386) | | Interest expense | (27,205) | | | (25,709) | | | (52,630) | | | (51,223) | |
| Income tax benefit of taxable REIT subsidiary | — | | | 91 | | | 259 | | | 308 | | |
| Income tax (expense) benefit of taxable REIT subsidiary | | Income tax (expense) benefit of taxable REIT subsidiary | (45) | | | 188 | | | (16) | | | 259 | |
| | Equity in earnings (loss) of unconsolidated subsidiaries | Equity in earnings (loss) of unconsolidated subsidiaries | 144 | | | (196) | | | (56) | | | (758) | | Equity in earnings (loss) of unconsolidated subsidiaries | 118 | | | 114 | | | (126) | | | (200) | |
| Other income (expense), net | Other income (expense), net | 58 | | | 168 | | | (207) | | | 189 | | Other income (expense), net | 304 | | | (162) | | | 707 | | | (265) | |
| Net (loss) income | (7,721) | | | (6,828) | | | (11,102) | | | 18,433 | | |
| Net income (loss) | | Net income (loss) | 32,481 | | | 13,445 | | | 38,042 | | | (3,381) | |
| Net income attributable to noncontrolling interests | Net income attributable to noncontrolling interests | (209) | | | (132) | | | (535) | | | (396) | | Net income attributable to noncontrolling interests | (30) | | | (182) | | | (134) | | | (326) | |
| Net (loss) income attributable to common unitholders | $ | (7,930) | | | $ | (6,960) | | | $ | (11,637) | | | $ | 18,037 | | |
| Net income (loss) attributable to common unitholders | | Net income (loss) attributable to common unitholders | $ | 32,451 | | | $ | 13,263 | | | $ | 37,908 | | | $ | (3,707) | |
| | Allocation of net (loss) income: | | |
| Allocation of net income (loss): | | Allocation of net income (loss): | |
| Limited Partners | Limited Partners | $ | (93) | | | $ | — | | | $ | (127) | | | $ | 662 | | Limited Partners | $ | 393 | | | $ | 132 | | | $ | 459 | | | $ | (34) | |
| Parent Company | Parent Company | (7,837) | | | (6,960) | | | (11,510) | | | 17,375 | | Parent Company | 32,058 | | | 13,131 | | | 37,449 | | | (3,673) | |
| | $ | (7,930) | | | $ | (6,960) | | | $ | (11,637) | | | $ | 18,037 | | | $ | 32,451 | | | $ | 13,263 | | | $ | 37,908 | | | $ | (3,707) | |
| | Net (loss) income per common unit – basic and diluted | $ | (0.04) | | | $ | (0.08) | | | $ | (0.05) | | | $ | 0.21 | | |
| Net income (loss) per common unit – basic and diluted | | Net income (loss) per common unit – basic and diluted | $ | 0.15 | | | $ | 0.06 | | | $ | 0.17 | | | $ | (0.02) | |
| | | Weighted average common units outstanding – basic | Weighted average common units outstanding – basic | 222,059,366 | | | 87,003,748 | | | 221,791,428 | | | 86,951,170 | | Weighted average common units outstanding – basic | 222,388,487 | | | 221,879,784 | | | 222,287,815 | | | 221,655,238 | |
| Weighted average common units outstanding – diluted | Weighted average common units outstanding – diluted | 222,059,366 | | | 87,003,748 | | | 221,791,428 | | | 87,866,501 | | Weighted average common units outstanding – diluted | 223,066,578 | | | 222,550,306 | | | 222,993,000 | | | 221,655,238 | |
| | Distributions declared per common unit | $ | 0.21 | | | $ | 0.18 | | | $ | 0.60 | | | $ | 0.50 | | |
| | Net (loss) income | $ | (7,721) | | | $ | (6,828) | | | $ | (11,102) | | | $ | 18,433 | | |
| | Net income (loss) | | Net income (loss) | $ | 32,481 | | | $ | 13,445 | | | $ | 38,042 | | | $ | (3,381) | |
| Change in fair value of derivatives | Change in fair value of derivatives | 33,131 | | | 1,919 | | | 89,628 | | | 8,653 | | Change in fair value of derivatives | 8,642 | | | 17,559 | | | (3,003) | | | 56,497 | |
| Total comprehensive income (loss) | 25,410 | | | (4,909) | | | 78,526 | | | 27,086 | | |
| Total comprehensive income | | Total comprehensive income | 41,123 | | | 31,004 | | | 35,039 | | | 53,116 | |
Comprehensive income attributable to noncontrolling interests | Comprehensive income attributable to noncontrolling interests | (209) | | | (132) | | | (535) | | | (396) | | Comprehensive income attributable to noncontrolling interests | (30) | | | (182) | | | (134) | | | (326) | |
Comprehensive income (loss) attributable to common unitholders | $ | 25,201 | | | $ | (5,041) | | | $ | 77,991 | | | $ | 26,690 | | |
Comprehensive income attributable to common unitholders | | Comprehensive income attributable to common unitholders | $ | 41,093 | | | $ | 30,822 | | | $ | 34,905 | | | $ | 52,790 | |
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 | | General Partner | | Total |
| | | Common
Equity | | Accumulated
Other
Comprehensive
(Loss) Income | | | Common
Equity | | Accumulated
Other
Comprehensive
Income (Loss) | |
| Balance at December 31, 2021 | $ | 3,937,949 | | | $ | (15,902) | | | $ | 3,922,047 | | |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | $ | 3,692,171 | | | $ | 74,344 | | | $ | 3,766,515 | |
| Stock compensation activity | Stock compensation activity | 1,822 | | | — | | | 1,822 | | Stock compensation activity | 2,135 | | | — | | | 2,135 | |
| Other comprehensive income attributable to Parent Company | — | | | 38,713 | | | 38,713 | | |
| Distributions declared to Parent Company | (41,600) | | | — | | | (41,600) | | |
| Net loss attributable to Parent Company | (16,804) | | | — | | | (16,804) | | |
| | Adjustment to redeemable noncontrolling interests | (5,597) | | | — | | | (5,597) | | |
| Balance at March 31, 2022 | $ | 3,875,770 | | | $ | 22,811 | | | $ | 3,898,581 | | |
| Stock compensation activity | 2,851 | | | — | | | 2,851 | | |
| Other comprehensive income attributable to Parent Company | — | | | 17,146 | | | 17,146 | | |
| Distributions declared to Parent Company | (43,808) | | | — | | | (43,808) | | |
| Other comprehensive loss attributable to Parent Company | | Other comprehensive loss attributable to Parent Company | — | | | (11,557) | | | (11,557) | |
| Distributions to Parent Company | | Distributions to Parent Company | (52,659) | | | — | | | (52,659) | |
| Net income attributable to Parent Company | Net income attributable to Parent Company | 13,131 | | | — | | | 13,131 | | Net income attributable to Parent Company | 5,391 | | | — | | | 5,391 | |
| | Adjustment to redeemable noncontrolling interests | Adjustment to redeemable noncontrolling interests | 3,239 | | | — | | | 3,239 | | Adjustment to redeemable noncontrolling interests | (3,821) | | | — | | | (3,821) | |
| Balance at June 30, 2022 | $ | 3,851,183 | | | $ | 39,957 | | | $ | 3,891,140 | | |
| Balance at March 31, 2023 | | Balance at March 31, 2023 | $ | 3,643,217 | | | $ | 62,787 | | | $ | 3,706,004 | |
| Stock compensation activity | Stock compensation activity | 2,881 | | | — | | | 2,881 | | Stock compensation activity | 2,960 | | | — | | | 2,960 | |
| Other comprehensive income attributable to Parent Company | Other comprehensive income attributable to Parent Company | — | | | 32,736 | | | 32,736 | | Other comprehensive income attributable to Parent Company | — | | | 8,536 | | | 8,536 | |
| Distributions declared to Parent Company | (46,014) | | | — | | | (46,014) | | |
| Net loss attributable to Parent Company | (7,837) | | | — | | | (7,837) | | |
| Distributions to Parent Company | | Distributions to Parent Company | (52,650) | | | — | | | (52,650) | |
| Net income attributable to Parent Company | | Net income attributable to Parent Company | 32,058 | | | — | | | 32,058 | |
| | Adjustment to redeemable noncontrolling interests | Adjustment to redeemable noncontrolling interests | (94) | | | — | | | (94) | | Adjustment to redeemable noncontrolling interests | (4,101) | | | — | | | (4,101) | |
| Balance at September 30, 2022 | $ | 3,800,119 | | | $ | 72,693 | | | $ | 3,872,812 | | |
| Balance at June 30, 2023 | | Balance at June 30, 2023 | $ | 3,621,484 | | | $ | 71,323 | | | $ | 3,692,807 | |
|
| | | | | | | | | | | | | | | | | |
| | | |
| | | | |
| Balance at December 31, 2020 | $ | 1,261,539 | | | $ | (30,885) | | | $ | 1,230,654 | |
| Stock compensation activity | 1,466 | | | — | | | 1,466 | |
| Other comprehensive income attributable to Parent Company | — | | | 6,537 | | | 6,537 | |
| Distributions declared to Parent Company | (12,992) | | | — | | | (12,992) | |
| Net income attributable to Parent Company | 24,577 | | | — | | | 24,577 | |
| Purchase of capped calls | (9,800) | | | — | | | (9,800) | |
| Conversion of Limited Partner Units to shares of the Parent Company | 2,062 | | | — | | | 2,062 | |
| Adjustment to redeemable noncontrolling interests | (10,633) | | | — | | | (10,633) | |
| Balance at March 31, 2021 | $ | 1,256,219 | | | $ | (24,348) | | | $ | 1,231,871 | |
| Stock compensation activity | 1,977 | | | — | | | 1,977 | |
| Other comprehensive loss attributable to Parent Company | — | | | (6) | | | (6) | |
| Distributions declared to Parent Company | (14,363) | | | — | | | (14,363) | |
| Net loss attributable to Parent Company | (242) | | | — | | | (242) | |
| Conversion of Limited Partner Units to shares of the Parent Company | 530 | | | — | | | 530 | |
| Adjustment to redeemable noncontrolling interests | (6,292) | | | — | | | (6,292) | |
| Balance at June 30, 2021 | $ | 1,237,829 | | | $ | (24,354) | | | $ | 1,213,475 | |
| Stock compensation activity | 1,989 | | | — | | | 1,989 | |
| Other comprehensive income attributable to Parent Company | — | | | 1,878 | | | 1,878 | |
| Distributions declared to Parent Company | (15,221) | | | — | | | (15,221) | |
| Net loss attributable to Parent Company | (6,960) | | | — | | | (6,960) | |
| Conversion of Limited Partner Units to shares of the Parent Company | 537 | | | — | | | 537 | |
| Adjustment to redeemable noncontrolling interests | 3,148 | | | — | | | 3,148 | |
| Balance at September 30, 2021 | $ | 1,221,322 | | | $ | (22,476) | | | $ | 1,198,846 | |
| | | | | | | | | | | | | | | | | |
| | | |
| | | | |
| Balance at December 31, 2021 | $ | 3,937,949 | | | $ | (15,902) | | | $ | 3,922,047 | |
| Stock compensation activity | 1,822 | | | — | | | 1,822 | |
| Other comprehensive income attributable to Parent Company | — | | | 38,713 | | | 38,713 | |
| Distributions to Parent Company | (41,600) | | | — | | | (41,600) | |
| Net loss attributable to Parent Company | (16,804) | | | — | | | (16,804) | |
| | | | | |
| Adjustment to redeemable noncontrolling interests | (5,597) | | | — | | | (5,597) | |
| Balance at March 31, 2022 | $ | 3,875,770 | | | $ | 22,811 | | | $ | 3,898,581 | |
| Stock compensation activity | 2,851 | | | — | | | 2,851 | |
| Other comprehensive income attributable to Parent Company | — | | | 17,146 | | | 17,146 | |
| Distributions to Parent Company | (43,808) | | | — | | | (43,808) | |
| Net income attributable to Parent Company | 13,131 | | | — | | | 13,131 | |
| | | | | |
| Adjustment to redeemable noncontrolling interests | 3,239 | | | — | | | 3,239 | |
| Balance at June 30, 2022 | $ | 3,851,183 | | | $ | 39,957 | | | $ | 3,891,140 | |
| | | | | |
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| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
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, |
| | | 2022 | | 2021 | | 2023 | | 2022 |
| Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
| Net (loss) income | $ | (11,102) | | | $ | 18,433 | | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
| Net income (loss) | | Net income (loss) | $ | 38,042 | | | $ | (3,381) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| Depreciation and amortization | Depreciation and amortization | 359,265 | | | 92,587 | | Depreciation and amortization | 219,315 | | | 242,634 | |
| Gain on sales of operating properties, net | Gain on sales of operating properties, net | (27,126) | | | (27,517) | | Gain on sales of operating properties, net | (28,440) | | | (27,126) | |
| | Straight-line rent | Straight-line rent | (12,653) | | | (1,215) | | Straight-line rent | (6,958) | | | (8,359) | |
| Compensation expense for equity awards | Compensation expense for equity awards | 8,209 | | | 5,667 | | Compensation expense for equity awards | 5,133 | | | 5,603 | |
| Amortization of debt fair value adjustments | Amortization of debt fair value adjustments | (10,204) | | | (333) | | Amortization of debt fair value adjustments | (6,688) | | | (6,835) | |
| Amortization of in-place lease liabilities | Amortization of in-place lease liabilities | (3,143) | | | (1,432) | | Amortization of in-place lease liabilities | (5,375) | | | (1,915) | |
| Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
| Tenant receivables | Tenant receivables | (7,021) | | | 8,449 | | Tenant receivables | 268 | | | (1,447) | |
| Deferred costs and other assets | Deferred costs and other assets | (15,691) | | | (1,951) | | Deferred costs and other assets | (14,074) | | | (4,257) | |
| Accounts payable, accrued expenses, deferred revenue and other liabilities | Accounts payable, accrued expenses, deferred revenue and other liabilities | (18,105) | | | 11,143 | | Accounts payable, accrued expenses, deferred revenue and other liabilities | (20,798) | | | (40,595) | |
| Net cash provided by operating activities | Net cash provided by operating activities | 262,429 | | | 103,831 | | Net cash provided by operating activities | 180,425 | | | 154,322 | |
| | Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
| Acquisition of interests in properties | Acquisition of interests in properties | (100,142) | | | — | | Acquisition of interests in properties | — | | | (65,765) | |
| Capital expenditures | Capital expenditures | (106,536) | | | (36,935) | | Capital expenditures | (67,767) | | | (58,731) | |
| Net proceeds from sales of land | Net proceeds from sales of land | 3,680 | | | 47,706 | | Net proceeds from sales of land | 917 | | | 1,935 | |
| Net proceeds from sales of operating properties | Net proceeds from sales of operating properties | 65,408 | | | 2,484 | | Net proceeds from sales of operating properties | 78,556 | | | 65,408 | |
| Investment in short-term deposits | Investment in short-term deposits | 125,000 | | | (125,000) | | Investment in short-term deposits | — | | | 125,000 | |
| Small business loan repayments | Small business loan repayments | 513 | | | 541 | | Small business loan repayments | 287 | | | 372 | |
| Change in construction payables | Change in construction payables | (2,636) | | | 2,141 | | Change in construction payables | (3,980) | | | (717) | |
| Distribution from unconsolidated joint venture | Distribution from unconsolidated joint venture | 1,144 | | | — | | Distribution from unconsolidated joint venture | — | | | 1,144 | |
| Capital contribution to unconsolidated joint venture | (125) | | | — | | |
| Net cash used in investing activities | (13,694) | | | (109,063) | | |
| | Net cash provided by investing activities | | Net cash provided by investing activities | 8,013 | | | 68,646 | |
| | Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
| Contributions from the General Partner | Contributions from the General Partner | 20 | | | 31 | | Contributions from the General Partner | 40 | | | 20 | |
| Repurchases of common shares upon the vesting of restricted shares | Repurchases of common shares upon the vesting of restricted shares | (1,144) | | | (458) | | Repurchases of common shares upon the vesting of restricted shares | (731) | | | (1,144) | |
| Purchase of capped calls | — | | | (9,800) | | |
| Debt and equity issuance costs | Debt and equity issuance costs | (4,922) | | | (6,017) | | Debt and equity issuance costs | (54) | | | (662) | |
| Loan proceeds | Loan proceeds | 445,000 | | | 175,000 | | Loan proceeds | 293,095 | | | 120,000 | |
| Loan payments | Loan payments | (558,151) | | | (52,096) | | Loan payments | (361,162) | | | (255,766) | |
| | Distributions paid – common unitholders | Distributions paid – common unitholders | (131,422) | | | (42,576) | | Distributions paid – common unitholders | (105,243) | | | (85,408) | |
| Distributions paid – redeemable noncontrolling interests | Distributions paid – redeemable noncontrolling interests | (1,972) | | | (1,639) | | Distributions paid – redeemable noncontrolling interests | (1,399) | | | (1,219) | |
| Net cash (used in) provided by financing activities | (252,591) | | | 62,445 | | |
| Net cash used in financing activities | | Net cash used in financing activities | (175,454) | | | (224,179) | |
| | Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | (3,856) | | | 57,213 | | Net change in cash, cash equivalents and restricted cash | 12,984 | | | (1,211) | |
| Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | 100,363 | | | 46,586 | | Cash, cash equivalents and restricted cash, beginning of period | 121,970 | | | 100,363 | |
| Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | $ | 96,507 | | | $ | 103,799 | | Cash, cash equivalents and restricted cash, end of period | $ | 134,954 | | | $ | 99,152 | |
| | Non-cash investing and financing activities | | |
| Conversion of Limited Partner Units to shares of the Parent Company | $ | — | | | $ | 3,129 | | |
|
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, 20222023
(Unaudited)
($ in thousands, except share, per share, unit and per unit amounts and where indicated in millions or billions)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Kite Realty Group Trust (the “Parent Company”), through its majority-owned subsidiary, Kite Realty Group, L.P. (the “Operating Partnership”), owns interests in various operating subsidiaries and joint ventures engaged in the ownership, operation, acquisition, development and redevelopment of high-quality, open-air shopping centers and mixed-use assets in select markets in the United States. The terms “Company,” “we,” “us,” and “our” refer to the Parent Company and the Operating Partnership, collectively, and those entities owned or controlled by the Parent Company and/or the Operating Partnership.
The Operating Partnership was formed on August 16, 2004, when the Parent Company contributed properties and the net proceeds from an initial public offering of shares of its common stock to the Operating Partnership. The Parent Company was organized in Maryland in 2004 to succeed in the development, acquisition, construction and real estate businesses of its predecessor. We believe the Company qualifies as a real estate investment trust (“REIT”) under provisions of the Internal Revenue Code of 1986, as amended.
The Parent Company is the sole general partner of the Operating Partnership, and as of SeptemberJune 30, 20222023 owned approximately 98.7%98.6% of the common partnership interests in the Operating Partnership (“General Partner Units”). The remaining 1.3%1.4% of the common partnership interests (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”) were owned by the limited partners. As the sole general partner of the Operating Partnership, the Parent Company has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership. The Parent Company and the Operating Partnership are operated as one enterprise. The management of the Parent Company consists of the same members as the management of the Operating Partnership. As the sole general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have any significant assets other than its investment in the Operating Partnership.
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the presentation not misleading. The unaudited consolidated financial statements as of SeptemberJune 30, 20222023 and for the three and ninesix months ended SeptemberJune 30, 20222023 and 20212022 include all adjustments, consisting of normal recurring adjustments, necessary in the opinion of management to present fairly the financial information set forth therein. The unaudited consolidated financial statements in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the combined Annual Report on Form 10-K of the Parent Company and the Operating Partnership for the year ended December 31, 2021.2022.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reported period. Actual results could differ from these estimates. The results of operations for the interim periods are not necessarily indicative of the results that may be expected on an annual basis.
On October 22, 2021, we completed a merger with Retail Properties of America, Inc. (“RPAI”) in accordance with the Agreement and Plan of Merger dated July 18, 2021 (the “Merger Agreement”), by and among the Company, its wholly owned subsidiary, KRG Oak, LLC (“Merger Sub”), and RPAI, pursuant to which RPAI merged with and into Merger Sub (the “Merger”). Immediately following the closing of the Merger, Merger Sub merged with and into the Operating Partnership so that all of the assets and liabilities of the Company continue to be held at or below the Operating Partnership level. The transaction value was approximately $4.7 billion, including the assumption of approximately $1.8 billion of debt. We acquired 100 operating retail properties and five development projects through the Merger along with multiple parcels of entitled land for future value creation.
Pursuant toAs of June 30, 2023, the termsCompany’s portfolio consisted of the Merger Agreement, each outstanding share of RPAI common stock converted into the right to receive 0.623 common shares of the Company plus cash in lieu of fractional Company shares. The aggregate value of the Merger consideration paid or payable to former holders of RPAI common stock was approximately $2.8 billion, excluding the value of RPAI restricted stock units that vested at closing and certain restricted share awards assumed by the Company at closing. In connection with the Merger, the Operating Partnership issued an equivalent amount of General Partner Units to the Parent Company.following:
As of September 30, 2022, we owned interests in 183 | | | | | | | | | | | |
| Properties | | Square Footage |
Operating retail properties(1) | 181 | | | 28,590,350 | |
| Office properties | 1 | | | 287,291 | |
| Development and redevelopment projects: | | | |
| Carillon medical office building | 1 | | | 126,000 | |
| The Corner (IN) | 1 | | | 24,000 | |
(1)Included within operating retail properties totaling approximately 28.9 million square feet and one office property with 0.3 million square feet. Of the 183 operating retailare 11 properties 11that contain an office component. We also owned four development projects under construction as of this date. Of the 183181 operating retail properties, 180178 are consolidated in these financial statements and the remaining three are accounted for under the equity method.
