Kite Realty Group Trust
Consolidated Statement of Shareholders’ Equity
(Unaudited)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
Additional
Paid-in Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated
Deficit
|
|
Total
|
|
Shares
|
|
Amount
|
|
|
|
|
Balances, December 31, 2015
|
83,334,865
|
|
|
$
|
833
|
|
|
$
|
2,050,545
|
|
|
$
|
(2,145
|
)
|
|
$
|
(323,257
|
)
|
|
$
|
1,725,976
|
|
Stock compensation activity
|
27,351
|
|
|
1
|
|
|
887
|
|
|
—
|
|
|
—
|
|
|
888
|
|
Other comprehensive loss
attributable to Kite Realty Group Trust
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,145
|
)
|
|
—
|
|
|
(7,145
|
)
|
Distributions declared to common
shareholders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,967
|
)
|
|
(23,967
|
)
|
Net income attributable to Kite
Realty Group Trust
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,402
|
|
|
1,402
|
|
Exchange of redeemable noncontrolling
interests for common shares
|
2,000
|
|
|
—
|
|
|
52
|
|
|
—
|
|
|
—
|
|
|
52
|
|
Adjustment to redeemable
noncontrolling interests
|
—
|
|
|
—
|
|
|
(7,218
|
)
|
|
—
|
|
|
—
|
|
|
(7,218
|
)
|
Balances, March 31, 2016
|
83,364,216
|
|
|
$
|
834
|
|
|
$
|
2,044,266
|
|
|
$
|
(9,290
|
)
|
|
$
|
(345,822
|
)
|
|
$
|
1,689,988
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Kite Realty Group Trust
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
Consolidated net income
|
$
|
1,975
|
|
|
$
|
7,862
|
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
|
|
|
|
|
|
Straight-line rent
|
(1,443
|
)
|
|
(1,279
|
)
|
Depreciation and amortization
|
43,075
|
|
|
41,336
|
|
Gain on sale of operating properties, net
|
—
|
|
|
(3,363
|
)
|
Provision for credit losses
|
841
|
|
|
748
|
|
Compensation expense for equity awards
|
1,241
|
|
|
1,061
|
|
Amortization of debt fair value adjustment
|
(1,015
|
)
|
|
(1,601
|
)
|
Amortization of in-place lease liabilities, net
|
(1,208
|
)
|
|
(797
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
Tenant receivables and other
|
(958
|
)
|
|
6,730
|
|
Deferred costs and other assets
|
(4,536
|
)
|
|
(5,354
|
)
|
Accounts payable, accrued expenses, deferred revenue and other liabilities
|
(5,586
|
)
|
|
526
|
|
Payments on assumed earnout liability
|
—
|
|
|
(774
|
)
|
Net cash provided by operating activities
|
32,386
|
|
|
45,095
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Deposits related to acquisitions
|
—
|
|
|
(2,000
|
)
|
Capital expenditures, net
|
(21,445
|
)
|
|
(22,569
|
)
|
Net proceeds from sales of operating properties
|
—
|
|
|
126,460
|
|
Collection of note receivable
|
500
|
|
|
—
|
|
Change in construction payables
|
(3,640
|
)
|
|
3,314
|
|
Net cash (used in) provided by investing activities
|
(24,585
|
)
|
|
105,205
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Purchase of redeemable noncontrolling interests
|
—
|
|
|
(33,998
|
)
|
Repurchases of common shares upon the vesting of restricted shares
|
(654
|
)
|
|
(765
|
)
|
Loan proceeds
|
48,100
|
|
|
83,577
|
|
Loan transaction costs
|
(689
|
)
|
|
(433
|
)
|
Loan payments
|
(41,308
|
)
|
|
(90,927
|
)
|
Distributions paid – common shareholders
|
(22,709
|
)
|
|
(21,708
|
)
|
Distributions paid - preferred shareholders
|
—
|
|
|
(2,114
|
)
|
Distributions paid – redeemable noncontrolling interests
|
(950
|
)
|
|
(985
|
)
|
Distributions to noncontrolling interests
|
(164
|
)
|
|
(29
|
)
|
Net cash used in financing activities
|
(18,374
|
)
|
|
(67,382
|
)
|
Net change in cash and cash equivalents
|
(10,573
|
)
|
|
82,918
|
|
Cash and cash equivalents, beginning of period
|
33,880
|
|
|
43,826
|
|
Cash and cash equivalents, end of period
|
$
|
23,307
|
|
|
$
|
126,744
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
Assumption of mortgages by buyer upon sale of properties
|
$
|
—
|
|
|
$
|
40,303
|
|
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)