NOTE 2. CONSOLIDATION, INVESTMENTS IN JOINT VENTURES AND NONCONTROLLING INTERESTSSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Components of Investment Properties
The following table summarizes the composition of the Company’s investment properties as of SeptemberJune 30, 20222023 and December 31, 2021:2022 (in thousands):
| | | Balance as of | | Balance as of |
| ($ in thousands) | September 30, 2022 | | December 31, 2021 | |
| | | June 30, 2023 | | December 31, 2022 |
| Land, buildings and improvements | Land, buildings and improvements | $ | 7,639,490 | | | $ | 7,543,376 | | Land, buildings and improvements | $ | 7,589,842 | | | $ | 7,656,765 | |
| Furniture, equipment and other | 7,495 | | | 7,612 | | |
| Construction in progress | Construction in progress | 68,531 | | | 41,360 | | Construction in progress | 80,523 | | | 75,808 | |
| Investment properties, at cost | Investment properties, at cost | $ | 7,715,516 | | | $ | 7,592,348 | | Investment properties, at cost | $ | 7,670,365 | | | $ | 7,732,573 | |
Components of Rental Income including Allowance for Uncollectible Accounts
Rental income related to the Company’s operating leases is comprised of the following for the three and ninesix months ended SeptemberJune 30, 2023 and 2022 and 2021:(in thousands):
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| ($ in thousands) | 2022 | | 2021 | | 2022 | | 2021 | |
| | | 2023 | | 2022 | | 2023 | | 2022 |
| Fixed contractual lease payments – operating leases | Fixed contractual lease payments – operating leases | $ | 155,399 | | | $ | 54,894 | | | $ | 457,875 | | | $ | 164,095 | | Fixed contractual lease payments – operating leases | $ | 160,134 | | | $ | 152,652 | | | $ | 318,724 | | | $ | 302,476 | |
| Variable lease payments – operating leases | Variable lease payments – operating leases | 36,636 | | | 12,461 | | | 112,725 | | | 38,540 | | Variable lease payments – operating leases | 39,876 | | | 39,064 | | | 79,630 | | | 76,089 | |
| Bad debt (reserve) recovery | (1,882) | | | 1,709 | | | (3,624) | | | 338 | | |
| Bad debt reserve | | Bad debt reserve | (233) | | | (1,171) | | | (1,788) | | | (1,742) | |
| Straight-line rent adjustments | Straight-line rent adjustments | 4,328 | | | 585 | | | 12,951 | | | 1,109 | | Straight-line rent adjustments | 2,910 | | | 4,530 | | | 6,768 | | | 8,623 | |
| Straight-line rent (reserve) recovery for uncollectibility | (34) | | | 39 | | | (298) | | | 587 | | |
| Straight-line rent recovery (reserve) for uncollectibility | | Straight-line rent recovery (reserve) for uncollectibility | 504 | | | (202) | | | 190 | | | (264) | |
| Amortization of in-place lease liabilities, net | Amortization of in-place lease liabilities, net | 1,228 | | | 528 | | | 3,143 | | | 1,428 | | Amortization of in-place lease liabilities, net | 2,645 | | | 1,332 | | | 5,375 | | | 1,915 | |
| Rental income | Rental income | $ | 195,675 | | | $ | 70,216 | | | $ | 582,772 | | | $ | 206,097 | | Rental income | $ | 205,836 | | | $ | 196,205 | | | $ | 408,899 | | | $ | 387,097 | |
The Company makes estimates as to the collectability of its accounts receivable. In making these estimates, the Company reviews a variety of qualitative and quantitative data and considers such facts as the credit quality of our customer, historical write-off experience and current economic trends, to make a subjective determination. An allowance for uncollectible accounts, including future credit losses of the accrued straight-line rent receivables, is maintained for estimated losses resulting from the inability of certain tenants to meet contractual obligations under their lease agreements.
Short-Term Deposits
During the nine months ended September 30, 2022, the Company used the proceeds from a $125.0 million short-term deposit that matured on April 7, 2022 to repay borrowings on the Company’s revolving line of credit. The deposit balance was held in a custody account at Bank of New York Mellon and earned interest at a rate of the Federal Funds Rate plus 43 basis points. Interest income on the deposit is recorded within “Other income (expense), net” on the accompanying consolidated statements of operations and comprehensive income.
Consolidation and Investments in Joint Ventures
The accompanying financial statements are presented on a consolidated basis and include all accounts of the Parent Company, the Operating Partnership, the taxable REIT subsidiaries (“TRSs”) of the Operating Partnership, subsidiaries of the Operating Partnership that are controlled and any variable interest entities (“VIEs”) in which the Operating Partnership is the primary beneficiary. As of SeptemberJune 30, 2022,2023, we owned investments in threetwo consolidated joint ventures that were VIEs in which the partners did not have substantive participating rights and we were the primary beneficiary. As of SeptemberJune 30, 2022,2023, these consolidated VIEs had mortgage debt of $28.5$123.0 million, which were secured by assets of the VIEs totaling $118.9$227.2 million. The Operating Partnership guarantees the mortgage debt of these VIEs.
The Operating Partnership is considered a VIE as the limited partners do not hold kick-out rights or substantive participating rights. The Parent Company consolidates the Operating Partnership as it is the primary beneficiary.
Income Taxes and REIT Compliance
Parent Company
The Parent Company, which is considered a corporation for U.S. federal income tax purposes, has been organized and operated, and intends to continue to operate, in a manner that will enable it to maintain its qualification as a REIT for U.S. federal income tax purposes. As a result, it generally will not be subject to U.S. federal income tax on the earnings that it distributes to the extent it distributes its “REIT taxable income” (determined before the deduction for dividends paid and excluding net capital gains) to shareholders of the Parent Company and meets certain other requirements on a recurring basis. To the extent that it satisfies this distribution requirement, but distributes less than 100% of its taxable income, it will be subject to U.S. federal corporate income tax on its undistributed REIT taxable income. REITs are subject to a number of organizational and operational requirements. If the Parent Company fails to qualify as a REIT in any taxable year, it will be subject to U.S. federal income tax on its taxable income at regular corporate rates for a period of four years following the year in which qualification is lost. Additionally, we may also be subject to certain taxes enacted by the Inflation Reduction Act of 2022 that are applicable to non-REIT corporations, including the nondeductible 1% excise tax on certain stock repurchases. We may also be subject to certain U.S. federal, state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed taxable income even if the Parent Company does qualify as a REIT. The Operating Partnership intends to continue to make distributions to the Parent Company in amounts sufficient to assist the Parent Company in adhering to REIT requirements and maintaining its REIT status.
We have elected to treat Kite Realty Holdings, LLC as a TRS of the Operating Partnership. In addition, in connection with the Merger,merger with Retail Properties of America, Inc. (“RPAI”) in October 2021, we assumed RPAI’s existing TRS, IWR Protective Corporation, as a TRS of the Operating Partnership and we may elect to treat other subsidiaries as TRSs in the future. This election enables us to receive income and provide services that would otherwise be impermissible for a REIT. Deferred tax assets and liabilities are established for temporary differences between the financial reporting bases and the tax bases of assets and liabilities at the tax rates expected to be in effect when the temporary differences reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Operating Partnership
The allocated share of income and loss, other than the operations of our TRSs, is included in the income tax returns of the Operating Partnership’s partners. Accordingly, the only U.S. federal income taxes included in the accompanying consolidated financial statements are in connection with the TRSs.
Noncontrolling Interests
We report the non-redeemable noncontrolling interests in subsidiaries as equity, and the amount of consolidated net income attributable to these noncontrolling interests is set forth separately in the consolidated financial statements. The following table summarizes the non-redeemable noncontrolling interests in consolidated properties for the ninesix months ended SeptemberJune 30, 2023 and 2022 and 2021:(in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| ($ in thousands) | 2022 | | 2021 |
| Noncontrolling interests balance as of January 1, | $ | 5,146 | | | $ | 698 | |
| Net income allocable to noncontrolling interests, excluding redeemable noncontrolling interests | 139 | | | — | |
| Noncontrolling interests balance as of September 30, | $ | 5,285 | | | $ | 698 | |
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2023 | | 2022 |
| Noncontrolling interests balance as of January 1, | $ | 5,370 | | | $ | 5,146 | |
| Net income allocable to noncontrolling interests, excluding redeemable noncontrolling interests | 134 | | | 62 | |
| Noncontrolling interests balance as of June 30, | $ | 5,504 | | | $ | 5,208 | |
Noncontrolling Interests – Joint Venture
Prior to the Mergermerger with RPAI, RPAI entered into a joint venture related to the development, ownership and operation of the multifamily rental portion of the expansion project at One Loudoun Downtown – Pads G & H. The Company owns 90% of the joint venture.
As of SeptemberDuring the three months ended June 30, 2022,2023, the Company has funded $0.9originated a 10-year $95.1 million mortgage payable at a fixed interest rate of the partner’s development costs related to One Loudoun Downtown – Pads G & H through a loan provided by the Company to the joint venture. The loan is5.36% secured by the joint venture project, is required to be repaid subsequent toproject. In conjunction with the completion ofloan origination, the joint venture’s construction and stabilization of the project and is eliminated upon consolidation.loan was repaid. Under terms defined in the joint venture agreement, after construction completion and stabilization of the development project (as defined in the joint venture agreement), the Company has the ability to call, and the
joint venture partner has the ability to put to the Company, subject to certain conditions, the joint venture partner’s interest in the joint venture at fair value. The Company expects that these conditions will be met in the second half of 2023.
The joint venture is considered a VIE primarily because the Company’s joint venture partner does not have substantive kick-out rights or substantive participating rights. The Company is considered the primary beneficiary as it has a controlling financial interest in the joint venture. As such, the Company has consolidated this joint venture and presented the joint venture partner’s interests as noncontrolling interests.
Redeemable Noncontrolling Interests – Limited Partners
Limited Partner Units are redeemable noncontrolling interests in the Operating Partnership. We classify redeemable noncontrolling interests in the Operating Partnership in the accompanying consolidated balance sheets outside of permanent equity because we may be required to pay cash to holders of Limited Partner Units upon redemption of their interests in the Operating Partnership or deliver registered shares upon their conversion. The carrying amount of the redeemable noncontrolling interests in the Operating Partnership is reflected at the greater of historical book value or redemption value with a corresponding adjustment to additional paid-in capital. As of SeptemberJune 30, 2022, the redemption value of the redeemable noncontrolling interests in the Operating Partnership did not exceed the historical book value,2023 and the balances were accordingly adjusted to historical book value. As of December 31, 2021,2022, the redemption value of the redeemable noncontrolling interests in the Operating Partnership exceeded the historical book value, and the balances were accordingly adjusted to redemption value.
We allocate net operating results of the Operating Partnership after noncontrolling interests in the consolidated properties based on the partners’ respective weighted average ownership interest. We adjust the redeemable noncontrolling interests in the Operating Partnership at the end of each reporting period to reflect their interests in the Operating Partnership or redemption value. This adjustment is reflected in our shareholders’ and Parent Company’s equity. For the three and ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, the weighted average interests of the Parent Company and the limited partners in the Operating Partnership were as follows:
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Parent Company’s weighted average interest in Operating Partnership | Parent Company’s weighted average interest in Operating Partnership | 98.7 | % | | 97.2 | % | | 98.8 | % | | 97.1 | % | Parent Company’s weighted average interest in Operating Partnership | 98.6 | % | | 98.7 | % | | 98.7 | % | | 98.8 | % |
| Limited partners’ weighted average interests in Operating Partnership | Limited partners’ weighted average interests in Operating Partnership | 1.3 | % | | 2.8 | % | | 1.2 | % | | 2.9 | % | Limited partners’ weighted average interests in Operating Partnership | 1.4 | % | | 1.3 | % | | 1.3 | % | | 1.2 | % |
At SeptemberAs of June 30, 2023, the Parent Company’s interest and the limited partners’ redeemable noncontrolling ownership interests in the Operating Partnership were 98.6% and 1.4%. As of December 31, 2022, the Parent Company’s interest and the limited partners’ redeemable noncontrolling ownership interests in the Operating Partnership were 98.7% and 1.3%. At December 31, 2021, the Parent Company’s interest and the limited partners’ redeemable noncontrolling ownership interests in the Operating Partnership were 98.9% and 1.1%.
Concurrent with the Parent Company’s initial public offering and related formation transactions, certain individuals received Limited Partner Units of the Operating Partnership in exchange for their interests in certain properties. The limited partners have the right to redeem Limited Partner Units for cash or, at the Parent Company’s election, common shares of the Parent Company in an amount equal to the market value of an equivalent number of common shares of the Parent Company at the time of redemption. Such common shares must be registered, which is not fully in the Parent Company’s control. Therefore, the limited partners’ interest is not reflected in permanent equity. The Parent Company also has the right to redeem the Limited Partner Units directly from the limited partner in exchange for either cash in the amount specified above or a number of its common shares equal to the number of Limited Partner Units being redeemed.
There were 2,955,6973,034,212 and 2,377,7772,870,697 Limited Partner Units outstanding as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively. The increase in Limited Partner Units outstanding from December 31, 20212022 is due to non-cash compensation awards madegranted 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. As of SeptemberJune 30, 2022, the Class B units related to one of these joint ventures that owned Crossing at Killingly Commons, our multi-tenant retail property in Dayville, Connecticut, waswere outstanding and accounted for as noncontrolling interests in the remaining venture. In October 2022, the remaining Class B units became redeemable at the partner’s election and the fulfillment of certain redemption criteria for cash or Limited Partner Units in the Operating Partnership. In October 2022, we received notice from our joint venture partner of its exercise of their right to redeem the remaining Class B units for cash in the amount of $9.7 million, which redemption was funded using cash on October 3, 2022. Prior to the redemption, the Class B units did not have a maturity date and were not mandatorily redeemable unless either party
had elected for the units to be redeemed. Prior to the redemption, we consolidated this joint venture because we controlled the decision-making and our joint venture partner had limited protective rights.
We classifyPrior to the redemption, we classified the redeemable noncontrolling interests related to the remaining Class B units in the accompanying consolidated balance sheets outside of permanent equity because, under certain circumstances, we may becould have been required to pay cash to the Class B unitholders in this subsidiary upon redemption of their interests. The carrying amount of these redeemable noncontrolling interests is required to be reflected at the greater of initial book value or redemption value with a corresponding adjustment to additional paid-in capital. As of SeptemberJune 30, 2022, and December 31, 2021, the redemption amounts of these interests did not exceed their fair value nor did they exceed the initial book value.
The redeemable noncontrolling interests in the Operating Partnership and subsidiaries for the ninesix months ended SeptemberJune 30, 20222023 and 20212022 were as follows:follows (in thousands):
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| ($ in thousands) | 2022 | | 2021 | |
| | | 2023 | | 2022 |
| Redeemable noncontrolling interests balance as of January 1, | Redeemable noncontrolling interests balance as of January 1, | $ | 55,173 | | | $ | 43,275 | | Redeemable noncontrolling interests balance as of January 1, | $ | 53,967 | | | $ | 55,173 | |
| Net income allocable to redeemable noncontrolling interests | Net income allocable to redeemable noncontrolling interests | 269 | | | 1,058 | | Net income allocable to redeemable noncontrolling interests | 459 | | | 230 | |
| Distributions declared to redeemable noncontrolling interests | Distributions declared to redeemable noncontrolling interests | (1,972) | | | (1,639) | | Distributions declared to redeemable noncontrolling interests | (1,456) | | | (1,219) | |
| Other, net including adjustments to redemption value | Other, net including adjustments to redemption value | 3,484 | | | 10,587 | | Other, net including adjustments to redemption value | 7,957 | | | 2,995 | |
Total limited partners’ interests in Operating Partnership and other redeemable noncontrolling interests balance as of September 30, | $ | 56,954 | | | $ | 53,281 | | |
Total limited partners’ interests in the Operating Partnership and other redeemable noncontrolling interests balance as of June 30, | | Total limited partners’ interests in the Operating Partnership and other redeemable noncontrolling interests balance as of June 30, | $ | 60,927 | | | $ | 57,179 | |
| | | Limited partners’ interests in Operating Partnership | $ | 46,884 | | | $ | 43,211 | | |
| Limited partners’ interests in the Operating Partnership | | Limited partners’ interests in the Operating Partnership | $ | 60,927 | | | $ | 47,109 | |
| Other redeemable noncontrolling interests in certain subsidiaries | Other redeemable noncontrolling interests in certain subsidiaries | 10,070 | | | 10,070 | | Other redeemable noncontrolling interests in certain subsidiaries | — | | | 10,070 | |
Total limited partners’ interests in Operating Partnership and other redeemable noncontrolling interests balance as of September 30, | $ | 56,954 | | | $ | 53,281 | | |
Total limited partners’ interests in the Operating Partnership and other redeemable noncontrolling interests balance as of June 30, | | Total limited partners’ interests in the Operating Partnership and other redeemable noncontrolling interests balance as of June 30, | $ | 60,927 | | | $ | 57,179 | |
Fair Value Measurements
We follow the framework established under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements and Disclosures, for measuring fair value of non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis but only in certain circumstances, such as a business combination or upon determination of an impairment.
Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
•Level 1 fair value inputs are quoted prices in active markets for identical instruments to which we have access.
•Level 2 fair value inputs are inputs other than quoted prices included in Level 1 that are observable for similar instruments, either directly or indirectly, and appropriately consider counterparty creditworthiness in the valuations.valuation.
•Level 3 fair value inputs reflect our best estimate of inputs and assumptions market participants would use in pricing an instrument at the measurement date. The inputs are unobservable in the market and significant to the valuation estimate.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Effects of Accounting Pronouncements
In March 2020, the FASBAny recently issued ASU 2020-04, Reference Rate Reform (Topic 848), which contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over timeaccounting standards or pronouncements have been excluded as reference rate reform activities occur. In March 2020,they are either not relevant to the Company electedor are not expected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Interbank Offered Rate (“LIBOR”)-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the indexhave a material impact on the corresponding derivatives. During the nine months ended September 30, 2022, the Company elected to apply additional expedients related to contract modifications, changes in critical terms, and updates to the designated hedged risks as qualifying changes have been made to applicable debt and derivative contracts. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
NOTE 3. ACQUISITIONS
RPAI Merger
On October 22, 2021, we completed a Merger with RPAI pursuant to which RPAI merged with and into Merger Sub, with the Company continuing as the surviving public company. Immediately following the closing of the Merger, Merger Sub merged with and into the Operating Partnership so that all of the assets and liabilities of the Company continue to be held at or below the Operating Partnership level. The aggregate value of the Merger consideration paid or payable to former holders of RPAI common stock was approximately $2.8 billion, excluding the value of RPAI restricted stock units that vested at closing and certain restricted share awards assumed by the Company at closing. The total purchase price was calculated based on the closing price of the Company’s common stock on October 21, 2021, the last business day prior to the effective time of the Merger, which was $21.18 per share. At the effective time of the Merger, each share of RPAI common stock issued and outstanding immediately prior to the effective time was converted into the right to receive 0.623 newly issued Company common shares plus cash in lieu of fractional Company shares. In addition, holders of (i) options to purchase shares of RPAI common stock, (ii) certain awards of restricted shares of RPAI common stock (as agreed in accordance with the Merger Agreement), and (iii) restricted stock units representing the right to vest in and be issued shares of RPAI common stock became entitled to receive cash and/or Company common shares in accordance with the terms of the Merger Agreement. The Company assumed certain existing awards of restricted shares of RPAI common stock, each of which were converted into 0.623 awards of restricted Company common shares plus cash in lieu of fractional Company shares in accordance with the Merger Agreement. In connection with the Merger, the Operating Partnership issued an equivalent amount of General Partner Units to the Parent Company. The number of RPAI common stock outstanding as of October 21, 2021 converted to shares of the Company’s common stock was determined as follows:
| | | | | |
RPAI common stock outstanding as of October 21, 2021 | 214,797,869 | |
Exchange ratio | 0.623 | |
Company common shares issued for outstanding RPAI common stock | 133,814,066 | |
Company common shares issued for RPAI restricted stock units | 1,117,399 | |
Total Company common shares issued | 134,931,465 | |
The following table presents the purchase price and total value of equity consideration paid by the Company at the close of the Merger:
| | | | | | | | | | | | | | | | | |
| (in thousands, except share price) | Price of
Company
common shares | | Equity
Consideration Given
(Company common shares issued) | | Total Value of Stock Consideration(1) |
| As of October 21, 2021 | $ | 21.18 | | | 134,931 | | | $ | 2,847,369 | |
(1)The total value of stock consideration is the total of the common shares issued multiplied by the closing price of the Company’s common stock on October 21, 2021 excluding the value of certain RPAI restricted stock that vested at the closing of the Merger and share awards assumed by the Company at the closing of the Merger.
As a result of the Merger, the Company acquired 100 operating retail properties and five development projects under construction along with multiple parcels of entitled land for future value creation. During the nine months ended September 30, 2022, the Company incurred $1.0 million of merger and acquisition costs consisting primarily of professional fees and technology costs, which are recorded within “Merger and acquisition costs” in the accompanying consolidated statements of operations and comprehensive income. In addition, the Company assumed approximately $1.8 billion of debt in connection with the Merger.
“Rental income” and “Net income attributable to common shareholders” in the accompanying consolidated statements of operations and comprehensive income include revenues from the RPAI portfolio of $124.7 million and $375.0 million and net loss of $7.1 million and $17.3 million for the three months and nine months ended September 30, 2022, respectively, which includes $84.0 million and $265.2 million of depreciation and amortization, respectively, as a result of the Merger.
Purchase Price Allocation
In accordance with ASC 805-10, Business Combinations, the Company accounted for the Merger as a business combination using the acquisition method of accounting. Based on the value of the common shares issued, the total fair value of the assets acquired and liabilities assumed in the Merger was $2.8 billion as of October 22, 2021, the date of the Merger.NOTE 3. ACQUISITIONS
The Company used the following valuation methodologies, inputs and assumptions to estimate the fair value of the assets acquired and liabilities assumed:
•Investment properties: The Company estimated the fair value of the buildings on an as-if-vacant basis using either a direct capitalization method or a discounted cash flow analysis. Comparable market data, real estate tax assessments and independent appraisals were used in estimating the fair value of the land acquired. These valuation methodologies are based on Level 2 and Level 3 inputs in the fair value hierarchy, such as estimates of future income growth, capitalization rates and cash flow projections at the respective properties.
•Acquired lease intangible assets: The Company estimated the fair value of its above-market and below-market in-place leases based on the present value (using a discount rate that reflects the risk associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over the remaining non-cancelable term of the leases. Any below-market renewal options are also considered in the in-place lease values. This valuation methodology is based on Level 3 inputs in the fair value hierarchy.
•In-place lease liabilities: The Company estimated the fair value of its in-place leases using independent and internal sources, which are methods similar to those used by independent appraisers. Factors we consider in our analysis include an estimate of costs to execute similar leases including tenant improvements, leasing commissions and foregone costs and rent receiveddid not acquire any properties during the estimated lease-up period as if the space was vacant. This valuation methodology is based on Level 3 inputs in the fair value hierarchy.
•Mortgage and other indebtedness: The Company estimated the fair value of the secured and unsecured debt assumed, including related derivative instruments, using third party and independent sources for our estimates. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining term of the loan using the interest method. This valuation methodology is based on Level 2 and Level 3 inputs in the fair value hierarchy.
The range of the most significant Level 3 assumptions utilized in determining the value of the real estate and related assets acquired through the Merger with RPAI are as follows:
| | | | | |
| Range of Assumptions |
Net rental rate per square foot – Anchors | $4.00 to $45.00 |
Net rental rate per square foot – Small Shops | $7.00 to $140.00 |
Capitalization rate | 5.50% to 12.00% |
The following table summarizes the final purchase price allocation, including the acquisition date fair value of the tangible and intangible assets acquired and liabilities assumed:
| | | | | |
($ in thousands) | Purchase Price
Allocation |
Investment properties | $ | 4,425,254 | |
Acquired lease intangible assets | 535,465 | |
Cash, accounts receivable and other assets | 84,632 | |
Total assets acquired | 5,045,351 | |
| |
Mortgage and other indebtedness, net | (1,848,476) | |
Accounts payable, other liabilities, tenant security deposits and prepaid rent | (176,391) | |
In-place lease liabilities | (168,652) | |
Noncontrolling interests | (4,463) | |
Total liabilities assumed | (2,197,982) | |
| |
Total purchase price | $ | 2,847,369 | |
The following table details the weighted average amortization periods, in years, of the purchase price allocated to real estate and related intangible assets and liabilities acquired arising from the Merger:
| | | | | |
| Weighted Average
Amortization Period
(in years) |
Land | 10.2 |
Building | 18.8 |
Tenant improvements | 6.7 |
In-place lease intangibles | 5.5 |
Above-market leases | 5.7 |
Below-market leases (including below-market option periods) | 20.5 |
Fair market value of debt adjustments | 6.8 |
Pro Forma Financial Information (unaudited)
The pro forma financial information set forth below is based upon the Company’s historical consolidated statements of operations for the three and ninesix months ended SeptemberJune 30, 2021, adjusted to give effect for the properties assumed through the Merger as if they were acquired as of January 1, 2021. The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of income would have been, nor does it purport to represent the results of income for future periods.2023.
| | | | | | | | | | | |
| ($ in thousands) | Three Months Ended
September 30, 2021 | | Nine Months Ended
September 30, 2021 |
| Rental income | $ | 190,908 | | | $ | 560,423 | |
| Net loss | $ | (38,786) | | | $ | (87,551) | |
| Net loss attributable to common shareholders | $ | (38,358) | | | $ | (86,571) | |
| Net loss attributable to common shareholders per common share: | | | |
| Basic | $ | (0.17) | | | $ | (0.39) | |
| Diluted | $ | (0.17) | | | $ | (0.39) | |
Asset Acquisitions
The Company closed on the following asset acquisitions during the ninesix months ended SeptemberJune 30, 2022:2022 (dollars in thousands):
| | Date | Date | | Property Name | | Metropolitan
Statistical Area (MSA) | | Property Type | | Square
Footage | | Acquisition
Price | Date | | Property Name | | Metropolitan
Statistical Area (MSA) | | Property Type | | Square
Footage | | Acquisition
Price |
| February 16, 2022 | February 16, 2022 | | Pebble Marketplace | | Las Vegas | | Multi-tenant retail | | 85,796 | | | $ | 44,100 | | February 16, 2022 | | Pebble Marketplace | | Las Vegas | | Multi-tenant retail | | 85,796 | | | $ | 44,100 | |
| April 13, 2022 | April 13, 2022 | | MacArthur Crossing | | Dallas | | Two-tenant building | | 56,077 | | | 21,920 | | April 13, 2022 | | MacArthur Crossing | | Dallas | | Two-tenant building | | 56,077 | | | 21,920 | |
| July 15, 2022 | | Palms Plaza | | Miami | | Multi-tenant retail | | 68,976 | | | 35,750 | | |
| | 210,849 | | | $ | 101,770 | | | 141,873 | | | $ | 66,020 | |
The above acquisitions were funded using a combination of available cash on hand and proceeds from the Company’s unsecured revolving line of credit. Substantially all of the purchase price was allocated to investment properties. The Company did not acquire any properties during the nine months ended September 30, 2021.
NOTE 4. DISPOSITIONS
DuringThe Company closed on the ninefollowing dispositions during the six months ended SeptemberJune 30, 2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Property Name | | MSA | | Property Type | | Square
Footage | | Sales Price | | Gain |
| May 8, 2023 | | Kingwood Commons | | Houston | | Multi-tenant retail | | 158,172 | | | $ | 27,350 | | | $ | 4,740 | |
| June 8, 2023 | | Pan Am Plaza & Garage | | Indianapolis | | Land & garage | | — | | | 52,025 | | | 23,700 | |
| | | | | | | | 158,172 | | | $ | 79,375 | | | $ | 28,440 | |
The Company closed on the following dispositions during the six months ended June 30, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Property Name | | MSA | | Property Type | | Square
Footage | | Sales Price | | Gain |
| January 26, 2022 | | Hamilton Crossing Centre | | Indianapolis | | Redevelopment(1) | | — | | | $ | 6,900 | | | $ | 3,168 | |
| June 16, 2022 | | Plaza Del Lago | | Chicago | | Multi-tenant retail(2) | | 100,016 | | | 58,650 | | | 23,958 | |
| | | | | | | | 100,016 | | | $ | 65,550 | | | $ | 27,126 | |
(1)We sold a portion of the Company sold Plaza Del Lago, a 100,016 square foot multi-tenant retail property located in the Chicago MSA, for a sales price of $58.7 million and a net gain of $24.0 million. redevelopment at Hamilton Crossing Centre.
(2)Plaza Del Lago also contains 8,800 square feet of residential space comprised of 18 multifamily rental units. In addition,
There were no discontinued operations for the Company sold a portion of Hamilton Crossing Centre, a redevelopment property located in the Indianapolis MSA, for a sales price of $6.9 million and a net gain of $3.2 million during the ninesix months ended SeptemberJune 30, 2022.
During the nine months ended September 30, 2021, the Company sold 17 ground leases for gross proceeds of $42.0 million2023 and a net gain of $27.6 million. A portion2022 as none of the proceeds was used to pay downdispositions represented a strategic shift that has had, or will have, a material effect on our unsecured revolving line of credit.operations or financial results.
NOTE 5. DEFERRED COSTS AND INTANGIBLES, NET
Deferred costs consist primarily of acquired lease intangible assets, broker fees and capitalized internal commissions incurred in connection with lease originations. Deferred leasing costs, lease intangibles and similar costs are amortized on a straight-line basis over the terms of the related leases. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, deferred costs consisted of the following:following (in thousands):
| | ($ in thousands) | September 30, 2022 | | December 31, 2021 | |
| | | June 30, 2023 | | December 31, 2022 |
| Acquired lease intangible assets | Acquired lease intangible assets | $ | 539,730 | | | $ | 567,149 | | Acquired lease intangible assets | $ | 472,486 | | | $ | 522,152 | |
| Deferred leasing costs and other | Deferred leasing costs and other | 64,286 | | | 55,817 | | Deferred leasing costs and other | 70,570 | | | 66,842 | |
| | | 604,016 | | | 622,966 | | | 543,056 | | | 588,994 | |
| Less: accumulated amortization | Less: accumulated amortization | (162,092) | | | (81,448) | | Less: accumulated amortization | (189,342) | | | (179,166) | |
| | Total | Total | $ | 441,924 | | | $ | 541,518 | | Total | $ | 353,714 | | | $ | 409,828 | |
Amortization of deferred leasing costs, lease intangibles and other is included within “Depreciation and amortization” in the accompanying consolidated statements of operations and comprehensive income. The amortization of above-market lease intangibles is included as a reduction to “Rental income” in the accompanying consolidated statements of operations and comprehensive income. The amounts of such amortization included in the accompanying consolidated statements of operations and comprehensive income are as follows:follows (in thousands):
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| ($ in thousands) | 2022 | | 2021 | |
| | | 2023 | | 2022 |
| Amortization of deferred leasing costs, lease intangibles and other | Amortization of deferred leasing costs, lease intangibles and other | $ | 117,177 | | | $ | 8,005 | | Amortization of deferred leasing costs, lease intangibles and other | $ | 57,610 | | | $ | 81,821 | |
| Amortization of above-market lease intangibles | Amortization of above-market lease intangibles | $ | 10,161 | | | $ | 700 | | Amortization of above-market lease intangibles | $ | 6,274 | | | $ | 6,630 | |
NOTE 6. DEFERRED REVENUE, INTANGIBLES, NET AND OTHER LIABILITIES
Deferred revenue and other liabilities consist of (i) the unamortized fair value of below-market lease liabilities recorded in connection with purchase accounting, (ii) retainage payables for development and redevelopment projects, (iii) tenant rent payments received in advance of the month in which they are due, and (iv) lease liabilities recorded upon adoption of ASU 2016-02, Leases (Topic 842). The amortization of below-market lease liabilities is recognized as revenue over the remaining life of the leases (including option periods for leases with below-market renewal options) through 2085. Tenant rent payments received in advance are recognized as revenue in the period to which they apply, which is typically the month following their receipt.
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, deferred revenue, intangibles, net and other liabilities consisted of the following:following (in thousands):
| | ($ in thousands) | September 30, 2022 | | December 31, 2021 | |
| | | June 30, 2023 | | December 31, 2022 |
| Unamortized in-place lease liabilities | Unamortized in-place lease liabilities | $ | 193,894 | | | $ | 210,261 | | Unamortized in-place lease liabilities | $ | 176,530 | | | $ | 188,815 | |
| Retainages payable and other | Retainages payable and other | 10,513 | | | 10,796 | | Retainages payable and other | 11,397 | | | 12,110 | |
| Tenant rents received in advance | Tenant rents received in advance | 28,059 | | | 30,125 | | Tenant rents received in advance | 33,576 | | | 29,947 | |
| Lease liabilities | Lease liabilities | 67,543 | | | 70,237 | | Lease liabilities | 68,168 | | | 67,167 | |
| | Total | Total | $ | 300,009 | | | $ | 321,419 | | Total | $ | 289,671 | | | $ | 298,039 | |
The amortization of below-market lease intangibles is included as a component of “Rental income” in the accompanying consolidated statements of operations and comprehensive income and totaled $13.3$11.6 million and $2.1$8.5 million for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.
NOTE 7. MORTGAGE AND OTHER INDEBTEDNESS
The following table summarizes the Company’s indebtedness as of SeptemberJune 30, 20222023 and December 31, 2021:2022 (in thousands):
| | ($ in thousands) | September 30, 2022 | | December 31, 2021 | |
| | | June 30, 2023 | | December 31, 2022 |
| Mortgages payable | Mortgages payable | $ | 234,433 | | | $ | 392,590 | | Mortgages payable | $ | 165,554 | | | $ | 233,621 | |
| Senior unsecured notes | Senior unsecured notes | 1,924,635 | | | 1,924,635 | | Senior unsecured notes | 1,924,635 | | | 1,924,635 | |
| Unsecured term loans | Unsecured term loans | 820,000 | | | 720,000 | | Unsecured term loans | 820,000 | | | 820,000 | |
| Revolving line of credit | — | | | 55,000 | | |
| Unsecured revolving line of credit | | Unsecured revolving line of credit | — | | | — | |
| | 2,979,068 | | | 3,092,225 | | | 2,910,189 | | | 2,978,256 | |
| Unamortized discounts and premiums, net | Unamortized discounts and premiums, net | 46,877 | | | 69,425 | | Unamortized discounts and premiums, net | 38,428 | | | 44,362 | |
| Unamortized debt issuance costs, net | Unamortized debt issuance costs, net | (13,075) | | | (10,842) | | Unamortized debt issuance costs, net | (10,654) | | | (12,319) | |
| Total mortgage and other indebtedness, net | Total mortgage and other indebtedness, net | $ | 3,012,870 | | | $ | 3,150,808 | | Total mortgage and other indebtedness, net | $ | 2,937,963 | | | $ | 3,010,299 | |
Consolidated indebtedness, including weighted average interest rates and weighted average maturities as of SeptemberJune 30, 2022,2023, considering the impact of interest rate swaps, is summarized below:below (dollars in thousands):
| | ($ in thousands) | Amount
Outstanding | | Ratio | | Weighted Average
Interest Rate | | Weighted
Average Years to Maturity | |
| | | Amount
Outstanding | | Ratio | | Weighted Average
Interest Rate | | Weighted
Average Years to Maturity |
Fixed rate debt(1) | Fixed rate debt(1) | $ | 2,795,595 | | | 94 | % | | 3.96 | % | | 4.6 | Fixed rate debt(1) | $ | 2,727,256 | | | 94 | % | | 4.02 | % | | 4.3 |
Variable rate debt(2) | Variable rate debt(2) | 183,473 | | | 6 | % | | 7.02 | % | | 3.4 | Variable rate debt(2) | 182,933 | | | 6 | % | | 8.87 | % | | 2.7 |
| Debt discounts, premiums and issuance costs, net | Debt discounts, premiums and issuance costs, net | 33,802 | | | N/A | | N/A | | N/A | Debt discounts, premiums and issuance costs, net | 27,774 | | | N/A | | N/A | | N/A |
| Total | Total | $ | 3,012,870 | | | 100 | % | | 4.15 | % | | 4.5 | Total | $ | 2,937,963 | | | 100 | % | | 4.32 | % | | 4.2 |
(1)Fixed rate debt includes the portion of variable rate debt that has been hedged by interest rate swaps. As of SeptemberJune 30, 2022,2023, $820.0 million in variable rate debt is hedged to a fixed rate for a weighted average of 2.92.2 years.
(2)Variable rate debt includes the portion of fixed rate debt that has been hedged by interest rate swaps. As of SeptemberJune 30, 2022,2023, $155.0 million in fixed rate debt is hedged to a floating rate for a weighted average of 2.92.2 years.
Mortgages Payable
The following table summarizes the Company’s mortgages payable:payable (dollars in thousands):
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| ($ in thousands) | Balance | | Weighted Average
Interest Rate | | Weighted Average Years
to Maturity | | Balance | | Weighted Average
Interest Rate | | Weighted Average Years
to Maturity | |
| | | Balance | | Weighted Average
Interest Rate | | Weighted Average Years
to Maturity | | Balance | | Weighted Average
Interest Rate | | Weighted Average Years
to Maturity |
Fixed rate mortgages payable(1) | Fixed rate mortgages payable(1) | $ | 205,960 | | | 3.98 | % | | 1.6 | | $ | 363,577 | | | 4.13 | % | | 1.7 | Fixed rate mortgages payable(1) | $ | 137,621 | | | 5.09 | % | | 8.6 | | $ | 205,328 | | | 3.98 | % | | 1.4 |
Variable rate mortgage payable(2) | Variable rate mortgage payable(2) | 28,473 | | | 4.69 | % | | 0.8 | | 29,013 | | | 1.70 | % | | 0.1 | Variable rate mortgage payable(2) | 27,933 | | | 6.81 | % | | 0.1 | | 28,293 | | | 5.96 | % | | 0.6 |
| Total mortgages payable | Total mortgages payable | $ | 234,433 | | | $ | 392,590 | | | Total mortgages payable | $ | 165,554 | | | $ | 233,621 | | |
(1)The fixed rate mortgages had interest rates ranging from 3.75% to 5.73% as of SeptemberJune 30, 20222023 and December 31, 2021.2022.
(2)On April 1, 2022, theThe interest rate on the variable rate mortgage switched to theis based on Bloomberg Short Term Bank Yield Index (“BSBY”) plus 160 basis points from LIBOR plus 160 basis points. The one-month BSBY rate was 3.09%5.21% and 4.36% as of SeptemberJune 30, 2022. The one-month LIBOR rate was 0.10% as of2023 and December 31, 2021.2022, respectively. Subsequent to June 30, 2023, the Company amended the loan agreement to extend the maturity date to August 4, 2026, with a one-year extension option. In addition, the interest rate margin increased to 215 basis points. In conjunction with the extension, the Company made a $9.9 million paydown of the principal balance using available cash on hand.
Mortgages payable are secured by certain real estate and, in some cases, by guarantees from the Operating Partnership, are generally due in monthly installments of principal and interest and mature over various terms through 2032. During the ninesix months ended SeptemberJune 30, 2022,2023, we (i) originated a 10-year $95.1 million mortgage payable at a fixed interest rate of 5.36% secured by the multifamily rental portion of the expansion project at One Loudoun Downtown – Pads G & H, (ii) repaid mortgages payable totaling $155.2$161.5 million that had a weighted average fixed interest rate of 4.31%3.85%, and (iii) made scheduled principal payments of $3.0$1.7 million related to amortizing loans.
Unsecured Notes
The following table summarizes the Company’s senior unsecured notes and exchangeable senior notes:notes (dollars in thousands):
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| ($ in thousands) | Maturity Date | | Balance | | Interest Rate | | Balance | | Interest Rate | |
| | | Maturity Date | | Balance | | Interest Rate | | Balance | | Interest Rate |
| Senior notes – 4.23% due 2023 | Senior notes – 4.23% due 2023 | September 10, 2023 | | $ | 95,000 | | | 4.23 | % | | $ | 95,000 | | | 4.23 | % | Senior notes – 4.23% due 2023 | September 10, 2023 | | $ | 95,000 | | | 4.23 | % | | $ | 95,000 | | | 4.23 | % |
Senior notes – 4.58% due 2024(1) | Senior notes – 4.58% due 2024(1) | June 30, 2024 | | 149,635 | | | 4.58 | % | | 149,635 | | | 4.58 | % | Senior notes – 4.58% due 2024(1) | June 30, 2024 | | 149,635 | | | 4.58 | % | | 149,635 | | | 4.58 | % |
Senior notes – 4.00% due 2025(2) | Senior notes – 4.00% due 2025(2) | March 15, 2025 | | 350,000 | | | 4.00 | % | | 350,000 | | | 4.00 | % | Senior notes – 4.00% due 2025(2) | March 15, 2025 | | 350,000 | | | 4.00 | % | | 350,000 | | | 4.00 | % |
Senior notes – LIBOR + 3.65% due 2025(3)(1) | Senior notes – LIBOR + 3.65% due 2025(3)(1) | September 10, 2025 | | 80,000 | | | 7.40 | % | | 80,000 | | | 3.86 | % | Senior notes – LIBOR + 3.65% due 2025(3)(1) | September 10, 2025 | | 80,000 | | | 9.19 | % | | 80,000 | | | 8.41 | % |
Senior notes – 4.08% due 2026(1) | Senior notes – 4.08% due 2026(1) | September 30, 2026 | | 100,000 | | | 4.08 | % | | 100,000 | | | 4.08 | % | Senior notes – 4.08% due 2026(1) | September 30, 2026 | | 100,000 | | | 4.08 | % | | 100,000 | | | 4.08 | % |
| Senior notes – 4.00% due 2026 | Senior notes – 4.00% due 2026 | October 1, 2026 | | 300,000 | | | 4.00 | % | | 300,000 | | | 4.00 | % | Senior notes – 4.00% due 2026 | October 1, 2026 | | 300,000 | | | 4.00 | % | | 300,000 | | | 4.00 | % |
| Senior exchangeable notes – 0.75% due 2027 | Senior exchangeable notes – 0.75% due 2027 | April 1, 2027 | | 175,000 | | | 0.75 | % | | 175,000 | | | 0.75 | % | Senior exchangeable notes – 0.75% due 2027 | April 1, 2027 | | 175,000 | | | 0.75 | % | | 175,000 | | | 0.75 | % |
Senior notes – LIBOR + 3.75% due 2027(4)(2) | Senior notes – LIBOR + 3.75% due 2027(4)(2) | September 10, 2027 | | 75,000 | | | 7.50 | % | | 75,000 | | | 3.96 | % | Senior notes – LIBOR + 3.75% due 2027(4)(2) | September 10, 2027 | | 75,000 | | | 9.29 | % | | 75,000 | | | 8.51 | % |
Senior notes – 4.24% due 2028(1) | Senior notes – 4.24% due 2028(1) | December 28, 2028 | | 100,000 | | | 4.24 | % | | 100,000 | | | 4.24 | % | Senior notes – 4.24% due 2028(1) | December 28, 2028 | | 100,000 | | | 4.24 | % | | 100,000 | | | 4.24 | % |
Senior notes – 4.82% due 2029(1) | Senior notes – 4.82% due 2029(1) | June 28, 2029 | | 100,000 | | | 4.82 | % | | 100,000 | | | 4.82 | % | Senior notes – 4.82% due 2029(1) | June 28, 2029 | | 100,000 | | | 4.82 | % | | 100,000 | | | 4.82 | % |
Senior notes – 4.75% due 2030(2) | Senior notes – 4.75% due 2030(2) | September 15, 2030 | | 400,000 | | | 4.75 | % | | 400,000 | | | 4.75 | % | Senior notes – 4.75% due 2030(2) | September 15, 2030 | | 400,000 | | | 4.75 | % | | 400,000 | | | 4.75 | % |
| Total senior unsecured notes | Total senior unsecured notes | | $ | 1,924,635 | | | $ | 1,924,635 | | | Total senior unsecured notes | | $ | 1,924,635 | | | $ | 1,924,635 | | |
(1)Private placement notes assumed in connection with the Merger.
(2)Publicly placed notes assumed in connection with the Merger.
(3)$80,000 of 4.47% senior unsecured notes has been swapped to a variable rate of three-month LIBOR plus 3.65% through September 10, 2025.
(4)(2)$75,000 of 4.57% senior unsecured notes has been swapped to a variable rate of three-month LIBOR plus 3.75% through September 10, 2025.