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Assets:
|
|
|
|
Investment properties, at cost
|
$
|
3,947,922
|
|
|
$
|
3,933,140
|
|
Less: accumulated depreciation
|
(461,051
|
)
|
|
(432,295
|
)
|
|
3,486,871
|
|
|
3,500,845
|
|
|
|
|
|
Cash and cash equivalents
|
23,307
|
|
|
33,880
|
|
Tenant and other receivables, including accrued straight-line rent of $25,230 and
$23,809, respectively, net of allowance for uncollectible accounts
|
52,406
|
|
|
51,101
|
|
Restricted cash and escrow deposits
|
13,345
|
|
|
13,476
|
|
Deferred costs and intangibles, net
|
143,028
|
|
|
148,274
|
|
Prepaid and other assets
|
10,793
|
|
|
8,852
|
|
Total Assets
|
$
|
3,729,750
|
|
|
$
|
3,756,428
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
Mortgage and other indebtedness, net
|
$
|
1,730,787
|
|
|
$
|
1,724,449
|
|
Accounts payable and accrued expenses
|
81,772
|
|
|
81,356
|
|
Deferred revenue and intangibles, net and other liabilities
|
127,484
|
|
|
131,559
|
|
Total Liabilities
|
1,940,043
|
|
|
1,937,364
|
|
Commitments and contingencies
|
—
|
|
|
—
|
|
Redeemable Limited Partners’ and other redeemable noncontrolling interests
|
99,021
|
|
|
92,315
|
|
Partners Equity:
|
|
|
|
Parent Company:
|
|
|
|
Common equity, 83,364,216 and 83,334,865 units issued and outstanding
at March 31, 2016 and December 31, 2015, respectively
|
1,699,278
|
|
|
1,728,121
|
|
Accumulated other comprehensive loss
|
(9,290
|
)
|
|
(2,145
|
)
|
Total Partners Equity
|
1,689,988
|
|
|
1,725,976
|
|
Noncontrolling Interests
|
698
|
|
|
773
|
|
Total Equity
|
1,690,686
|
|
|
1,726,749
|
|
Total Liabilities and Equity
|
$
|
3,729,750
|
|
|
$
|
3,756,428
|
|
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
March 31,
|
|
2016
|
|
2015
|
|
|
|
|
Revenue:
|
|
|
|
Minimum rent
|
$
|
67,463
|
|
|
$
|
65,479
|
|
Tenant reimbursements
|
18,155
|
|
|
18,615
|
|
Other property related revenue
|
2,932
|
|
|
2,734
|
|
Total revenue
|
88,550
|
|
|
86,828
|
|
Expenses:
|
|
|
|
|
Property operating
|
12,192
|
|
|
12,724
|
|
Real estate taxes
|
11,135
|
|
|
10,021
|
|
General, administrative, and other
|
5,291
|
|
|
5,006
|
|
Merger and acquisition costs
|
—
|
|
|
159
|
|
Depreciation and amortization
|
42,240
|
|
|
40,435
|
|
Total expenses
|
70,858
|
|
|
68,345
|
|
Operating income
|
17,692
|
|
|
18,483
|
|
Interest expense
|
(15,325
|
)
|
|
(13,933
|
)
|
Income tax expense of taxable REIT subsidiary
|
(410
|
)
|
|
(55
|
)
|
Other income, net
|
18
|
|
|
4
|
|
Income before gain on sale of operating properties
|
1,975
|
|
|
4,499
|
|
Gain on sales of operating properties
|
—
|
|
|
3,363
|
|
Consolidated net income
|
1,975
|
|
|
7,862
|
|
Net income attributable to noncontrolling interests
|
(523
|
)
|
|
(587
|
)
|
Distributions on preferred units
|
—
|
|
|
(2,114
|
)
|
Net income attributable to common unitholders
|
$
|
1,452
|
|
|
$
|
5,161
|
|
|
|
|
|
Allocation of net income:
|
|
|
|
Limited Partners
|
$
|
50
|
|
|
$
|
96
|
|
Parent Company
|
1,402
|
|
|
5,065
|
|
|
$
|
1,452
|
|
|
$
|
5,161
|
|
|
|
|
|
|
|
|
|
Net income per unit - basic & diluted
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
|
|
|
Weighted average common units outstanding - basic
|
85,271,012
|
|
|
85,172,613
|
|
Weighted average common units outstanding - diluted
|
85,413,485
|
|
|
85,265,873
|
|
|
|
|
|
Distributions declared per common unit
|
$
|
0.2875
|
|
|
$
|
0.2725
|
|
|
|
|
|
Consolidated net income
|
$
|
1,975
|
|
|
$
|
7,862
|
|
Change in fair value of derivatives
|
(7,313
|
)
|
|
(3,226
|
)
|
Total comprehensive (loss) income
|
(5,338
|
)
|
|
4,636
|
|
Comprehensive income attributable to noncontrolling interests
|
(523
|
)
|
|
(587
|
)
|
Comprehensive (loss) income attributable to common unitholders
|
$
|
(5,861
|
)
|
|
$
|
4,049
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Kite Realty Group, L.P. and subsidiaries