Unsecured Term Loans and Revolving Line of Credit
The following table summarizes the Company’s term loans and revolving line of credit:credit (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 | | December 31, 2021 |
| ($ in thousands) | Maturity Date | | Balance | | Interest Rate | | Balance | | Interest Rate |
Unsecured term loan due 2023 – fixed rate(1)(2) | November 22, 2023 | | $ | — | | | — | % | | $ | 200,000 | | | 4.10 | % |
Unsecured term loan due 2024 – fixed rate(1)(3) | July 17, 2024 | | 120,000 | | | 2.68 | % | | 120,000 | | | 2.88 | % |
Unsecured term loan due 2025 – fixed rate(4) | October 24, 2025 | | 250,000 | | | 5.09 | % | | 250,000 | | | 5.09 | % |
Unsecured term loan due 2026 – fixed rate(1)(5) | July 17, 2026 | | 150,000 | | | 2.73 | % | | 150,000 | | | 2.97 | % |
Unsecured term loan due 2029 – fixed rate(6) | July 29, 2029 | | 300,000 | | | 4.05 | % | | — | | | — | % |
| Total unsecured term loans | | | $ | 820,000 | | | | | $ | 720,000 | | | |
| | | | | | | | | |
Unsecured credit facility revolving line of credit – variable rate(7) | January 8, 2026 | | $ | — | | | 4.24 | % | | $ | 55,000 | | | 1.20 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2023 | | December 31, 2022 |
| Maturity Date | | Balance | | Interest Rate | | Balance | | Interest Rate |
Unsecured term loan due 2024 – fixed rate(1) | July 17, 2024 | | $ | 120,000 | | | 2.68 | % | | $ | 120,000 | | | 2.68 | % |
Unsecured term loan due 2025 – fixed rate(2) | October 24, 2025 | | 250,000 | | | 5.09 | % | | 250,000 | | | 5.09 | % |
Unsecured term loan due 2026 – fixed rate(3) | July 17, 2026 | | 150,000 | | | 2.73 | % | | 150,000 | | | 2.73 | % |
Unsecured term loan due 2029 – fixed rate(4) | July 29, 2029 | | 300,000 | | | 4.05 | % | | 300,000 | | | 4.05 | % |
| Total unsecured term loans | | | $ | 820,000 | | | | | $ | 820,000 | | | |
| | | | | | | | | |
Unsecured credit facility revolving line of credit – variable rate(5) | January 8, 2026 | | $ | — | | | 6.29 | % | | $ | — | | | 5.56 | % |
(1)Unsecured term loans assumed in connection with the Merger.
(2)As of December 31, 2021, $200,000 of LIBOR-based variable rate debt had been swapped to a fixed rate 2.85% plus a credit spread based on a leverage grid ranging from 1.20% to 1.85% through November 22, 2023. The applicable credit spread was 1.25% as of December 31, 2021.
(3)As of September 30, 2022, $120,000$120,000 of Secured Overnight Financing Rate (“SOFR”)-based variable rate debt has been swapped to a fixed rate of 1.58% plus a credit spread based on a ratings grid ranging from 0.80% to 1.65% through July 17, 2024. The applicable
credit spread was 1.10% as of SeptemberJune 30, 2022. As of2023 and December 31, 2021, $120,000 of LIBOR-based variable rate debt had been swapped to a fixed rate 1.68% plus a credit spread based on a leverage grid ranging from 1.20% to 1.70% through July 17, 2024. The applicable credit spread was 1.20% as of December 31, 2021.2022.
(4)(2)$250,000 of LIBOR-basedSOFR-based variable rate debt has been swapped to a fixed rate of 5.09% through October 24, 2025. The maturity date of the term loan may be extended for up to three additional periods of one year each at the Operating Partnership’s option, subject to certain conditions.
(5)(3)As of September 30, 2022, $150,000$150,000 of SOFR-based variable rate debt has been swapped to a fixed rate of 1.68% plus a credit spread based on a ratings grid ranging from 0.75% to 1.60% through July 17, 2026. The applicable credit spread was 1.05% as of SeptemberJune 30, 2022. As of2023 and December 31, 2021, $150,000 of LIBOR-based variable rate debt had been swapped to a fixed rate 1.77% plus a credit spread based on a leverage grid ranging from 1.20% to 1.70% through July 17, 2026. The applicable credit spread was 1.20% as of December 31, 2021.2022.
(6)(4)$300,000 of SOFR-based variable rate debt has been swapped to a fixed rate of 2.70% plus a credit spread based on a ratings grid ranging from 1.15% to 2.20% through November 22, 2023. The applicable credit spread was 1.35% as of SeptemberJune 30, 2023 and December 31, 2022.
(7)(5)The revolving line of credit has two six-month extension options that the Company can exercise, at its election, subject to (i) customary representations and warranties, including, but not limited to, the absence of an event of default as defined in the unsecured credit agreement and (ii) payment of an extension fee equal to 0.075% of the revolving line of credit capacity. On July 29, 2022, SOFR replaced LIBOR as the interest reference rate for the revolving line of credit.
Unsecured Revolving Credit Facility
OnIn July 29, 2022, the Operating Partnership, as borrower, and the Company entered into the Second Amendment (the “Second Amendment”) to the Sixth Amended and Restated Credit Agreement, dated as of July 8, 2021 (as amended, the “Credit Agreement”) with a syndicate of financial institutions to provide for (i) a $250.0 million increase to the $850.0 million unsecured revolving line of credit that was assumed in the Merger, resulting in a $1.1 billionan unsecured revolving credit facility aggregating $1.1 billion (the “2022 Revolving“Revolving Facility”) and (ii) a seven-year $300.0 million unsecured term loan (the “$300M Term Loan”). Under the Second Amendment, the Operating Partnership has the option, subject to certain customary conditions, to increase the 2022 Revolving Facility and/or incur additional term loans in an aggregate amount for all such increases and additional loans of up to $600.0 million, for a total facility amount of up to $2.0 billion. The 2022 Revolving Facility has a scheduled maturity date of January 8, 2026, which maturity date may be extended for up to two additional periods of six months at the Operating Partnership’s option, subject to certain conditions.
Borrowings under the 2022 Revolving Facility bear interest at a rate per annum equal to SOFR plus a margin based on the Operating Partnership’s leverage ratio or credit rating, respectively, plus a facility fee based on the Operating Partnership’s leverage ratio or credit rating, respectively. The SOFR rate is also subject to an additional 0.10% spread adjustment as specified in the Second Amendment. The 2022 Revolving Facility is currently priced on the leverage-based pricing grid. In accordance with the Credit Agreement, the credit spread set forth in the leverage grid resets quarterly based on the Company’s leverage, as calculated at the previous quarter end. The Company may irrevocably elect to convert to the ratings-based pricing grid at any time. As of SeptemberJune 30, 2022,2023, making such an election would have resulted in a lower interest rate; however, the Company had not made the election to convert to the ratings-based pricing grid. The Credit Agreement includes a sustainability metric based on targeted greenhouse gas emission reductions, which results in a reduction of the otherwise applicable interest rate margin by one basis point upon achievement of targets set forth therein.
The following table summarizes the key terms of the 2022 Revolving Facility as of SeptemberJune 30, 2022:2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | Leverage-Based Pricing | | Investment Grade Pricing | | |
| 2022 Credit Agreement | | Maturity Date | | Extension Option | | Extension Fee | | Credit Spread | | Facility Fee | | Credit Spread | | Facility Fee | | SOFR Adjustment |
| $1,100,000 unsecured revolving line of credit | | 1/8/2026 | | 2 six-month | | 0.075% | | 1.05%–1.50% | | 0.15%–0.30% | | 0.725%–1.40% | | 0.125%–0.30% | | 0.10% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Leverage-Based Pricing | | Investment Grade Pricing | | |
| Credit Agreement | | Maturity Date | | Extension Option | | Extension Fee | | Credit Spread | | Facility Fee | | Credit Spread | | Facility Fee | | SOFR Adjustment |
| $1,100,000 unsecured revolving line of credit | | 1/8/2026 | | 2 six-month | | 0.075% | | 1.05%–1.50% | | 0.15%–0.30% | | 0.725%–1.40% | | 0.125%–0.30% | | 0.10% |
The Operating Partnership’s ability to borrow under the Credit Agreement is subject to ongoing compliance by the Operating Partnership and its subsidiaries with various restrictive covenants, including with respect to liens, transactions with affiliates, dividends, mergers and asset sales. In addition, the Credit Agreement requires that the Operating Partnership satisfy certain financial covenants, including (i) a maximum leverage ratio; (ii) a minimum fixed charge coverage ratio; (iii) a maximum secured indebtedness ratio; (iv) a maximum unsecured leverage ratio; and (v) a minimum unencumbered interest coverage ratio. As of SeptemberJune 30, 2022,2023, we were in compliance with all such covenants.
As of SeptemberJune 30, 2022,2023, we had letters of credit outstanding which totaled $1.5totaling $0.3 million, against which no amounts were advanced as of SeptemberJune 30, 2022.
Unsecured Term Loans
On July 29, 2022, in conjunction with the Second Amendment,As of June 30, 2023, the Operating Partnership obtainedhas the following unsecured term loans: (i) a $120.0 million unsecured term loan due July 2024 (the “$120M Term Loan”), (ii) a $250.0 million unsecured term loan due October 2025 (the “$250M Term Loan”), (iii) a $150.0 million unsecured term loan due July 2026 (the “$150M Term Loan”), and (iv) the $300M Term Loan that is priced on a ratings-based pricing gridmatures in July 2029, each of which bears interest at a rate of SOFR plus a credit spread ranging from 1.15% to 2.20%.spread. The SOFR rate is also subject to an additional 0.10% spread adjustment as specified in the Second Amendment. Proceeds from the$120M Term Loan, $150M Term Loan and $300M Term Loan were usedare each priced on a ratings-based pricing grid while the $250M Term Loan is priced on a leverage-based pricing grid. The agreements related to repay the Operating Partnership’s $200.0 million unsecured term loan that was assumed in the Merger$150M Term Loan and was scheduled to mature on November 22, 2023 (the “$200M Term Loan”), certain secured loans, and for other general corporate purposes. The Operating Partnership is permitted to prepay the $300M Term Loan in whole or in part, at any time, subject to a prepayment fee if prepaid on or before July 29, 2024. The agreement related to the $300M Term Loan includesinclude a sustainability metric based on targeted greenhouse gas emission reductions, which results in a reduction of the otherwise applicable interest rate margin by one basis point upon achievement of targets set forth therein.in each agreement.
On October 22, 2021, in connection with
The following table summarizes the Merger,key terms of the Operating Partnership (as successor by merger to RPAI) assumed RPAI’s $120.0 million (the “$120M Term Loan”) and $150.0 million (the “$150M Term Loan”) unsecured term loans which were originally priced on a leverage-based pricing grid with the credit spread set forthas of June 30, 2023 (dollars in the leverage grid resetting quarterly based on the Company’s leverage, as calculatedthousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unsecured Term Loans | | Maturity Date | | Leverage-Based Pricing
Credit Spread | | Investment Grade Pricing
Credit Spread | | SOFR Adjustment |
| $120,000 unsecured term loan due 2024 | | 7/17/2024 | | 1.20% – 1.70% | | 0.80% – 1.65% | | 0.10% |
| $250,000 unsecured term loan due 2025 | | 10/24/2025(1) | | 2.00% – 2.55% | | 2.00% – 2.50% | | 0.10% |
| $150,000 unsecured term loan due 2026 | | 7/17/2026 | | 1.20% – 1.70% | | 0.75% – 1.60% | | 0.10% |
| $300,000 unsecured term loan due 2029 | | 7/29/2029 | | N/A | | 1.15% – 2.20% | | 0.10% |
(1)The maturity date may be extended for up to three additional periods of one year each at the previous quarter end. The Company had theOperating Partnership’s option, subject to irrevocably elect to convert to a ratings-based pricing grid at any time. On August 2, 2022, the Company made the election to convert to the ratings-based pricing grid. The agreement related to the $150M Term Loan includes a sustainability metric based on targeted greenhouse gas emission reductions, which results in a reduction of the otherwise applicable interest rate margin by one basis point upon achievement of targets set forth therein.certain conditions.
Under the agreement related to the $120M Term Loan and the $150M Term Loan, the Operating Partnership has the option to increase each of the term loans to $250.0 million upon the Operating Partnership’s request, subject to certain conditions, including obtaining commitments from any one or more lenders, whether or not currently party to the term loan agreement, to provide such increased amounts. The Operating Partnership is permitted to prepay each of the $120M Term Loan and $150M Term Loan, in whole or in part, at any time without being subject to a prepayment fee.
On October 25, 2018, the Operating Partnership entered into a term loan agreement with KeyBank National Association, as Administrative Agent, and the other lenders party thereto, providing for an unsecured term loan facility of up to $250.0 million (the “$250M Term Loan”).
The Operating Partnership has the option to increase the $250M Term Loan to $300.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders, whether or not currently party to the term loan agreement, to provide such increased amounts. The Operating Partnership is permitted to prepay the $250M Term Loan in whole or in part, at any time, subject to a prepayment fee if prepaid on or before October 25, 2023.
The Operating Partnership is permitted to prepay the $300M Term Loan in whole or in part, at any time, subject to a prepayment fee if prepaid on or before July 29, 2024.
The unsecured term loan agreements contain representations, financial and other affirmative and negative covenants and events of default that are substantially similar to those contained in the Credit Agreement. The unsecured term loan agreements all rank pari passu with the Operating Partnership’s 2022 Revolving Facility and other unsecured indebtedness of the Operating Partnership.
The following table summarizes the key terms of the unsecured term loans as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands)
Unsecured Term Loans
| | Maturity Date | | Leverage-Based Pricing
Credit Spread | | Investment Grade Pricing
Credit Spread | | SOFR Adjustment |
$120,000 unsecured term loan due 2024 | | 7/17/2024 | | 1.20% – 1.70% | | 0.80% – 1.65% | | 0.10% |
$250,000 unsecured term loan due 2025 | | 10/24/2025(1)
| | 2.00% – 2.55% | | 2.00% – 2.50% | | N/A |
$150,000 unsecured term loan due 2026 | | 7/17/2026 | | 1.20% – 1.70% | | 0.75% – 1.60% | | 0.10% |
$300,000 unsecured term loan due 2029 | | 7/29/2029 | | N/A | | 1.15% – 2.20% | | 0.10% |
(1)The maturity date may be extended for up to three additional periods of one year each at the Operating Partnership’s option, subject to certain conditions.
Debt Issuance Costs
Debt issuance costs are amortized over the terms of the respective loan agreements. The following amounts of amortization of debt issuance costs are included as a component of “Interest expense” in the accompanying consolidated statements of operations and comprehensive income:income (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| ($ in thousands) | 2022 | | 2021 |
| Amortization of debt issuance costs | $ | 2,169 | | | $ | 1,963 | |
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2023 | | 2022 |
| Amortization of debt issuance costs | $ | 1,782 | | | $ | 1,370 | |
Fair Value of Fixed and Variable Rate Debt
As of SeptemberJune 30, 2022,2023, the estimated fair value of fixed rate debt was $1.9 billion compared to the book value of $2.1 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 6.67%3.75% to 7.06%8.56%. As of SeptemberJune 30, 2022,2023, the estimated fair value of variable rate debt was $850.5 million compared to the book value of $848.5$847.9 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 4.09%6.34% to 5.14%7.34%.
NOTE 8. DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND OTHER COMPREHENSIVE INCOME
In order to manage potential future variable interest rate risk, we enter into interest rate derivative agreements from time to time. We do not use interest rate derivative agreements for trading or speculative purposes. The agreements with each of our derivative counterparties provide that in the event of default on any of our indebtedness, we could also be declared in default on our derivative obligations.
During the three months ended September 30, 2022, we amended certain interest rate swap agreements, contemporaneous with a modification of the Company’s unsecured revolving credit facility and $300M Term Loan, $120M Term Loan and $150M Term Loan, to facilitate reference rate reform, converting the outstanding swaps from LIBOR to SOFR. In addition, we (i) designated the interest rate swaps related to the $200M Term Loan that was repaid in July 2022 to the $300M Term Loan with an effective date of August 2022 and a maturity date of November 2023; (ii) entered into two forward-starting interest rate swap contracts with notional amounts totaling $200.0 million that swap a floating rate of term SOFR to a fixed rate of 2.37% plus a credit spread of 1.35% with an effective date of November 2023 and a maturity date of August 2025; and (iii) entered into two agreements to swap a total of $100.0 million of SOFR-based variable rate debt to a fixed rate of 2.66% plus a credit spread of 1.35% with an effective date of August 2022 and a maturity date of August 2025.
The following table summarizes the terms and fair values of the Company’s derivative financial instruments that were designated and qualified as part of a hedging relationship as of SeptemberJune 30, 20222023 and December 31, 2021:2022 (dollars in thousands):
| | ($ in thousands) | | Fair Value Assets (Liabilities)(1) | |
| | | Fair Value Assets (Liabilities)(1) |
| Type of Hedge | Type of Hedge | | Number of Instruments | | Aggregate Notional | | Reference Rate | | Interest Rate | | Effective Date | | Maturity Date | | September 30, 2022 | | December 31, 2021 | Type of Hedge | | Number of Instruments | | Aggregate Notional | | Reference Rate | | Interest Rate | | Effective Date | | Maturity Date | | June 30, 2023 | | December 31, 2022 |
| Cash Flow | Cash Flow | | Four | | $ | 250,000 | | | LIBOR | | 3.09 | % | | 12/3/2018 | | 10/24/2025 | | $ | 7,243 | | | $ | (18,282) | | Cash Flow | | Four | | $ | 250,000 | | | SOFR | | 2.99 | % | | 12/1/2022 | | 10/24/2025 | | $ | 8,633 | | | $ | 7,134 | |
| Cash Flow | Cash Flow | | Two | | 100,000 | | | SOFR | | 2.66 | % | | 8/1/2022 | | 8/1/2025 | | 3,645 | | | — | | Cash Flow | | Two | | 100,000 | | | SOFR | | 2.66 | % | | 8/1/2022 | | 8/1/2025 | | 3,972 | | | 3,616 | |
| Cash Flow | Cash Flow | | Two | | 200,000 | | | SOFR | | 2.72 | % | | 8/3/2022 | | 11/22/2023 | | 3,295 | | | (7,769) | | Cash Flow | | Two | | 200,000 | | | SOFR | | 2.72 | % | | 8/3/2022 | | 11/22/2023 | | 2,021 | | | 3,663 | |
| Cash Flow | Cash Flow | | Three | | 120,000 | | | SOFR | | 1.58 | % | | 8/15/2022 | | 7/17/2024 | | 5,414 | | | (2,190) | | Cash Flow | | Three | | 120,000 | | | SOFR | | 1.58 | % | | 8/15/2022 | | 7/17/2024 | | 4,479 | | | 5,461 | |
| Cash Flow | Cash Flow | | Three | | 150,000 | | | SOFR | | 1.68 | % | | 8/15/2022 | | 7/17/2026 | | 11,684 | | | (3,876) | | Cash Flow | | Three | | 150,000 | | | SOFR | | 1.68 | % | | 8/15/2022 | | 7/17/2026 | | 11,094 | | | 10,896 | |
| | $ | 820,000 | | | $ | 31,281 | | | $ | (32,117) | | | $ | 820,000 | | | $ | 30,199 | | | $ | 30,770 | |
| Fair Value(2) | Fair Value(2) | | Two | | $ | 155,000 | | | LIBOR | | LIBOR + 3.70% | | 4/23/2021 | | 9/10/2025 | | $ | (14,979) | | | $ | (2,630) | | Fair Value(2) | | Two | | $ | 155,000 | | | LIBOR | | LIBOR + 3.70% | | 4/23/2021 | | 9/10/2025 | | $ | (13,423) | | | $ | (14,177) | |
| Forward-Starting Cash Flow(3) | Forward-Starting Cash Flow(3) | | Two | | $ | 150,000 | | | SOFR | | 1.356 | % | | 12/1/2022 | | 6/1/2032 | | $ | 26,732 | | | $ | 299 | | Forward-Starting Cash Flow(3) | | Two | | $ | 200,000 | | | SOFR | | 2.37 | % | | 11/22/2023 | | 8/1/2025 | | $ | 6,795 | | | $ | 4,370 | |
Forward-Starting Cash Flow | | Two | | $ | 200,000 | | | SOFR | | 2.37 | % | | 11/22/2023 | | 8/1/2025 | | $ | 4,761 | | | $ | — | | |
(1)Derivatives in an asset position are included within “Prepaid and other assets” and derivatives in a liability position are included within “Accounts payable and accrued expenses” in the accompanying consolidated balance sheets.
(2)The derivative agreements swap a blended fixed rate of 4.52% for a blended floating rate of LIBOR plus 3.70%.
(3)Subsequent to September 30,In October 2022, we terminated these two forward-starting interest rate swaps with notional amounts totaling $150.0 million and a maturity date of June 1, 2032 and received proceeds of $30.9 million upon termination. This settlement is included as a component of accumulated“Accumulated other comprehensive incomeincome” in the accompanying consolidated balance sheets and will beis being reclassified to earnings over time as the hedged items are recognized in earnings. During the six months ended June 30, 2023, we accelerated the reclassification of $1.5 million in accumulated other comprehensive income as a reduction to interest expense as a result of a portion of the hedged forecasted transaction becoming probable not to occur. We currently expect that the debt issuance will occur during 2023.
These interest rate derivative agreements are the only assets or liabilities that we record at fair value on a recurring basis. The valuation of these assets and liabilities is determined using widely accepted techniques including discounted cash flow analysis. These techniques consider the contractual terms of the derivatives (including the period to maturity) and use observable market-based inputs such as interest rate curves and implied volatilities. We also incorporate credit valuation adjustments into the fair value measurements to reflect nonperformance risk on both our part and that of the respective counterparties.
We determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, although the credit valuation adjustments associated with our derivatives utilizeuse 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, 20222023 and December 31, 2021,2022, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined the credit valuation adjustments were not significant to the overall valuation of our derivatives. As a result, we determined our derivative valuations were classified within Level 2 of the fair value hierarchy.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to earnings over time as the hedged items are recognized in earnings. Approximately $1.2$3.5 million and $1.7$7.7 million was reclassified as an increase to earnings during the three and six months ended June 30, 2023, respectively. Approximately $3.3 million and $7.4 million was reclassified as a reductiondecrease to earnings during the three and six months ended SeptemberJune 30, 2022, and 2021, respectively. Approximately $8.6 million and $4.1 million was reclassified as a reduction to earnings during the nine months ended September 30, 2022 and 2021, respectively. As interest payments on our derivatives are made over the next 12 months, we estimate the decrease to interest expense to be $13.1approximately $29.9 million, assuming the current LIBOR and SOFR curves.curve.
Unrealized gains and losses on our interest rate derivative agreements are the only components of the change in accumulated other comprehensive loss.income.
NOTE 9. SHAREHOLDERS’ EQUITY
Distributions
Our Board of Trustees declared a cash distribution of $0.22$0.24 per common share and Common Unit for the thirdsecond quarter of 2022.2023. This distribution was paid on OctoberJuly 14, 20222023 to common shareholders and Common Unit holders of record as of OctoberJuly 7, 2022.2023. For the six months ended June 30, 2023, we declared cash distributions totaling $0.48 per common share and Common Unit.
For the three and six months ended June 30, 2022, we declared cash distributions of $0.21 and $0.41, respectively, per common share and Common Unit.
At-The-Market Offering Program
OnIn February 23, 2021, the Company and the Operating Partnership entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with each of BofA Securities, Inc., Citigroup Global Markets Inc., KeyBanc Capital Markets Inc. and Raymond James & Associates, Inc., pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $150.0 million of its common shares of beneficial interest, $0.01 par value per share, under an at-the-market offering program (the “ATM Program”). OnIn November 30, 2021, the Company and the Operating Partnership amended the Equity Distribution Agreement to reflect their filing of a shelf registration statement on November 16, 2021 with the SEC. As of September 30, 2022, the Company has not sold anycommon shares under the ATM Program. The Operating Partnership intends to use the net proceeds, if any, to repay borrowings under its 2022 Revolving Facility and other indebtedness and for working capital and other general corporate purposes. The Operating Partnership may also use the net proceeds for acquisitions of operating properties and the development or redevelopment of properties, although there are currently no understandings, commitments or agreements to do so. As of June 30, 2023, the Company has not sold anycommon shares under the ATM Program.
Share Repurchase Program
In February 2021, the Company’s Board of Trustees approved aThe Company has an existing share repurchase program authorizing share repurchasesunder which it may repurchase, from time to time, up to an aggregatea maximum of $150.0$300.0 million of its common shares (the “Share Repurchase Program”). In February 2022, the Company extended its Share Repurchase Program for an additional year and it will now terminate on February 28, 2023, if not terminated or extended prior to that date. In April 2022, the Company’s Board of Trustees authorized a $150.0 million increase to the size of the Share Repurchase Program, authorizing share repurchases up to an aggregate of $300.0 million. As of September 30, 2022, the Company has not repurchased any shares under its Share Repurchase Program. The Company intends to fund any future repurchases under the Share Repurchase Program with cash on hand or availability under the 2022 Revolving Facility, subject
to any applicable restrictions. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors. In February 2023, the Company extended the Share Repurchase Program for an additional year so it will now terminate on February 28, 2024, if not terminated or extended prior to that date. As of June 30, 2023, the Company has not repurchased any shares under the Share Repurchase Program.
NOTE 10. EARNINGS PER SHARE OR UNIT
Basic earnings per share or unit is calculated based on the weighted average number of common shares or units outstanding during the period. Diluted earnings per share or unit is determinedcalculated based on the weighted average number of common shares or units outstanding during the period combined with the incremental average common shares or units that would have been outstanding assuming the conversion of all potentially dilutive common shares or units into common shares or units as of the earliest date possible.
Potentially dilutive securities include (i) outstanding options to acquire common shares; (ii) Limited Partner Units, which may be exchanged for either cash or common shares at the Parent Company’s option and under certain circumstances; (iii) appreciation-only Long-Term Incentive Plan (“AO LTIP”) units; and (iv) deferred common share units, which may be credited to the personal accounts of non-employee trustees in lieu of compensation paid in cash or the issuance of common shares to such trustees. Limited Partner Units have been omitted from the Parent Company’s denominator for the purpose of computing diluted earnings per share since the effect of including thesethose amounts in the denominator would have no dilutive impact. Weighted average Limited Partner Units outstanding were 3.0 million for the three and 2.7six months ended June 30, 2023, and 2.8 million and 2.6 million for the three and ninesix months ended SeptemberJune 30, 2022, respectively, and 2.4 million and 2.5 million for the three and nine months ended September 30, 2021, respectively.
Due to the net loss allocable to common shareholders and Common Unit holders for the three and ninesix months ended SeptemberJune 30, 2022, and the three months ended September 30, 2021, no securities had a dilutive impact for those periods.this period.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Other Commitments and Contingencies
We are obligated under various completion guarantees with certain lenders and lease agreements with tenants to complete all or portions of a development project and tenant-specific space currently under construction. We believe we currently have sufficient financing in place to fund these projects and expect to do so primarily through free cash flow or borrowings on the 2022 Revolving Facility.
In 2017, we provided a repayment guaranty on a $33.8 million construction loan associated with the development of the Embassy Suites at the University of Notre Dame, consistent with our 35% ownership interest. Our portion of the repayment guaranty is limited to $5.9 million and the guaranty’s term is through July 1, 2024, the maturity date of the construction loan. As of SeptemberJune 30, 2022,2023, the outstanding loan balance was $33.6$33.1 million, of which our share was $11.8$11.6 million. The loan is secured by the hotel.
In 2021, we provided repayment and completion guaranties on loans totaling $66.2 million associated with the development of The Corner mixed-use project in the Indianapolis MSA. As of SeptemberJune 30, 2022,2023, the outstanding balance of the loans was $44.5 million, of which our share was $22.2 million.
As of June 30, 2023, we had outstanding letters of credit totaling $1.5$0.3 million with no amounts advanced against these instruments.
Legal Proceedings
We are not subject to any material litigation nor, to management’s knowledge, is any material litigation currently threatened against us. We are parties to routine litigation, claims, and administrative proceedings arising in the ordinary course of business. Management believes that such matters will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows taken as a whole.
NOTE 12. SUBSEQUENT EVENTS
Subsequent to SeptemberJune 30, 2022, we:2023, we amended the loan agreement on a $27.9 million variable rate mortgage payable to extend the maturity date to August 4, 2026, with a one-year extension option. In addition, the interest rate margin increased to 215 basis points. In conjunction with the extension, we made a $9.9 million paydown of the principal balance using available cash on hand.
•redeemedOn August 7, 2023, a wholly owned subsidiary of the Company (“KRG Development”) assigned to Pan Am Development Partners, LLC (“Assignee”) certain rights and obligations created by a certain project agreement for the development of a hotel on the Pan Am Plaza site across from the Indiana Convention Center in Indianapolis, IN, including certain future development rights and a right of first offer involving the project (collectively, the “Project Rights and Obligations”). Assignee is a wholly owned subsidiary of Circle Block Investors, LLC, the parent company that owns the Conrad Indianapolis hotel, of which Mr. Alvin E. Kite, our Chairman Emeritus and the father of John A. Kite, is the majority owner, and Mr. John A. Kite, our Chief Executive Officer and Chairman of the Board, and Mr. Thomas K. McGowan, our President and Chief Operating Officer, are minority owners. In connection with the transaction, Assignee assumed all remaining Class B units relatedProject Rights and Obligations from and after August 7, 2023 and will pay KRG Development an assignment fee of up to a joint venture$3.5 million (the “Assignment Fee”), which is due and payable upon the completion of certain development activities that owned Crossing at Killingly Commonsare expected to occur in 2024. In connection with the transactions, Mr. Kite and Mr. McGowan expressly acknowledged and agreed that was entered into by Inland Diversified priorthey remain subject to its mergertheir executive employment agreements with the Company, including, without limitation, the obligation of each executive to devote substantially all his business time and effort to the performance of his duties for $9.7 million;
•sold one ground lease at Lincoln Plaza, our multi-tenant retail property in Worcester, Massachusetts, forthe Company. Assignee will engage a sales priceteam of $10.0 million;full-time professionals to perform the Project Rights and
•terminated two forward-starting interest rate swaps with notional amounts totaling $150.0 million and received proceeds Obligations. The transaction was approved by a special transaction committee of $30.9 million upon termination. This settlement is includedthe independent trustees of the Company (the “Transaction Committee”) as a component of accumulated other comprehensive income and will be reclassified to earnings over timewell as the hedged items are recognizedCompany’s independent trustees. The Transaction Committee engaged a third-party financial advisor to assist it in earnings.determining the net value of the Project Rights and Obligations and establishing the Assignment Fee.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying historical financial statements and related notes thereto. In this discussion, unless the context suggests otherwise, references to “our Company,” “we,” “us,” and “our” mean Kite Realty Group Trust and its direct and indirect subsidiaries, including Kite Realty Group, L.P.
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by us, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, performance, transactions or achievements, financial or otherwise, may differ materially from the results, performance, transactions or achievements, financial or otherwise, expressed or implied by the forward-looking statements.
Risks, uncertainties and other factors that might cause such differences, some of which could be material, include but are not limited to:
•risks associated with the adverse effect of the ongoing pandemic of the novel coronavirus (“COVID-19”), including possible resurgences, variants and mutations, on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets;
•risks associated with the Company’s Merger (defined below) with Retail Properties of America, Inc. (“RPAI”), including the integration of the businesses of the combined company, the ability to achieve expected synergies or cost savings and potential disruptions to the Company’s plans and operations;
•national and local economic, business, banking, real estate and other market conditions, particularly in connection with low or negative growth in the U.S. economy as well as economic uncertainty (including a potential economic slowdown or recession, rising interest rates, inflation, unemployment, or limited growth in consumer income or spending);
•financing risks, including the availability of, and costs associated with, sources of liquidity;
•our ability to refinance, or extend the maturity dates of, our indebtedness;
•the level and volatility of interest rates;
•the financial stability of tenants;
•the competitive environment in which we operate, including potential oversupplies of and reduction in demand for rental space;
•acquisition, disposition, development and joint venture risks;
•property ownership and management risks, including the relative illiquidity of real estate investments, and expenses, vacancies or the inability to rent space on favorable terms or at all;
•our ability to maintain our status as a real estate investment trust (“REIT”) for U.S. federal income tax purposes;
•potential environmental and other liabilities;
•impairment in the value of real estate property we own;
•the attractiveness of our properties to tenants, the actual and perceived impact of e-commerce on the value of shopping center assets and changing demographics and customer traffic patterns;
•business continuity disruptions and a deterioration in our tenant’stenants’ ability to operate in affected areas or delays in the supply of products or services to us or our tenants from vendors that are needed to operate efficiently, causing costs to rise sharply and inventory to fall;
•risks related to our current geographical concentration of our properties in Texas, Florida, Maryland, New York, Maryland, and North Carolina;
•civil unrest, acts of violence, terrorism or war, acts of God, climate change, epidemics, pandemics (including COVID-19)the ongoing pandemic of the novel coronavirus (“COVID-19”)), natural disasters and severe weather conditions, including such events that may result in underinsured or uninsured losses or other increased costs and expenses;
•changes in laws and government regulations including governmental orders affecting the use of our properties or the ability of our tenants to operate, and the costs of complying with such changed laws and government regulations;
•possible short-term or long-term changes in consumer behavior due to COVID-19 and the fear of future pandemics;
•our ability to satisfy environmental, social or governance standards set by various constituencies;
•insurance costs and coverage;
•risks associated with cybersecurity attacks and the loss of confidential information and other business disruptions;
•other factors affecting the real estate industry generally; and
•other risks identified in this Quarterly Report on Form 10-Q and, from time to time, in other reports we file with the Securities and Exchange Commission (the “SEC”) or in other documents that we publicly disseminate, including, in particular, the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022.
We undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Our Business and Properties
Kite Realty Group Trust is a publicly held REIT which,that, through its majority-owned subsidiary, Kite Realty Group, L.P., owns interests in various operating subsidiaries and joint ventures engaged in the ownership, operation, acquisition, development, and redevelopment of high-quality, open-air shopping centers and mixed-use assets that are primarily grocery-anchored and located in high-growth Sun Belt and select strategic gateway markets in the United States. We derive revenuesour revenue primarily from the collection of contractual rents and reimbursement payments from tenants under existing lease agreements at each of our properties. Therefore, our operating results depend materially on, among other things, the ability of our tenants to make required lease payments, the health and resilience of the U.S. retail sector, interest rate volatility, stability in the banking sector, job growth, and the real estate market and overall economic conditions.
As of SeptemberJune 30, 2022,2023, we owned interests in 183181 operating retail properties totaling approximately 28.928.6 million square feet and one office property with 0.3 million square feet. Of the 183181 operating retail properties, 11 contain an office component. We also owned fourtwo development projects under construction as of this date.
Merger with RPAI
On October 22, 2021, we completed a merger with RPAI in accordance with the Agreement and Plan of Merger dated July 18, 2021 (the “Merger Agreement”), by and among the Company, its wholly owned subsidiary KRG Oak, LLC (“Merger Sub”) and RPAI, pursuant to which RPAI merged with and into Merger Sub (the “Merger”). Immediately following the closing of the Merger, Merger Sub merged with and into the Operating Partnership so that all of the assets and liabilities of the Company continue to be held at or below the Operating Partnership level. As a result of the Merger, we acquired 100 operating retail properties and five development projects along with multiple parcels of entitled land for future value creation, creating a top five open-air shopping center REIT. The combined high-quality, open-air portfolio is a mixture of predominantly necessity-based, grocery-anchored neighborhood and community centers, combined with vibrant mixed-use assets. The Merger more than doubled the Company’s presence in high-growth markets that have mild or temperate climates and no or relatively low income taxes, while also introducing and/or enhancing its presence in strategic gateway markets. In addition, the combined company has additional opportunities to further increase shareholder value, including leasing of pandemic-related vacancies, optimizing net operating income (“NOI”) margins, lowering the Company’s cost of capital, and completing select development projects. Pursuant to the terms of the Merger Agreement, each outstanding share of RPAI common stock converted into the right to
receive 0.623 common shares of the Company plus cash in lieu of fractional Company shares. The Operating Partnership issued an equivalent amount of General Partner Units to the Parent Company.
Inflation
Prior to 2021, inflation was relatively low and had a minimal impact on our operating and financial performance; however, inflation has increased significantly in recent months and may continue to be elevated or increase further. Most of our leases contain provisions designed to mitigate the adverse impact of inflation, including stated rent increases and requirements for tenants to pay a share of operating expenses, including common area maintenance, real estate taxes, insurance or other operating expenses related to the maintenance of our properties, with escalation clauses in certain leases. Most of our leases also include clauses that allow us to collect additional rent based on a percentage of tenants’ gross sales over stated thresholds, which sales generally increase as prices rise. In addition, we believe that the rental rates in many of our leases are below current market rates for comparable space and that upon renewal, such rates may be increased to be in line with current rates, which may offset certain inflationary expense pressures. Due to the current high inflation environment, the U.S. Federal Reserve has aggressively raised short-term interest rates to slow the economy down, which has caused our borrowing costs to rise. We continually evaluate our exposure to interest rate fluctuations and enter into interest rate protection agreements to mitigate the impact of changes in interest rates on our variable rate debt. However, because we cannot predict with any level of certainty what future actions the U.S. Federal Reserve will take to combat the high inflationary environment, we cannot estimate the ultimate impact it will have on our operating and financial performance.
Historically, economic indicators such as GDP growth, consumer confidence and employment have been correlated with demand for certain of our tenants’ products and services. If an economic recession returns, it could increase the number of our tenants that are unable to meet their lease obligations to us and could limit the demand for space in our spaceproperties from new tenants.
Impacts on Business from COVID-19
In 2020 and 2021, the COVID-19 pandemic had a significant adverse impact on many of our tenants and on our business. As the domestic economy recovered from many of the effects of COVID-19, retailers improved their operations to account for the pandemic, including using open-air centers as convenient shopping destinations and last-mile fulfillment through the use of in-store pickup, curbside pickup, and shipping from stores. We expect the ongoing effects of COVID-19 to be dictated by, among other things, the duration of the COVID-19 pandemic, including possible resurgences and mutations, the success of efforts to contain it, the efficacy of vaccines, including against variants of COVID-19, public adoption rates of vaccines and the impact of other actions taken in response to the pandemic. These uncertainties make it difficult to predict operating results for our business; therefore, there can be no assurances that we will not experience further declines in revenues, net income, Funds From Operations (“FFO”) or other operating metrics, which could be material.
Operating Activity
During the thirdsecond quarter of 2022,2023, we executed new and renewal leases on 221190 individual spaces totaling 1,574,3381,331,056 square feet (10.8%(14.8% cash leasing spread on 156146 comparable leases). New leases were signed on 6152 individual spaces for 207,224234,140 square feet of gross leasable area (“GLA”) (30.7%(45.5% cash leasing spread on 2229 comparable leases), while non-option renewal leases were signed on 16085 individual spaces for 1,367,114289,661 square feet of GLA (8.5%(11.9% cash leasing spread on 13464 comparable leases) and option renewals were signed on 53 individual spaces for 807,255 square feet of GLA (8.6% cash leasing spread). Excluding option renewals, the blended cash spreads for comparable new and non-option renewal leases were 24.0%. Comparable new and renewal leases are defined as those for which the space was occupied by a tenant within the last 12 months.
Results of Operations
The comparability of results of operations for the three and ninesix months ended SeptemberJune 30, 20222023 and 20212022 is affected by our Merger with RPAI that was completed on October 22, 2021, in which we acquired 100 operating retail properties as well as five development projects, along with our development, redevelopment, and operating property acquisition and disposition activities during these periods. Therefore, we believe it is most useful to review the comparisons of our results of operations for these periods in conjunction with the discussion of our activities during those periods, which is set forth below.
Property Acquisitions
In addition to the properties we acquired in the Merger, theThe following operating properties were acquired at various times during the period from January 1, 20212022 through SeptemberJune 30, 2022:2023:
| | | | | | | | | | | | | | | | | | | | |
| Property Name | | Metropolitan
Statistical Area (MSA) | | Acquisition Date | | Owned GLA |
Nora Plaza outparcel | | Indianapolis, IN | | December 2021 | | 23,722 | |
| Pebble Marketplace | | Las Vegas, NV | | February 16, 2022 | | 85,796 | |
| MacArthur Crossing two-tenant building | | Dallas, TX | | April 13, 2022 | | 56,077 | |
| Palms Plaza | | Miami, FL | | July 15, 2022 | | 68,976 | |
Operating Property Dispositions
The following operating and other properties were sold during the period from January 1, 20212022 through SeptemberJune 30, 2022:2023:
| | | | | | | | | | | | | | | | | | | | |
| Property Name | | MSA | | Disposition Date | | Owned GLA |
Westside Market | | Dallas, TX | | October 2021 | | 93,377 | |
Plaza Del Lago(1) | | Chicago, IL | | June 16, 2022 | | 100,016 | |
Lincoln Plaza – Lowe’s(2) | | Worcester, MA | | October 27, 2022 | | — | |
| Kingwood Commons | | Houston, TX | | May 8, 2023 | | 158,172 | |
| Pan Am Plaza & Garage | | Indianapolis, IN | | June 8, 2023 | | — | |
(1)Plaza Del Lago also contains 8,800 square feet of residential space comprised of 18 multifamily rental units.
(2)We sold the ground lease interest in one tenant at an existing multi-tenant operating retail property. The total number of properties in our portfolio was not affected by this transaction.
Development and Redevelopment Projects
The following properties were under active development or redevelopment at various times during the period from January 1, 20212022 through SeptemberJune 30, 20222023 and removed from our operating portfolio:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Project Name | | MSA | | Transition to Development or Redevelopment(1) | | Transition to
Operating Portfolio | | Owned
Commercial GLA |
Hamilton Crossing Centre(2)(3) | | Indianapolis, IN | | June 2014 | | Pending | | 92,283 | |
The Corner(2) | | Indianapolis, IN | | December 2015 | | Pending | | 24,000 | |
| Eddy Street Commons – Phase III | | South Bend, IN | | September 2020 | | March 2022 | | 18,600 | |
Glendale Town Center(2)
| | Indianapolis, IN | | March 2019 | | December 2021 | | 199,021 | |
| The Landing at Tradition – Phase II | | Port St. Lucie, FL | | September 2021 | | PendingJune 2023 | | 39,900 | |
Carillon MOB(4)(2) | | Washington, D.C. | | October 2021 | | Pending | | 126,000 | |
Circle East(4) | | Baltimore, MD | | October 2021 | | September 2022 | | 82,000 | |
One Loudoun Downtown – Residential and Pads G&H Commercial(4) | | Washington, D.C. | | October 2021 | | Residential: June 2022
Commercial: PendingDecember 2022 | | 67,000 | |
Shoppes at Quarterfield(4) | | Baltimore, MD | | October 2021 | | June 2022 | | 58,000 | |
Edwards Multiplex – Ontario(2) | | Los Angeles, CA | | March 2023 | | Pending | | 124,614 | |
(1)Transition date represents the date the property was transferred from our operating portfolio into redevelopment status. For legacy RPAIRetail Properties of America, Inc. (“RPAI”) projects, the transition date represents the later of the date of the closing of the Mergermerger (October 2021) and the date the project was transferred into redevelopment status.
(2)This property has been identified as a redevelopment property and is not included in the operating portfolio or the same property pool. The redevelopment projects at Hamilton Crossing Centre and The Corner will include the creation of a mixed-used development.
(3)A portion of the Hamilton Crossing Centre redevelopment was sold in January 2022.
(4)Project was assumed as part of the Merger with RPAI in October 2021.