Consolidated Statements of Partners’ Equity
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Partner
|
|
Total
|
|
Common Equity
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
|
|
|
|
Balances, December 31, 2015
|
$
|
1,728,121
|
|
|
$
|
(2,145
|
)
|
|
$
|
1,725,976
|
|
Stock compensation activity
|
888
|
|
|
—
|
|
|
888
|
|
Other comprehensive loss attributable to Parent Company
|
—
|
|
|
(7,145
|
)
|
|
(7,145
|
)
|
Distributions declared to Parent Company
|
(23,967
|
)
|
|
—
|
|
|
(23,967
|
)
|
Net income
|
1,402
|
|
|
—
|
|
|
1,402
|
|
Conversion of Limited Partner Units to shares of the Parent Company
|
52
|
|
|
—
|
|
|
52
|
|
Adjustment to redeemable noncontrolling interests
|
(7,218
|
)
|
|
—
|
|
|
(7,218
|
)
|
Balances, March 31, 2016
|
$
|
1,699,278
|
|
|
$
|
(9,290
|
)
|
|
$
|
1,689,988
|
|
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)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
Consolidated net income
|
$
|
1,975
|
|
|
$
|
7,862
|
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
|
|
|
|
Straight-line rent
|
(1,443
|
)
|
|
(1,279
|
)
|
Depreciation and amortization
|
43,075
|
|
|
41,336
|
|
Gain on sale of operating properties, net
|
—
|
|
|
(3,363
|
)
|
Provision for credit losses
|
841
|
|
|
748
|
|
Compensation expense for equity awards
|
1,241
|
|
|
1,061
|
|
Amortization of debt fair value adjustment
|
(1,015
|
)
|
|
(1,601
|
)
|
Amortization of in-place lease liabilities, net
|
(1,208
|
)
|
|
(797
|
)
|
Changes in assets and liabilities:
|
|
|
|
Tenant receivables and other
|
(958
|
)
|
|
6,730
|
|
Deferred costs and other assets
|
(4,536
|
)
|
|
(5,354
|
)
|
Accounts payable, accrued expenses, deferred revenue and other liabilities
|
(5,586
|
)
|
|
526
|
|
Payments on assumed earnout liability
|
—
|
|
|
(774
|
)
|
Net cash provided by operating activities
|
32,386
|
|
|
45,095
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Deposits related to acquisitions
|
—
|
|
|
(2,000
|
)
|
Capital expenditures, net
|
(21,445
|
)
|
|
(22,569
|
)
|
Net proceeds from sales of operating properties
|
—
|
|
|
126,460
|
|
Collection of note receivable
|
500
|
|
|
—
|
|
Change in construction payables
|
(3,640
|
)
|
|
3,314
|
|
Net cash (used in) provided by investing activities
|
(24,585
|
)
|
|
105,205
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Purchase of redeemable noncontrolling interests
|
—
|
|
|
(33,998
|
)
|
Repurchases of common shares upon the vesting of restricted shares
|
(654
|
)
|
|
(765
|
)
|
Loan proceeds
|
48,100
|
|
|
83,577
|
|
Loan transaction costs
|
(689
|
)
|
|
(433
|
)
|
Loan payments
|
(41,308
|
)
|
|
(90,927
|
)
|
Distributions paid – common unitholders
|
(22,709
|
)
|
|
(21,708
|
)
|
Distributions paid - preferred unitholders
|
—
|
|
|
(2,114
|
)
|
Distributions paid – redeemable noncontrolling interests - subsidiaries
|
(950
|
)
|
|
(985
|
)
|
Distributions to noncontrolling interests
|
(164
|
)
|
|
(29
|
)
|
Net cash used in financing activities
|
(18,374
|
)
|
|
(67,382
|
)
|
Net change in cash and cash equivalents
|
(10,573
|
)
|
|
82,918
|
|
Cash and cash equivalents, beginning of period
|
33,880
|
|
|
43,826
|
|
Cash and cash equivalents, end of period
|
$
|
23,307
|
|
|
$
|
126,744
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
Assumption of mortgages by buyer upon sale of properties
|
$
|
—
|
|
|
$
|
40,303
|
|
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
March 31, 2016
(Unaudited)
(in thousands, except share and per share data)
Note 1. Organization
Kite Realty Group Trust (the "Parent Company"), through its majority-owned subsidiary, Kite Realty Group, L.P. (the “Operating Partnership”), owns interests in various operating subsidiaries and joint ventures engaged in the ownership and operation, acquisition, development and redevelopment of high-quality neighborhood and community shopping centers in selected markets in the United States. The terms "Company," "we," "us," and "our" refer to the Parent Company and the Operating Partnership, collectively, and those entities owned or controlled by the Parent Company and/or the Operating Partnership.