Comparison of Operating Results for the Three Months Ended SeptemberJune 30, 20222023 to the Three Months Ended SeptemberJune 30, 20212022
The following table reflects changes in the components of our consolidated statements of operations for the three months ended SeptemberJune 30, 2023 and 2022 and 2021.(in thousands):
| | | Three Months Ended September 30, | | | Three Months Ended June 30, | |
| ($ in thousands) | 2022 | | 2021 | | Change | |
| | | 2023 | | 2022 | | Change |
| Revenue: | Revenue: | | | | | | Revenue: | | | | | |
| Rental income | Rental income | $ | 195,675 | | | $ | 70,216 | | | $ | 125,459 | | Rental income | $ | 205,836 | | | $ | 196,205 | | | $ | 9,631 | |
| Other property-related revenue | Other property-related revenue | 3,013 | | | 1,054 | | | 1,959 | | Other property-related revenue | 1,883 | | | 3,729 | | | (1,846) | |
| Fee income | Fee income | 1,623 | | | 195 | | | 1,428 | | Fee income | 1,040 | | | 2,671 | | | (1,631) | |
| Total revenue | Total revenue | 200,311 | | | 71,465 | | | 128,846 | | Total revenue | 208,759 | | | 202,605 | | | 6,154 | |
| | Expenses: | Expenses: | | | Expenses: | | |
| Property operating | Property operating | 25,507 | | | 10,482 | | | 15,025 | | Property operating | 27,232 | | | 26,123 | | | 1,109 | |
| Real estate taxes | Real estate taxes | 25,703 | | | 8,624 | | | 17,079 | | Real estate taxes | 26,697 | | | 27,883 | | | (1,186) | |
| General, administrative and other | General, administrative and other | 14,859 | | | 8,241 | | | 6,618 | | General, administrative and other | 14,499 | | | 13,809 | | | 690 | |
| Merger and acquisition costs | Merger and acquisition costs | 108 | | | 9,198 | | | (9,090) | | Merger and acquisition costs | — | | | (27) | | | 27 | |
| Depreciation and amortization | Depreciation and amortization | 115,831 | | | 30,193 | | | 85,638 | | Depreciation and amortization | 109,462 | | | 119,761 | | | (10,299) | |
| | Total expenses | Total expenses | 182,008 | | | 66,738 | | | 115,270 | | Total expenses | 177,890 | | | 187,549 | | | (9,659) | |
| | Gain on sales of operating properties, net | Gain on sales of operating properties, net | — | | | 1,260 | | | (1,260) | | Gain on sales of operating properties, net | 28,440 | | | 23,958 | | | 4,482 | |
| | Operating income | Operating income | 18,303 | | | 5,987 | | | 12,316 | | Operating income | 59,309 | | | 39,014 | | | 20,295 | |
| Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
| Interest expense | Interest expense | (26,226) | | | (12,878) | | | (13,348) | | Interest expense | (27,205) | | | (25,709) | | | (1,496) | |
| Income tax benefit of taxable REIT subsidiary | — | | | 91 | | | (91) | | |
| Income tax (expense) benefit of taxable REIT subsidiary | | Income tax (expense) benefit of taxable REIT subsidiary | (45) | | | 188 | | | (233) | |
| | Equity in earnings (loss) of unconsolidated subsidiaries | 144 | | | (196) | | | 340 | | |
| Other income, net | 58 | | | 168 | | | (110) | | |
| Net loss | (7,721) | | | (6,828) | | | (893) | | |
| Equity in earnings of unconsolidated subsidiaries | | Equity in earnings of unconsolidated subsidiaries | 118 | | | 114 | | | 4 | |
| Other income (expense), net | | Other income (expense), net | 304 | | | (162) | | | 466 | |
| Net income | | Net income | 32,481 | | | 13,445 | | | 19,036 | |
| Net income attributable to noncontrolling interests | Net income attributable to noncontrolling interests | (116) | | | (132) | | | 16 | | Net income attributable to noncontrolling interests | (423) | | | (314) | | | (109) | |
| Net loss attributable to common shareholders | $ | (7,837) | | | $ | (6,960) | | | $ | (877) | | |
| | Property operating expense to total revenue ratio | 12.7 | % | | 14.7 | % | | |
| Net income attributable to common shareholders | | Net income attributable to common shareholders | $ | 32,058 | | | $ | 13,131 | | | $ | 18,927 | |
| | | | | | | | | | | | | | | | | |
| Property operating expense to total revenue ratio | 13.0 | % | | 12.9 | % | | |
Rental income (including tenant reimbursements) increased $125.5$9.6 million, or 178.7%4.9%, due to the following:following (in thousands):
| | | | | |
($ in thousands) | Net change three months ended SeptemberJune 30, 20212022 to 20222023
|
Properties or components of properties sold or held for sale during 2021 2022 and/or 20222023 | $ | (367)(1,146) | |
Properties under redevelopment or acquired during 20212022 and/or 20222023 | 2,025 | |
Properties acquired in the Merger with RPAI | 122,9233,174 | |
Properties fully operational during 20212022 and 20222023 and other | 8787,603 | |
| Total | $ | 125,4599,631 | |
The net increase of $0.9$7.6 million in rental income for properties that were fully operational during 20212022 and 20222023 is primarily due to a $1.0increases in the following: (i) base minimum rent of $5.2 million, increase in tenant reimbursements due to higher recoverable common area maintenance expenses(ii) lease termination income of $1.9 million, and real estate taxes and higher(iii) overage rent of $0.9$0.6 million due to improved tenant performance.performance, along with lower bad debt expense of $0.8 million. These variances were partially offset by an increasedecreases in bad debt expenseancillary income of $1.0$0.6 million and lower base minimum renttenant reimbursements of $0.4 million mainly due to the receipt of $1.4 million of previously unbilled base rent from a tenant during the three months ended September 30, 2021.current year real estate tax refunds due to tenants. The occupancy of the fully operational properties increased from 88.9%91.5% for 20212022 to 91.0%92.3% for 2022.2023.
Other property-related revenue primarily consists of parking revenues, gains on the sale of land and other miscellaneous activity. This revenue increaseddecreased by $2.0$1.8 million primarily as a result of higherlower gains on sales of undepreciated assets of $1.3 million recognized during the three months ended SeptemberJune 30, 20222023 and an increasea decrease in parking revenue of $0.2 million.
We recorded fee income of $1.6$1.0 million and $0.2$2.7 million during the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, from property management and development services provided to third parties and unconsolidated joint ventures.
The increasedecrease in fee income is primarily related to a decrease in development fee services forfees earned related to the development of a corporate campus for Republic Airways.Airways at Hamilton Crossing Centre.
Property operating expenses increased $15.0$1.1 million, or 143.3%4.2%, due to the following:following (in thousands):
| | | | | |
($ in thousands) | Net change three months ended SeptemberJune 30, 20212022 to 20222023
|
Properties or components of properties sold or held for sale during 2021 2022 and/or 20222023 | $ | (118)(321) | |
Properties under redevelopment or acquired during 20212022 and/or 20222023 | 366 | |
Properties acquired in the Merger with RPAI | 13,367454 | |
Properties fully operational during 20212022 and 20222023 and other | 1,410976 | |
| Total | $ | 15,0251,109 | |
The net increase of $1.4$1.0 million in property operating expenses for properties that were fully operational during 20212022 and 20222023 is primarily due to increases of $0.8 million in insurancenon-recoverable operating expenses and $0.6 million in landscaping and repairs and maintenance expense, of $1.1 million and utilities of $0.4 million, partially offset by a reduction$0.5 million decrease in non-recoverable operating expenses.insurance expense. As a percentage of revenue, property operating expenses decreasedincreased from 14.7%12.9% to 12.7%13.0% due to an increase in revenueexpenses in 2022.2023.
Real estate taxes increased $17.1decreased $1.2 million, or 198.0%4.3%, due to the following:following (in thousands):
| | | | | |
($ in thousands) | Net change three months ended SeptemberJune 30, 20212022 to 20222023
|
Properties or components of properties sold or held for sale during 2021 2022 and/or 20222023 | $ | (154)(411) | |
Properties under redevelopment or acquired during 20212022 and/or 20222023 | 279 | |
Properties acquired in the Merger with RPAI | 16,356635 | |
Properties fully operational during 20212022 and 20222023 and other | 598 (1,410) | |
| Total | $ | 17,079 (1,186) | |
The net increasedecrease of $0.6$1.4 million in real estate taxes for properties that were fully operational during 20212022 and 20222023 is primarily due to a slight increasehigher real estate tax refunds received in 2023 and lower real estate tax assessments at certain properties in the portfolio as well as lower real estate tax refunds received in 2022.2023. The majority of real estate tax expense is recoverable from tenants and such recovery is reflected within rental income.
General, administrative and other expenses increased $6.6$0.7 million, or 80.3%. This increase is5.0%, primarily due to incremental head count as part of the Merger and higher share-based compensation expense.
The Company incurred $0.1 million ofdid not incur any significant merger and acquisition costs related to the Mergermerger with RPAI during the three months ended SeptemberJune 30, 2022 compared to $9.2 million of merger2023 and acquisition costs incurred during the three months ended September 30, 2021.2022.
Depreciation and amortization expense increased $85.6decreased $10.3 million, or 283.6%8.6%, primarily as a result ofdue to the Merger with RPAI as detailed below:following (in thousands):
| | | | | |
($ in thousands) | Net change three months ended SeptemberJune 30, 20212022 to 20222023
|
Properties or components of properties sold or held for sale during 2021 2022 and/or 20222023 | $ | (255)(1,056) | |
Properties under redevelopment or acquired during 20212022 and/or 20222023 | 1,603 | |
Properties acquired in the Merger with RPAI | 83,8571,616 | |
Properties fully operational during 20212022 and 20222023 and other | 433 (10,859) | |
| Total | $ | 85,638 (10,299) | |
The net increasedecrease of $0.4$10.9 million in depreciation and amortization at properties that were fully operational during 20212022 and 20222023 is primarily due to certain assets with shorter useful lives that became fully depreciated during the timingprior year.
We recorded a net gain on sales of additionsoperating properties of $28.4 million for the three months ended June 30, 2023 on the sale of Kingwood Commons and disposalsthe undeveloped land and related parking garage at operating properties.Pan Am Plaza compared to a net gain of $24.0 million on the sale of Plaza Del Lago for the three months ended June 30, 2022.
Interest expense increased $1.5 million, or 5.8%, primarily due to higher interest costs related to our variable rate debt, partially offset by favorable interest rate swaps.
Interest expense increased $13.3 million, or 103.6%, primarily due to interest costs of $11.4 million related to debt assumed in conjunction with the Merger.
Comparison of Operating Results for the NineSix Months Ended SeptemberJune 30, 20222023 to the NineSix Months Ended SeptemberJune 30, 20212022
The following table reflects changes in the components of our consolidated statements of operations for the ninesix months ended SeptemberJune 30, 2023 and 2022 and 2021.(in thousands):
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
| ($ in thousands) | 2022 | | 2021 | | Change | |
| | | 2023 | | 2022 | | Change |
| Revenue: | Revenue: | | | | | | Revenue: | | | | | |
| Rental income | Rental income | $ | 582,772 | | | $ | 206,097 | | | $ | 376,675 | | Rental income | $ | 408,899 | | | $ | 387,097 | | | $ | 21,802 | |
| Other property-related revenue | Other property-related revenue | 7,932 | | | 3,133 | | | 4,799 | | Other property-related revenue | 3,799 | | | 4,919 | | | (1,120) | |
| Fee income | Fee income | 6,603 | | | 1,144 | | | 5,459 | | Fee income | 2,811 | | | 4,980 | | | (2,169) | |
| Total revenue | Total revenue | 597,307 | | | 210,374 | | | 386,933 | | Total revenue | 415,509 | | | 396,996 | | | 18,513 | |
| | Expenses: | Expenses: | | | Expenses: | | |
| Property operating | Property operating | 77,558 | | | 30,978 | | | 46,580 | | Property operating | 54,546 | | | 52,051 | | | 2,495 | |
| Real estate taxes | Real estate taxes | 80,445 | | | 26,574 | | | 53,871 | | Real estate taxes | 53,880 | | | 54,742 | | | (862) | |
| General, administrative and other | General, administrative and other | 41,977 | | | 23,676 | | | 18,301 | | General, administrative and other | 27,883 | | | 27,118 | | | 765 | |
| Merger and acquisition costs | Merger and acquisition costs | 1,006 | | | 9,958 | | | (8,952) | | Merger and acquisition costs | — | | | 898 | | | (898) | |
| Depreciation and amortization | Depreciation and amortization | 357,096 | | | 90,625 | | | 266,471 | | Depreciation and amortization | 217,533 | | | 241,265 | | | (23,732) | |
| | Total expenses | Total expenses | 558,082 | | | 181,811 | | | 376,271 | | Total expenses | 353,842 | | | 376,074 | | | (22,232) | |
| | Gain on sales of operating properties, net | Gain on sales of operating properties, net | 27,126 | | | 27,517 | | | (391) | | Gain on sales of operating properties, net | 28,440 | | | 27,126 | | | 1,314 | |
| | Operating income | Operating income | 66,351 | | | 56,080 | | | 10,271 | | Operating income | 90,107 | | | 48,048 | | | 42,059 | |
| Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
| Interest expense | Interest expense | (77,449) | | | (37,386) | | | (40,063) | | Interest expense | (52,630) | | | (51,223) | | | (1,407) | |
| Income tax benefit of taxable REIT subsidiary | 259 | | | 308 | | | (49) | | |
| Income tax (expense) benefit of taxable REIT subsidiary | | Income tax (expense) benefit of taxable REIT subsidiary | (16) | | | 259 | | | (275) | |
| | Equity in loss of unconsolidated subsidiaries | Equity in loss of unconsolidated subsidiaries | (56) | | | (758) | | | 702 | | Equity in loss of unconsolidated subsidiaries | (126) | | | (200) | | | 74 | |
| Other (expense) income, net | (207) | | | 189 | | | (396) | | |
| Net (loss) income | (11,102) | | | 18,433 | | | (29,535) | | |
| Other income (expense), net | | Other income (expense), net | 707 | | | (265) | | | 972 | |
| Net income (loss) | | Net income (loss) | 38,042 | | | (3,381) | | | 41,423 | |
| Net income attributable to noncontrolling interests | Net income attributable to noncontrolling interests | (408) | | | (1,058) | | | 650 | | Net income attributable to noncontrolling interests | (593) | | | (292) | | | (301) | |
| Net (loss) income attributable to common shareholders | $ | (11,510) | | | $ | 17,375 | | | $ | (28,885) | | |
| | Property operating expense to total revenue ratio | 13.0 | % | | 14.7 | % | | |
| Net income (loss) attributable to common shareholders | | Net income (loss) attributable to common shareholders | $ | 37,449 | | | $ | (3,673) | | | $ | 41,122 | |
| | | | | | | | | | | | | | | | | |
| Property operating expense to total revenue ratio | 13.1 | % | | 13.1 | % | | |
Rental income (including tenant reimbursements) increased $376.7$21.8 million, or 182.8%5.6%, due to the following:following (in thousands):
| | | | | |
($ in thousands) | Net change ninesix months ended
SeptemberJune 30, 20212022 to 20222023
|
Properties or components of properties sold or held for sale during 2021 2022 and/or 20222023 | $ | 285 (2,117) | |
Properties under redevelopment or acquired during 20212022 and/or 20222023 | 4,579 | |
Properties acquired in the Merger with RPAI | 370,1917,512 | |
Properties fully operational during 20212022 and 20222023 and other | 1,62016,407 | |
| Total | $ | 376,67521,802 | |
The net increase of $1.6$16.4 million in rental income for properties that were fully operational during 20212022 and 20222023 is primarily due to a $2.3increases in the following: (i) base minimum rent of $11.4 million due to an increase in occupancy, (ii) tenant reimbursements of $2.5 million due to higher recoverable common area maintenance expenses, higher(iii) overage rent of $1.3 million and ancillary income of $0.9 million, and higher base minimum rent of $0.4$1.7 million due to improved tenant performance.performance, and (iv) lease termination income of $1.6 million. These variances were partially offset by a $2.1 millionan increase in bad debt expense of $0.4 million and a $1.2 million decrease in lease termination income.
ancillary income of $0.3 million.Other property-related revenue primarily consists of parking revenues, gains on the sale of land and other miscellaneous activity. This revenue increaseddecreased by $4.8$1.1 million primarily as a result of higherlower gains on sales of undepreciated assets of $2.4 million recognized during the ninesix months ended SeptemberJune 30, 20222023 and an increasea decrease in parking revenue of $0.9 million.revenue.
We recorded fee income of $6.6$2.8 million and $1.1$5.0 million during the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, from property management and development services provided to third parties and unconsolidated joint ventures.
The increasedecrease in fee income is primarily related to a decrease in development fee services forfees earned related to the development of a corporate campus for Republic Airways.Airways at Hamilton Crossing Centre.
Property operating expenses increased $46.6$2.5 million, or 150.4%4.8%, due to the following:following (in thousands):
| | | | | |
($ in thousands) | Net change ninesix months ended
SeptemberJune 30, 20212022 to 20222023
|
Properties or components of properties sold or held for sale during 2021 2022 and/or 20222023 | $ | (91)(414) | |
Properties under redevelopment or acquired during 20212022 and/or 20222023 | 687 | |
Properties acquired in the Merger with RPAI | 45,872883 | |
Properties fully operational during 20212022 and 20222023 and other | 1122,026 | |
| Total | $ | 46,5802,495 | |
The net increase of $0.1$2.0 million in property operating expenses for properties that were fully operational during 20212022 and 20222023 is primarily due to increases of $1.0 million in insurancenon-recoverable operating expenses and $0.9 million in landscaping and repairs and maintenance expense, of $2.6 million and utilities of $0.8 million, partially offset by a $3.3$0.2 million decrease in repairs and maintenance and landscaping expenses.insurance expense. As a percentage of revenue, property operating expenses decreased from 14.7% to 13.0% due to an increase in revenue in 2022.remained flat at 13.1% for both periods.
Real estate taxes increased $53.9decreased $0.9 million, or 202.7%1.6%, due to the following:following (in thousands):
| | | | | |
($ in thousands) | Net change ninesix months ended
SeptemberJune 30, 20212022 to 20222023
|
Properties or components of properties sold or held for sale during 2021 2022 and/or 20222023 | $ | 376 (875) | |
Properties under redevelopment or acquired during 20212022 and/or 20222023 | 493 | |
Properties acquired in the Merger with RPAI | 53,415863 | |
Properties fully operational during 20212022 and 20222023 and other | (413)(850) | |
| Total | $ | 53,871 (862) | |
The net decrease of $0.4$0.9 million in real estate taxes for properties that were fully operational during 20212022 and 20222023 is primarily due to successfula decrease in real estate tax appealsassessments at certain properties in the portfolio most notably for certain of our Texas properties.in 2023, partially offset by lower real estate tax refunds received in 2023. The majority of real estate tax expense is recoverable from tenants and such recovery is reflected inwithin rental income.
General, administrative and other expenses increased $18.3$0.8 million, or 77.3%2.8%. This increase is primarily due to incrementalhigher compensation expense, partially offset by lower head count as part ofthan the Merger and higher share-based compensation expense.comparative period.
The Company incurred $1.0 million and $10.0 million ofdid not incur any significant merger and acquisition costs related to the Mergermerger with RPAI during the ninesix months ended SeptemberJune 30, 2023. The Company incurred $0.9 million of merger and acquisition costs during the six months ended June 30, 2022, and 2021, respectively. These costs primarily consistconsisting of professional fees and technology costs.
Depreciation and amortization expense increased $266.5decreased $23.7 million, or 294.0%9.8%, primarily as a result ofdue to the Merger with RPAI as detailed below:following (in thousands):
| | | | | |
($ in thousands) | Net change ninesix months ended
SeptemberJune 30, 20212022 to 20222023
|
Properties or components of properties sold or held for sale during 2021 2022 and/or 20222023 | $ | 3,343 (4,691) | |
Properties under redevelopment or acquired during 20212022 and/or 20222023 | 3,325 | |
Properties acquired in the Merger with RPAI | 263,6713,093 | |
Properties fully operational during 20212022 and 20222023 and other | (3,868)(22,134) | |
| Total | $ | 266,471 (23,732) | |
The net decrease of $3.9$22.1 million in depreciation and amortization at properties that were fully operational during 20212022 and 20222023 is primarily due to certain assets with shorter useful lives that became fully depreciated during the timingprior year.
We recorded a net gain on sales of additionsoperating properties of $28.4 million for the six months ended June 30, 2023 on the sale of Kingwood Commons and disposalsthe undeveloped land and related parking garage at operating properties.Pan Am Plaza compared to a net gain of $27.1 million on the sale of Plaza Del Lago and a portion of Hamilton Crossing Centre for the six months ended June 30, 2022.
Interest expense increased $40.1$1.4 million, or 107.2%2.7%, primarily due to higher interest costs of $37.9 million related to our variable rate debt, assumed in conjunction withincluding borrowings on the Merger.Revolving Facility that were used to repay mortgages payable at maturity, partially offset by favorable interest rate swaps.
Net Operating Income and Same Property Net Operating Income
We use property NOI,net operating income (“NOI”), a non-GAAP financial measure, to evaluate the performance of our properties. We define NOI as income from our real estate, including lease termination fees received from tenants, less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions and certain corporate level expenses, including merger and acquisition costs. We believe that NOI is helpful to investors as a measure of our operating performance because it excludes various items included in net income that do not relate to or are not indicative of our operating performance, such as depreciation and amortization, interest expense, and impairment, if any.
We also use same property NOI (“Same Property NOI”), a non-GAAP financial measure, to evaluate the performance of our properties. Same Property NOI is net income excluding properties that have not been owned for the full periods presented. However, due to the size of the RPAI portfolio acquired in the Merger with RPAI, which closed in October 2021, the legacy RPAI properties have been deemed to qualify for the same property pool beginning in 2022 if they had a full first quarter of operations in 2021 within the legacy RPAI portfolio prior to the Merger. Same Property NOI also excludes (i) net gains from outlot sales, (ii) straight-line rent revenue, (iii) lease termination income in excess of lost rent, (iv) amortization of lease intangibles, and (v) significant prior period expense recoveries and adjustments, if any. When the Company receiveswe receive payments in excess of any accounts receivable for terminating a lease, Same Property NOI will include such excess payments as monthly rent until the earlier of the expiration of 12 months or the start date of a replacement tenant. The Company believesWe believe that Same Property NOI is helpful to investors as a measure of our operating performance because it includes only the NOI of properties that have been owned for the full periods presented. The Company believesWe believe such presentation eliminates disparities in net income due to the acquisition or disposition of properties during the particular periods presented, and thus provides a more consistent metric for the comparison of our properties. Same Property NOI includes the results of properties that have been owned for the entire current and prior year reporting periods. In order to provide meaningful comparative information across periods that, in some cases, predate the Merger, all information regarding the performance of the same property pool is presented as though the Merger was consummated on January 1, 2021 (i.e., as though the properties owned by RPAI prior to the Merger that are included in our same property pool had been owned by the Company for the entirety of all comparison periods for which same property pool information is presented).
NOI and Same Property NOI should not, however, be considered as alternatives to net income (calculated in accordance with GAAP) as indicators of our financial performance. Our computation of NOI and Same Property NOI may differ from the methodology used by other REITs and, therefore, may not be comparable to such other REITs.
When evaluating the properties that are included in the same property pool, we have established specific criteria for determining the inclusion of properties acquired or those recently under development. An acquired property is included in the same property pool when there is a full quarter of operations in both years subsequent to the acquisition date. The properties acquired in the Merger with RPAI qualify for the same property pool beginning in 2022 if they had a full first quarter of operations in 2021 within the legacy RPAI portfolio prior to the Merger. Development and redevelopment properties are included in the same property pool four full quarters after the properties have been transferred to the operating portfolio. A redevelopment property is first excluded from the same property pool when the execution of a redevelopment plan is likely and we (a) begin recapturing space from tenants or (b) the contemplated plan significantly impacts the operations of the property.
For the three and ninesix months ended SeptemberJune 30, 2022,2023, the same property pool excludes (i) Glendale Town Center, the following:
•properties acquired or placed in service during 2022 and 2023;
•the multifamily rental units and commercial portion at One Loudoun Downtown – Pads G & H;
•Shoppes at Quarterfield, and Circle East and The Landing at Tradition – Phase II, which were reclassified from active redevelopment into our operating portfolio in December 2021, June 2022, and September 2022 respectively, (ii) the multifamily rental units at One Loudoun Downtown – Pads G & H, (iii) fourand June 2023, respectively;
•two active development and redevelopment projects, (iv) Arcadia Village, Pebble Marketplaceprojects;
•Edwards Multiplex – Ontario, which was reclassified from our operating portfolio into redevelopment in March 2023;
•properties sold or classified as held for sale during 2022 and Palms Plaza, which were acquired subsequent to January 1, 2021,2023; and (v)
•office properties.
The following table reflectspresents Same Property NOI and a reconciliation to net income (loss) attributable to common shareholders for the three and ninesix months ended SeptemberJune 30, 2023 and 2022 and 2021:(dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in thousands) | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Number of properties in same property pool for the period(1) | 177 | | | 177 | | | | | 177 | | | 177 | | | |
| | | | | | | | | | | |
| Leased percentage at period end | 94.1 | % | | 93.0 | % | | | | 94.1 | % | | 93.0 | % | | |
Economic occupancy percentage(2) | 91.2 | % | | 90.1 | % | | | | 90.9 | % | | 90.0 | % | | |
| | | | | | | | | | | |
| Same Property NOI | $ | 133,598 | | | $ | 127,996 | | | 4.4 | % | | $ | 394,910 | | | $ | 377,162 | | | 4.7 | % |
| | | | | | | | | | | |
Reconciliation of Same Property NOI to most directly comparable GAAP measure: | | | | | | | | | | | |
| Net operating income – same properties | $ | 133,598 | | | $ | 127,996 | | | | | $ | 394,910 | | | $ | 377,162 | | | |
| Prior period collection impact – same properties | 523 | | | 2,245 | | | | | 3,565 | | | 12,241 | | | |
Net operating income – non-same activity(3) | 13,357 | | | (78,077) | | | | | 34,226 | | | (237,725) | | | |
| Total property NOI | 147,478 | | | 52,164 | | | 182.7 | % | | 432,701 | | | 151,678 | | | 185.3 | % |
| Other income, net | 1,825 | | | 258 | | | | | 6,599 | | | 883 | | | |
| General, administrative and other | (14,859) | | | (8,241) | | | | | (41,977) | | | (23,676) | | | |
| Merger and acquisition costs | (108) | | | (9,198) | | | | | (1,006) | | | (9,958) | | | |
| Depreciation and amortization | (115,831) | | | (30,193) | | | | | (357,096) | | | (90,625) | | | |
| Interest expense | (26,226) | | | (12,878) | | | | | (77,449) | | | (37,386) | | | |
| Gain on sales of operating properties, net | — | | | 1,260 | | | | | 27,126 | | | 27,517 | | | |
| Net income attributable to noncontrolling interests | (116) | | | (132) | | | | | (408) | | | (1,058) | | | |
Net (loss) income attributable to common shareholders | $ | (7,837) | | | $ | (6,960) | | | | | $ | (11,510) | | | $ | 17,375 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change |
Number of properties in same property pool for the period(1) | 177 | | | 177 | | | | | 177 | | | 177 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Leased percentage at period end | 94.2 | % | | 94.0 | % | | | | 94.2 | % | | 94.0 | % | | |
Economic occupancy percentage(2) | 92.3 | % | | 91.5 | % | | | | 92.3 | % | | 90.9 | % | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Same Property NOI | $ | 140,434 | | | $ | 132,852 | | | 5.7 | % | | $ | 279,442 | | | $ | 263,328 | | | 6.1 | % |
| | | | | | | | | | | |
Reconciliation of Same Property NOI to most directly comparable GAAP measure: | | | | | | | | | | | |
| Net operating income – same properties | $ | 140,434 | | | $ | 132,852 | | | | | $ | 279,442 | | | $ | 263,328 | | | |
| | | | | | | | | | | |
Net operating income – non-same activity(3) | 13,356 | | | 13,076 | | | | | 24,830 | | | 21,895 | | | |
| Total property NOI | 153,790 | | | 145,928 | | | 5.4 | % | | 304,272 | | | 285,223 | | | 6.7 | % |
| Other income, net | 1,417 | | | 2,811 | | | | | 3,376 | | | 4,774 | | | |
| General, administrative and other | (14,499) | | | (13,809) | | | | | (27,883) | | | (27,118) | | | |
| Merger and acquisition costs | — | | | 27 | | | | | — | | | (898) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Depreciation and amortization | (109,462) | | | (119,761) | | | | | (217,533) | | | (241,265) | | | |
| Interest expense | (27,205) | | | (25,709) | | | | | (52,630) | | | (51,223) | | | |
| Gain on sales of operating properties, net | 28,440 | | | 23,958 | | | | | 28,440 | | | 27,126 | | | |
| Net income attributable to noncontrolling interests | (423) | | | (314) | | | | | (593) | | | (292) | | | |
| Net income (loss) attributable to common shareholders | $ | 32,058 | | | $ | 13,131 | | | | | $ | 37,449 | | | $ | (3,673) | | | |
(1)Same Property NOI excludes the following: (i) Glendale Town Center,properties acquired or placed in service during 2022 and 2023; (ii) the multifamily rental units and commercial portion at One Loudoun Downtown – Pads G & H; (iii) Shoppes at Quarterfield, and Circle East and The Landing at Tradition – Phase II, which were reclassified from active redevelopment into our operating portfolio in December 2021, June 2022, and September 2022 respectively, (ii) the multifamily rental units at One Loudoun Downtown – Pads G & H, (iii) fourand June 2023, respectively; (iv) two active development and redevelopment projects, (iv) Arcadia Village, Pebble Marketplaceprojects; (v) Edwards Multiplex – Ontario, which was reclassified from our operating portfolio into redevelopment in March 2023; (vi) properties sold or classified as held for sale during 2022 and Palms Plaza, which were acquired subsequent to January 1, 2021,2023; and (v)(vii) office properties.
(2)Excludes leases that are signed but for which tenants have not yet commenced the payment of cash rent. Calculatedrent; calculated as a weighted average based on the timing of cash rent commencement and expiration during the period.
(3)Includes non-cash activity across the portfolio as well as NOI from properties not included in the same property pool, including properties sold during both periods.
Our Same Property NOI increased 4.4%5.7% for the three months ended SeptemberJune 30, 20222023 compared to the same period of the prior year primarily due to improved occupancyhigher base rent driven by continued strong leasing activity.an increase in occupancy and an increase in overage rent.
Funds From Operations
FFOFunds From Operations (“FFO”) is a widely used performance measure for real estate companies and is provided here as a supplemental measure of our operating performance. We calculate FFO, a non-GAAP financial measure, in accordance with the best practices described in the April 2002 National Policy Bulletin of the National Association of Real Estate Investment Trusts (“NAREIT”), as restated in 2018. The NAREIT white paper defines FFO as net income (calculated in accordance with GAAP), excluding (i) depreciation and amortization related to real estate, (ii) gains and losses from the sale of certain real estate assets, (iii) gains and losses from change in control, and (iv) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.
Considering the nature of our business as a real estate owner and operator, the Company believes that FFO is helpful to investors in measuring our operational performance because it excludes various items included in net income that do not relate to or are not indicative of our operating performance, such as gains or losses from sales of depreciated property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. FFO excludes the 2021 gain on sale of the ground lease portfolios as these sales were part of our capital strategy distinct from our ongoing operating strategy of selling individual land parcels from time to time. FFO (a) should not be considered as an alternative to net income (calculated in accordance with GAAP) for the purpose of measuring our financial performance, (b) is not an alternative to cash flowflows from operating activities (calculated in accordance with GAAP) as a measure of our liquidity, and (c) is not indicative of funds available to satisfy our cash needs, including our ability
to make distributions. Our computation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do.
From time to time, the Company may report or provide guidance with respect to “NAREIT FFO“FFO, as adjusted,” which removes the impact of certain non-recurring and non-operating transactions or other items the Company does not consider to be representative of its core operating results including, without limitation, (i) gains or losses associated with the early extinguishment of debt, (ii) gains or losses associated with litigation involving the Company that is not in the normal course of business, (iii) merger and acquisition costs, (iv) the impact on earnings from employee severance, (v) the excess of redemption value over carrying value of preferred stock redemption, and (vi) in 2022, the impact of prior period bad debt or the collection of accounts receivable previously written off (“prior period collection impact”), due to the recovery from the COVID-19 pandemic, which are not otherwise adjusted in the Company’s calculation of FFO.
Our calculations of FFO(1) and reconciliation to consolidated net income and FFO, as adjusted, for the three and ninesix months ended SeptemberJune 30, 20222023 and 20212022 (unaudited) are as follows:follows (dollars in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| ($ in thousands) | 2022 | | 2021 | | 2022 | | 2021 | |
| Net (loss) income | $ | (7,721) | | | $ | (6,828) | | | $ | (11,102) | | | $ | 18,433 | | |
| | | 2023 | | 2022 | | 2023 | | 2022 |
| Net income (loss) | | Net income (loss) | $ | 32,481 | | | $ | 13,445 | | | $ | 38,042 | | | $ | (3,381) | |
| Less: net income attributable to noncontrolling interests in properties | Less: net income attributable to noncontrolling interests in properties | (209) | | | (132) | | | (535) | | | (396) | | Less: net income attributable to noncontrolling interests in properties | (30) | | | (182) | | | (134) | | | (326) | |
| Less: gain on sales of operating properties, net | Less: gain on sales of operating properties, net | — | | | (1,260) | | | (27,126) | | | (27,517) | | Less: gain on sales of operating properties, net | (28,440) | | | (23,958) | | | (28,440) | | | (27,126) | |
| Add: depreciation and amortization of consolidated and unconsolidated entities, net of noncontrolling interests | Add: depreciation and amortization of consolidated and unconsolidated entities, net of noncontrolling interests | 116,186 | | | 30,537 | | | 358,161 | | | 91,650 | | Add: depreciation and amortization of consolidated and unconsolidated entities, net of noncontrolling interests | 109,736 | | | 120,128 | | | 218,045 | | | 241,975 | |
FFO of the Operating Partnership(1) | FFO of the Operating Partnership(1) | 108,256 | | | 22,317 | | | 319,398 | | | 82,170 | | FFO of the Operating Partnership(1) | 113,747 | | | 109,433 | | | 227,513 | | | 211,142 | |
| Less: Limited Partners’ interests in FFO | Less: Limited Partners’ interests in FFO | (1,437) | | | (543) | | | (3,932) | | | (2,301) | | Less: Limited Partners’ interests in FFO | (1,547) | | | (1,377) | | | (3,054) | | | (2,495) | |
FFO attributable to common shareholders(1) | FFO attributable to common shareholders(1) | $ | 106,819 | | | $ | 21,774 | | | $ | 315,466 | | | $ | 79,869 | | FFO attributable to common shareholders(1) | $ | 112,200 | | | $ | 108,056 | | | $ | 224,459 | | | $ | 208,647 | |
| FFO per share of the Operating Partnership – diluted | | FFO per share of the Operating Partnership – diluted | $ | 0.51 | | | $ | 0.49 | | | $ | 1.02 | | | $ | 0.95 | |
| FFO of the Operating Partnership(1) | FFO of the Operating Partnership(1) | $ | 108,256 | | | $ | 22,317 | | | $ | 319,398 | | | $ | 82,170 | | FFO of the Operating Partnership(1) | $ | 113,747 | | | $ | 109,433 | | | $ | 227,513 | | | $ | 211,142 | |
| Add: merger and acquisition costs | Add: merger and acquisition costs | 108 | | | 9,198 | | | 1,006 | | | 9,958 | | Add: merger and acquisition costs | — | | | (27) | | | — | | | 898 | |
| Less: prior period collection impact | Less: prior period collection impact | (691) | | | (2,063) | | | (2,745) | | | (3,329) | | Less: prior period collection impact | — | | | (958) | | | — | | | (2,054) | |
| FFO, as adjusted, of the Operating Partnership | FFO, as adjusted, of the Operating Partnership | $ | 107,673 | | | $ | 29,452 | | | $ | 317,659 | | | $ | 88,799 | | FFO, as adjusted, of the Operating Partnership | $ | 113,747 | | | $ | 108,448 | | | $ | 227,513 | | | $ | 209,986 | |
| FFO, as adjusted, per share of the Operating Partnership – diluted | | FFO, as adjusted, per share of the Operating Partnership – diluted | $ | 0.51 | | | $ | 0.49 | | | $ | 1.02 | | | $ | 0.94 | |
(1)“FFO of the Operating Partnership” measures 100% of the operating performance of the Operating Partnership’s real estate properties. “FFO attributable to common shareholders” reflects a reduction for the redeemable noncontrolling weighted average diluted interest in the Operating Partnership.
Earnings before Interest, Tax,Taxes, Depreciation and Amortization (EBITDA)(“EBITDA”)
We define EBITDA, a non-GAAP financial measure, as net income before interest expense, income tax expense of the taxable REIT subsidiary, and depreciation and amortization. For informational purposes, we also provide Adjusted EBITDA, which we define as EBITDA less (i) Adjusted EBITDA from unconsolidated entities, (ii) gains on sales of operating properties or impairment charges, (iii) merger and acquisition costs, (iv) other income and expense, (v) noncontrolling interest Adjusted EBITDA, and (vi) other non-recurring activity or items impacting comparability from period to period. Annualized Adjusted EBITDA is Adjusted EBITDA for the most recent quarter multiplied by four. Net Debt to Adjusted EBITDA is our share of net debt divided by Annualized Adjusted EBITDA. EBITDA, Adjusted EBITDA, Annualized Adjusted EBITDA and Net Debt to Adjusted EBITDA, as calculated by us, are not comparable to EBITDA and EBITDA-related measures reported by other REITs that do not define EBITDA and EBITDA-related measures exactly as we do. EBITDA, Adjusted EBITDA and Annualized Adjusted EBITDA do not represent cash generated from operating activities in accordance with GAAP and should not be considered alternatives to net income as an indicator of performance or as alternatives to cash flows from operating activities as an indicator of liquidity.
Considering the nature of our business as a real estate owner and operator, we believe that EBITDA, Adjusted EBITDA and the ratio of Net Debt to Adjusted EBITDA are helpful to investors in measuring our operational performance because they exclude various items included in net income that do not relate to or are not indicative of our operating performance, such as gains or losses from sales of depreciated property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. For informational purposes, we also provide Annualized Adjusted EBITDA,
adjusted as described above. We believe this supplemental information provides a meaningful measure of our operating performance. We believe presenting EBITDA and the related measures in this manner allows investors and other interested parties to form a more meaningful assessment of our operating results.
The following table presents a reconciliation of our EBITDA, Adjusted EBITDA and Annualized Adjusted EBITDA to net income (the most directly comparable GAAP measure) and a calculation of Net Debt to Adjusted EBITDA:EBITDA (in thousands):
| | | | | |
($ in thousands) | Three Months Ended September
June 30, 20222023 |
Net lossincome | $ | (7,721)32,481 | |
| Depreciation and amortization | 115,831109,462 | |
| Interest expense | 26,22627,205 | |
Income tax benefitexpense of taxable REIT subsidiary | —45 | |
| EBITDA | 134,336169,193 | |
| Unconsolidated Adjusted EBITDA | 637773 | |
Merger and acquisition costs | 108 | |
Gain on sales of operating properties, net | — | |
| Other income and expense, net | (202)(422) | |
| Noncontrolling interests | (209)(170) | |
| Adjusted EBITDA | 134,670140,934 | |
| |
Annualized Adjusted EBITDA(1) | $ | 538,680563,736 | |
| |
| Company share of Net Debt: | |
| Mortgage and other indebtedness, net | $ | 3,012,8702,937,963 | |
| Plus: Company share of unconsolidated joint venture debt | 37,72347,823 | |
Less: Partner share of consolidated joint venture debt(2) | (569)(10,068) | |
| Less: cash, cash equivalents, and restricted cash | (98,639)(137,669) | |
| Less: debt discounts, premiums and issuance costs, net | (33,802)(27,774) | |
| Company share of Net Debt | $ | 2,917,5832,810,275 | |
| Net Debt to Adjusted EBITDA | 5.4x5.0x |
(1)Represents Adjusted EBITDA for the three months ended SeptemberJune 30, 20222023 (as shown in the table above) multiplied by four.
(2)Partner share of consolidated joint venture debt is calculated based upon the partner’s pro-ratapro rata ownership of the joint venture, multiplied by the related secured debt balance.
Liquidity and Capital Resources
Overview
Our primary finance and capital strategy is to maintain a strong balance sheet with sufficient flexibility to fund our operating and investment activities in a cost-effective manner. We consider a number of factors when evaluating our level of indebtedness and when making decisions regarding additional borrowings or equity offerings, including the interest or dividend rate, the maturity date and the Company’s debt maturity ladder, the impact of financial metrics such as overall Company leverage levels and coverage ratios, and the Company’s ability to generate cash flow to cover debt service. We will continue to monitor the capital markets and may consider raising additional capital through the issuance of our common or preferred shares, unsecured debt securities, or other securities.
One of the benefits of the Merger was a strengthened balance sheet to provide the Company with increased liquidity, a well-staggered debt maturity ladder, and an appropriately sized development pipeline. As part of the Merger, we assumed an $850.0 million unsecured revolving credit facility along with other indebtedness. In July 2022, we increased the capacity of the unsecured revolving credit facility to $1.1 billion (the “2022 Revolving Facility”), of which the available borrowing capacity
was $1.1 billion as of September 30, 2022, and issued a seven-year $300.0 million unsecured term loan that was used to retire 2022 and 2023 debt maturities.
As of SeptemberJune 30, 2022,2023, we had approximately $88.4$129.3 million in cash on hand, $8.1$5.7 million in restricted cash and escrow deposits, $1.1 billion of remaining availability under the 2022 Revolving Facility,$1.1 billion unsecured revolving credit facility (the “Revolving Facility”), and no$122.8 million of debt maturities untilfor the remainder of 2023. During the ninethree months ended SeptemberJune 30, 2022,2023, we usedoriginated a 10-year $95.1 million mortgage payable at a fixed interest rate of 5.36% secured by the $125.0 million short-term deposit that matured on April 7, 2022 to repay borrowings on our revolving linemultifamily rental portion of credit.the expansion project at One Loudoun Downtown – Pads G & H. We believe we will have adequate liquidity over the next 12 months and beyond to operate our business and meet our cash requirements.
We derive the majority of our revenue from tenants who lease space from us under existing lease agreements at each of our properties. Therefore, our ability to generate cash from operations is dependent onupon the rents that we are able to charge and collect from our tenants. While we believe that the nature of the properties in which we typically invest—primarily neighborhood and community shopping centers—provides a relatively stable revenue flow, an economic downturn, instability
in the banking sector, tenant bankruptcies, inflation, labor shortages, supply chain constraints, and/or the ongoing effects of COVID-19,increasing energy prices and interest rates, among other events, could adversely affect the ability of some of our tenants to meet their lease obligations.
Our Principal Capital Resources
For a discussion of cash generated from operations, see “Cash Flows” beginning on page 44.41. In addition to cash generated from operations, our other principal capital resources are discussed below.
Over the last several years, we have made substantial progress in enhancing our liquidity position and reducing our leverage and borrowing costs. We continue to focus on a balanced approach to growth and staggering debt maturities in order to retain our financial flexibility.
As of SeptemberJune 30, 2022,2023, we had approximately $1.1 billion available under the 2022 Revolving Facility for future borrowings. We also had $88.4$129.3 million in cash and cash equivalents as of SeptemberJune 30, 2022.2023.
We were in compliance with all applicable financial covenants under the 2022 Revolving Facility, unsecured term loans and senior unsecured notes as of SeptemberJune 30, 2022.2023.
On July 29, 2022, the Operating Partnership entered into the Second Amendment (the “Second Amendment”) to the sixth amended and restated credit agreement with a syndicate of financial institutions to provide for a $250.0 million increase to the unsecured revolving credit facility, the “2022 Revolving Facility”. Under the Second Amendment, the Operating Partnership has the option to increase the 2022 Revolving Facility to an aggregate committed amount of up to $1.7 billion upon the Operating Partnership’s request, subject to certain conditions. In addition, the Operating Partnership issued a seven-year $300.0 million unsecured term loan, the proceeds of which were used to repay the Operating Partnership’s existing $200.0 million unsecured term loan that was scheduled to mature on November 22, 2023, certain secured loans, and for other general corporate purposes.
On November 16, 2021, the Company filed with the SEC a shelf registration statement on Form S-3, which is effective for a term of three years, relating to the offer and sale, from time to time, of an indeterminate amount of equity and debt securities. Equity securities may be offered and sold by the Parent Company, and the net proceeds of any such offerings would be contributed to the Operating Partnership in exchange for additional General Partner Units. Debt securities may be offered and sold by the Operating Partnership with the Operating Partnership receiving the proceeds. From time to time, we may issue securities under this shelf registration statement for general corporate purposes, which may include acquisitions of additional properties, repayment of outstanding indebtedness, capital expenditures, the expansion, redevelopment, and/or improvement of properties in our portfolio, working capital and other general purposes.
OnIn February 23, 2021, the Company and the Operating Partnership entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with each of BofA Securities, Inc., Citigroup Global Markets Inc., KeyBanc Capital Markets Inc. and Raymond James & Associates, Inc., pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $150.0 million of its common shares of beneficial interest, $0.01 par value per share under an at-the-market offering program (the “ATM Program”). OnIn November 30, 2021, the Company and the Operating Partnership amended the Equity Distribution Agreement to reflect their filing of a shelf registration statement on November 16, 2021 with the SEC. As of September 30, 2022, the Company has not sold any common shares under the ATM Program. The Operating Partnership intends to use the net proceeds, if any, to repay borrowings under its 2022the Revolving Facility and other indebtedness and for working capital and other general corporate purposes. The Operating Partnership may also use the net proceeds for acquisitions of operating properties and the development or redevelopment of properties, although there are currently no understandings, commitments or agreements to do so. As of June 30, 2023, the Company has not sold any common shares under the ATM Program.
In the future, we will continue to monitor the capital markets and may consider raising additional capital through the issuance of our common shares, preferred shares or other securities. We may also raise capital by disposing of properties, land parcels or other assets that are no longer core components of our growth strategy. The sale price may differ from our carrying value at the time of sale.
Our Principal Liquidity Needs
Short-Term Liquidity Needs
Near-Term Debt Maturities. As of SeptemberJune 30, 2022,2023, we had $189.3$27.8 million of secured debt, excluding scheduled monthly principal payments, and $244.6 million of unsecured debt scheduled to mature prior to Septemberor on June 30, 2023, excluding scheduled monthly principal payments.2024. We believe we have sufficient liquidity to repay this obligationthese obligations from cash on hand and borrowings on the 2022 Revolving Facility.
Other Short-Term Liquidity Needs. The requirements for qualifying as a REIT and for a tax deduction for some or all of the dividends paid to shareholders necessitate that we distribute at least 90% of our taxable income on an annual basis. Such requirements cause us to have substantial liquidity needs over both the short and long term. Our short-term liquidity needs consist primarily of funds necessary to pay operating expenses associated with our operating properties, scheduled interest and principal payments on our debt of approximately $30.0$60.0 million and $0.9$1.4 million, respectively, for the remainder of 2022,2023, expected dividend payments to our common shareholders and Common Unit holders, and recurring capital expenditures.
In August 2022,April 2023, our Board of Trustees declared a cash distribution of $0.22$0.24 per common share and Common Unit for the thirdsecond quarter of 2022.2023. This distribution was paid on OctoberJuly 14, 20222023 to common shareholders and Common Unit holders of record as of OctoberJuly 7, 2022.2023. Future distributions, if any, are at the discretion of the Board of Trustees, who will continue to evaluate our sources and uses of capital, liquidity position, operating fundamentals, maintenance of our REIT qualification and other factors they may deem relevant. We believe we have sufficient liquidity to pay any dividend from cash on hand and borrowings on the 2022 Revolving Facility.
Other short-term liquidity needs include expenditures for tenant improvements, external leasing commissions and recurring capital expenditures. During the ninesix months ended SeptemberJune 30, 2022,2023, we incurred $22.9$8.0 million for recurring capital expenditures on operating properties and $45.1$39.3 million for tenant improvements and external leasing commissions, which includes costs to re-lease anchor space at our operating properties related to tenants open and operating as of SeptemberJune 30, 20222023 (excluding development and redevelopment properties). We currently anticipate incurring approximately $100 million of additional major tenant improvement costs related to leasing activity for space that is currently vacant at a number of our operating properties over the next 12 to 18 months. We believe we have the ability to fund these costs through cash flows from operations or borrowings on the 2022 Revolving Facility. In 2023, certain retailers have filed for bankruptcy protection including Bed Bath & Beyond Inc., a tenant that, as of December 31, 2022, occupied 613,000 square feet across 23 locations in our portfolio and generated $8.3 million of annualized base rent. As of June 30, 2023, eight tenant leases have been rejected in the bankruptcy process and we expect that additional leases will be rejected during the third quarter of 2023. Re-leasing costs may be significant for the leases that were rejected and we could experience a significant reduction in our revenues from those properties.
During the ninesix months ended SeptemberJune 30, 2022,2023, we completed major redevelopment construction activities at ShoppesThe Landing at Quarterfield, the residential portion of the project at One Loudoun Downtown and Circle EastTradition – Phase II and placed these projectsthis project in service. In addition, we began redevelopment activities at Edwards Multiplex – Ontario and reclassified this property from our operating portfolio into redevelopment. As of SeptemberJune 30, 2022,2023, we had four development projects under construction. Totalconstruction at the medical office building at Carillon and The Corner (IN). Our share of total estimated costs for the fourthese two projects are $112.7is $91.6 million, of which our share of the remaining expected funding requirement is estimated to be $80.8$59.7 million. As of SeptemberJune 30, 2022,2023, we have incurred $21.6$24.8 million of these costs. We anticipate incurring the majority of the remaining costs for these projects over the next 24 months and believe we have the ability to fund these projects through cash flowflows from operations or borrowings on the 2022 Revolving Facility.
Share Repurchase Program
In February 2021, the Company’s Board of Trustees approved aThe Company has an existing share repurchase program authorizing share repurchasesunder which it may repurchase, from time to time, up to an aggregatea maximum of $150.0$300.0 million of its common shares (the “Share Repurchase Program”). In February 2022, the Company extended its Share Repurchase Program for an additional year and it will now terminate on February 28, 2023, if not terminated or extended prior to that date. In April 2022, the Company’s Board of Trustees authorized a $150.0 million increase to the size of the Share Repurchase Program, authorizing share repurchases up to an aggregate of $300.0 million. As of September 30, 2022, the Company has not repurchased any shares under its Share Repurchase Program. The Company intends to fund any future repurchases under the Share Repurchase Program with cash on hand or availability under the 2022 Revolving Facility, subject to any applicable restrictions. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors.
In February 2023, the Company extended the Share Repurchase Program for an additional year so it will now terminate on February 28, 2024, if not terminated or extended prior to that date. As of June 30, 2023, the Company has not repurchased any shares under the Share Repurchase Program.Long-Term Liquidity Needs
Our long-term liquidity needs consist primarily of funds necessary to pay for any new development projects, redevelopment of existing properties, non-recurring capital expenditures, acquisitions of properties, payment of indebtedness at maturity and obligations under ground leases.
Selective Acquisitions, Developments and Joint Ventures. We may selectively pursue the acquisition, development and redevelopment of other properties, which would require additional capital. It is unlikely that we would have sufficient funds on hand to meet these long-term capital requirements. We would have to satisfy these needs through additional borrowings, sales of common or preferred shares, issuance of Operating Partnership units, cash generated through property dispositions and/or participation in joint venture arrangements. We cannot be certain that we would have access to these sources of capital on satisfactory terms, if at all, to fund our long-term liquidity requirements. We evaluate all future opportunities against pre-established criteria including, but not limited to, location, demographics, expected return, tenant credit quality, tenant relationships, and the amount of existing retail space. Our ability to access the capital markets will be dependentdepend on a number of factors, including general capital market conditions.
Potential Debt Repurchases. We may from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to repurchase our senior unsecured notes maturing at various dates through September 2030 in open-market transactions, by tender offer or otherwise, as market conditions warrant.
Commitments under Ground Leases. We are obligated under 12 ground leases for approximately 98 acres of land as of SeptemberJune 30, 2022.2023. Most of these ground leases require fixed annual rent payments and the expiration dates of the remaining initial terms of these ground leases range from 20232025 to 2092.
Capital Expenditures on Consolidated Properties
The following table summarizes cash capital expenditures for our development and redevelopment projects and other capital expenditures for the ninesix months ended SeptemberJune 30, 2022:2023 (in thousands):
| | | | | |
($ in thousands) | NineSix Months Ended
SeptemberJune 30, 20222023 |
| Active development and redevelopment projects | $ | 34,85014,006 | |
Redevelopment opportunities | 326 | |
| |
| |
| Recurring operating capital expenditures (primarily tenant improvements) and other | 71,36053,761 | |
| Total | $ | 106,53667,767 | |
We capitalize certain indirect costs such as interest, payroll, and other general and administrative costs related to these development activities. If we had experienced a 10% reduction in development and redevelopment activities, without a corresponding decrease in indirect project costs, we would have recorded additional expense of $0.2 million for the ninesix months ended SeptemberJune 30, 2022.2023.
Debt Maturities
The following table presentssummarizes the scheduled maturities and principal amortization of mortgage and corporate debtthe Company’s indebtedness as of SeptemberJune 30, 2022,2023, presented on a calendar year basis:basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Secured Debt | | | | |
($ in thousands) | Scheduled
Principal Payments | | Term
Maturities | | Unsecured Debt | | Total |
| 2022 | $ | 872 | | | $ | — | | | $ | — | | | $ | 872 | |
| 2023 | 3,020 | | | 189,330 | | | 95,000 | | | 287,350 | |
| 2024 | 2,721 | | | — | | | 269,635 | | | 272,356 | |
| 2025 | 2,848 | | | — | | | 430,000 | | | 432,848 | |
| 2026 | 2,981 | | | — | | | 550,000 | | | 552,981 | |
| Thereafter | 30,181 | | | 2,480 | | | 1,400,000 | | | 1,432,661 | |
| | $ | 42,623 | | | $ | 191,810 | | | $ | 2,744,635 | | | $ | 2,979,068 | |
| Debt discounts, premiums and issuance costs, net | | | | | | 33,802 | |
| Total | | | | | | | $ | 3,012,870 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Secured Debt | | | | |
| Scheduled
Principal Payments | | Term
Maturities | | Unsecured Debt | | Total |
| 2023 | $ | 1,433 | | | $ | 27,813 | | | $ | 95,000 | | | $ | 124,246 | |
| 2024 | 2,721 | | | — | | | 269,635 | | | 272,356 | |
| 2025 | 2,848 | | | — | | | 680,000 | | | 682,848 | |
| 2026 | 2,981 | | | — | | | 550,000 | | | 552,981 | |
| 2027 | 3,120 | | | — | | | 250,000 | | | 253,120 | |
| Thereafter | 31,849 | | | 92,789 | | | 900,000 | | | 1,024,638 | |
| | $ | 44,952 | | | $ | 120,602 | | | $ | 2,744,635 | | | $ | 2,910,189 | |
| Debt discounts, premiums and issuance costs, net | | | | | | 27,774 | |
| Total | | | | | | | $ | 2,937,963 | |
Failure to comply with the obligations under our debt agreements, (includingincluding payment obligations)obligations, could cause an event of default under such debt, which, among other things, could result in the loss of title to the assets securing the debt, acceleration of the payment of all principal and interest and/or termination of the agreements, or exposure to the risk of foreclosure. In addition, certain of our variable rate loans contain cross-default provisions that provide thatwhereby a violation by usthe Company of any financial covenant set forth in the 2022 Revolving Facility will constitute an “Event of Default” under the loans, which could allow the lenders to accelerate the amounts due under our debt agreements if we fail to satisfy these financial covenants. See “Item 1A. Risk Factors – Risks Related to Our Operations” in our Annual Report on Form 10-K for the year ended December 31, 20212022 for more information related to the risks associated with our indebtedness.
Impact of Changes in Credit Ratings on Our Liquidity
We have received investment grade corporate credit ratings from three nationally recognized credit rating agencies. These ratings did not change as of SeptemberJune 30, 2022.2023.
In the future, thethese ratings could change based upon, among other things, the impact that prevailing economic conditions may have on our results of operations and financial condition. Credit rating reductions by one or more rating agencies could also adversely affect our access to funding sources, the cost and other terms of obtaining funding, as well as our overall financial condition, operating results and cash flow.
Cash Flows
As of SeptemberJune 30, 2022,2023, we had cash, cash equivalents and restricted cash of $96.5$135.0 million. We may be subject to concentrations of credit risk with regard to our cash and cash equivalents. We place our cash and short-term investments with highly rated financial institutions. While we attempt to limit our exposure at any point in time, occasionally such cash and investments may temporarily be in excess of FDICexceed the Federal Deposit Insurance Corporation (“FDIC”) and SIPCthe Securities Investor Protection Corporation (“SIPC”) insurance limits. We also maintain certain compensating balances in several financial institutions in support of borrowings from those institutions. Such compensating balances were not material to the accompanying consolidated balance sheets.
Comparison of the NineSix Months Ended SeptemberJune 30, 20222023 to the NineSix Months Ended SeptemberJune 30, 20212022
Our cash flow activities are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2023 | | 2022 | | Change |
| Net cash provided by operating activities | $ | 180,425 | | | $ | 154,322 | | | $ | 26,103 | |
| Net cash provided by investing activities | 8,013 | | | 68,646 | | | (60,633) | |
| Net cash used in financing activities | (175,454) | | | (224,179) | | | 48,725 | |
| Increase (decrease) in cash, cash equivalents and restricted cash | 12,984 | | | (1,211) | | | 14,195 | |
| Cash, cash equivalents and restricted cash, at beginning of period | 121,970 | | | 100,363 | | | |
| Cash, cash equivalents and restricted cash, at end of period | $ | 134,954 | | | $ | 99,152 | | | |
Cash provided by operating activities was $262.4$180.4 million for the ninesix months ended SeptemberJune 30, 20222023 and $103.8$154.3 million for the same period of 2021.2022. The cash flows were positively impacted by the Merger, which generated significant incrementalfrom an increase in net operating income, along with improved collection activity including previously deferred rent from the COVID-19 pandemic. This improvement was partially offset by costs paid as part of the Merger along with higher interest costs related to debt assumed in the Merger.income.
Cash used inprovided by investing activities was $13.7$8.0 million for the ninesix months ended SeptemberJune 30, 20222023 and $109.1$68.6 million for the same period of 2021.2022. Highlights of significant cash sources and uses in investing activities are as follows:
•We received net proceeds of $78.6 million from the proceeds from a $125.0 million short-term deposit that matured on April 7, 2022;
•We acquired Pebble Marketplace,sale of Kingwood Commons and the two-tenant building adjacent to MacArthur Crossingundeveloped land and Palmsrelated parking garage at Pan Am Plaza for a total of $100.1 million during the ninesix months ended SeptemberJune 30, 2022;
•We received2023 compared to net proceeds of $65.4 million from the sale of Plaza Del Lago and a portion of Hamilton Crossing Centre during the ninesix months ended SeptemberJune 30, 2022 compared2022;
•We acquired Pebble Marketplace and the two-tenant building adjacent to net proceeds of $47.7MacArthur Crossing totaling $65.8 million related to the sale of 17 ground leases and other land parcels during the ninesix months ended SeptemberJune 30, 2021;2022;
•We received the proceeds from a $125.0 million short-term deposit that matured on April 7, 2022 during the six months ended June 30, 2022; and
•Capital expenditures increased by $69.6$9.0 million driven by the construction activity at our active development projects and anchor leasing activity, partially offset by a change in construction payables of $2.6$4.0 million for the ninesix months ended SeptemberJune 30, 2022.2023.
Cash used in financing activities was $252.6$175.5 million for the ninesix months ended SeptemberJune 30, 2022 compared to cash provided by financing activities of $62.42023 and $224.2 million for the same period of 2021.2022. Highlights of significant cash sources and uses in financing activities are as follows:
•We issued a seven-year $300.0 million unsecured term loan and borrowed $145.0$198.0 million on our unsecured revolving linethe Revolving Facility and received proceeds of credit$95.1 million from the origination of a mortgage payable during the ninesix months ended SeptemberJune 30, 2023 compared to borrowings of $120.0 million on the Revolving Facility during the six months ended June 30, 2022;
•In 2022, weWe repaid (i) a $200.0 million unsecured term loan that was scheduled to mature in 2023, (ii) $200.0$198.0 million of borrowings on our unsecured revolving linethe Revolving Facility and $163.2 million of credit, with no amount outstanding as of September 30, 2022, and (iii) mortgages payable totaling $155.2during the six months ended June 30, 2023 compared to repayments of $175.0 million along with $3.0on the Revolving Facility and $80.8 million of scheduled principal payments using proceeds frommortgages payable during the $300.0 million unsecured term loan, $125.0 million short-term depositsix months ended June 30, 2022; and property sales;
•We made distributions to common shareholders and holders of common partnership interests in the Operating Partnership of $133.4$106.6 million forduring the ninesix months ended SeptemberJune 30, 20222023 compared to distributions of $44.2$86.6 million forduring the ninesix months ended SeptemberJune 30, 2021; and2022.
•In 2021, we issued $175.0 million of exchangeable senior notes in a private placement offering to fund a portion of our 2022 debt maturities and other borrowings. In connection with this issuance, we incurred transaction costs of $5.3 million and purchased capped calls for $9.8 million.
Critical Accounting Estimates
We based the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There were no changes made by management to the critical accounting policies in the three months ended SeptemberJune 30, 2022.2023. We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 20212022 filed with the SEC on February 28, 2022.21, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Related to Fixed and Variable Rate Debt
WeAs of June 30, 2023, we had $3.0$2.9 billion of outstanding consolidated indebtedness as of September 30, 2022 (inclusive of net unamortized debt discounts, premiums and issuance costs of $33.8$27.8 million). As of September 30, 2022,In addition, we were party to various consolidated interest rate hedge agreements totaling $975.0 million with maturities over various terms through 2026.2026. Reflecting the effects of these hedge agreements, our fixed and variable rate debt would have been $2.8$2.7 billion (94%) and $183.5$182.9 million (6%), respectively, of our total consolidated indebtedness as of SeptemberJune 30, 2022.2023.
As of SeptemberJune 30, 2022,2023, we had $189.3$244.6 million of fixed rate debt scheduled to mature within the next 12 months. A 100-basis point change in interest rates on this debt as of SeptemberJune 30, 20222023 would change our annual cash flow by $1.9$2.4 million. A 100-basis point change in interest rates on our unhedged variable rate debt as of SeptemberJune 30, 20222023 would change our annual cash flow by $1.8 million. Based upon the terms of our variable rate debt, we are most vulnerable to a change in short-term Secured Overnight Financing Rate (“SOFR”) interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Kite Realty Group Trust
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Parent Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Parent Company’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.
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, 20222023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Kite Realty Group, L.P.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of Kite Realty Group Trust (the sole general partner of Kite Realty Group, L.P.), of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Operating Partnership’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There has been no change in the Operating Partnership’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(b)
under the Securities Exchange Act of 1934 of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of SeptemberJune 30, 20222023 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 not subject to any material litigation nor, to management’s knowledge, is any material litigation currently threatened against us. We are parties to routine litigation, claims, and administrative proceedings arising in the ordinary course of business. Management believes that such matters will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows taken as a whole.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in response to Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 20212022 filed on February 28, 2022.21, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
From time to time, certain of our employees surrender shares owned by them to satisfy their statutory minimum U.S. federal and state tax obligations associated with the vesting of restricted common shares of beneficial interest issued under the Company’s 2013 Equity Incentive Plan, as amended and restated as of May 11, 2022, which are repurchased by the Company. There were no shares of common stock surrendered or repurchased during the three months ended SeptemberJune 30, 2022.2023.
As of SeptemberJune 30, 2022,2023, $300.0 million remained available for repurchases under ourthe Company’s Share Repurchase Program announced in February 2021. TheIn April 2022, the Company’s Board of Trustees increased the size of the program from $150.0 million to $300.0 million and in April 2022. ThisFebruary 2023, extended the program for an additional year. The program may be suspended or terminated at any time by the Company and will terminate on February 28, 2023,2024, if not terminated or extended prior to that date.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.Trading Arrangements
During the three months ended June 30, 2023, none of our officers or trustees adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
Pan Am Plaza Transaction
On August 7, 2023, a wholly owned subsidiary of the Company (“KRG Development”) assigned to Pan Am Development Partners, LLC (“Assignee”) certain rights and obligations created by a certain project agreement for the development of a hotel on the Pan Am Plaza site across from the Indiana Convention Center in Indianapolis, IN, including certain future development rights and a right of first offer involving the project (collectively, the “Project Rights and Obligations”). Assignee is a wholly owned subsidiary of Circle Block Investors, LLC, the parent company that owns the Conrad Indianapolis hotel, of which Mr. Alvin E. Kite, our Chairman Emeritus and the father of John A. Kite, is the majority owner, and Mr. John A. Kite, our Chief Executive Officer and Chairman of the Board, and Mr. Thomas K. McGowan, our President and Chief Operating Officer, are minority owners. In connection with the transaction, Assignee assumed all Project Rights and Obligations from and after August 7, 2023 and will pay KRG Development an assignment fee of up to $3.5 million (the “Assignment Fee”), which is due and payable upon the completion of certain development activities that are expected to occur in 2024. In connection with the transactions, Mr. Kite and Mr. McGowan expressly acknowledged and agreed that they remain subject to their executive employment agreements with the Company, including, without limitation, the obligation of each executive to devote substantially all his business time and effort to the performance of his duties for the Company. Assignee will engage a team of
full-time professionals to perform the Project Rights and Obligations. The transaction was approved by a special transaction committee of the independent trustees of the Company (the “Transaction Committee”) as well as the Company’s independent trustees. The Transaction Committee engaged a third-party financial advisor to assist it in determining the net value of the Project Rights and Obligations and establishing the Assignment Fee.
ITEM 6. EXHIBITS
| | | | | | | | | | | | | | |
| Exhibit No. | | Description | | Location |
| | | | |
2.1 | | | | Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on July 19, 2021 |
| | | | |
| 3.1 | | | | Incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K of Kite Realty Group Trust filed with the SEC on February 28, 2022 |
| | | | |
| 3.2 | | | | Incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K of Kite Realty Group Trust filed with the SEC on February 28, 2022 |
| | | | |
| 10.1 | | | | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on August 2, 2022 |
| | | | |
10.2 | | | | Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Kite Realty Group Trust filed with the SEC on August 2, 2022Filed herewith |
| | | | |
| 31.1 | | | | Filed herewith |
| | | | |
| 31.2 | | | | Filed herewith |
| | | | |
| 31.3 | | | | Filed herewith |
| | | | |
| 31.4 | | | | Filed herewith |
| | | | |
| 32.1 | | | | Filed herewith |
| | | | |
| 32.2 | | | | Filed herewith |
| | | | |
| 101.INS | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | Filed herewith |
| | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | Filed herewith |
| | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
| | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
| | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
| | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
| | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | |
| | KITE REALTY GROUP TRUST | |
| | | | |
| Date: | November 4, 2022August 7, 2023 | By: | /s/ JOHN A. KITE | |
| | | | |
| | | John A. Kite | |
| | | Chairman and Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | | |
| | | | |
| Date: | November 4, 2022August 7, 2023 | By: | /s/ HEATH R. FEAR | |
| | | | |
| | | Heath R. Fear | |
| | | Executive Vice President and Chief Financial Officer | |
| | | (Principal Financial Officer) | |
| | | | |
| | | | |
| | KITE REALTY GROUP, L.P. | |
| | | By: Kite Realty Group Trust, its sole general partner | |
| | | | |
| Date: | November 4, 2022August 7, 2023 | By: | /s/ JOHN A. KITE | |
| | | | |
| | | John A. Kite | |
| | | Chairman and Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | | |
| | | | |
| Date: | November 4, 2022August 7, 2023 | By: | /s/ HEATH R. FEAR | |
| | | | |
| | | Heath R. Fear | |
| | | Executive Vice President and Chief Financial Officer | |
| | | (Principal Financial Officer) | |