The Operating Partnership was formed on August 16, 2004, when the Parent Company contributed properties and the net proceeds from an initial public offering of shares of its common stock to the Operating Partnership. The Parent Company was organized in Maryland in 2004 to succeed in the development, acquisition, construction and real estate businesses of its predecessor. We believe the Company qualifies as a real estate investment trust (a “REIT”) under provisions of the Internal Revenue Code of 1986, as amended.
The Parent Company is the sole general partner of the Operating Partnership, and as of
March 31, 2016
owned approximately
97.7%
of the common partnership interests in the Operating Partnership (“General Partner Units”). The remaining
2.3%
of the common partnership interests (“Limited Partner Units” and, together with the General Partner Units, the “Common Units”) are owned by the limited partners. As the sole general partner of the Operating Partnership, the Parent Company has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership. The Parent Company and the Operating Partnership are operated as one enterprise. The management of the Parent Company consists of the same members as the management of the Operating Partnership. As the sole general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have any significant assets other than its investment in the Operating Partnership.
At
March 31, 2016
, we owned interests in
118
operating and redevelopment properties consisting of
108
retail properties,
eight
retail redevelopment properties,
one
office operating property and an associated parking garage. We also owned
three
development properties under construction as of this date.
Note 2. Basis of Presentation, Consolidation, Investments in Joint Ventures, and Noncontrolling Interests
We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the presentation not misleading. The unaudited financial statements as of
March 31, 2016
and for the
three months ended March 31, 2016
and
2015
include all adjustments, consisting of normal recurring adjustments, necessary in the opinion of management to present fairly the financial information set forth therein. The consolidated financial statements in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the combined Annual Report on Form 10-K of the Parent Company and the Operating Partnership for the year ended December 31, 2015.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the disclosure of contingent assets and liabilities, the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue 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.
Consolidation and Investments in Joint Ventures
The accompanying financial statements are presented on a consolidated basis and include all accounts of the Parent Company, the Operating Partnership, the taxable REIT subsidiary of the Operating Partnership, subsidiaries of the Operating Partnership that are controlled and any variable interest entities (“VIEs”) in which the Operating Partnership is the primary beneficiary. In general, a VIE is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) has equity investors that do not provide sufficient financial resources for the entity to support its activities, (b) does not have equity investors with voting rights or (c) has equity investors whose votes are disproportionate from their economics and substantially all of the activities are conducted on behalf of the investor with disproportionately fewer voting rights.
As of January 1, 2016, we adopted Accounting Standards Update ("ASU") 2015-02,
Consolidation: Amendments to the Consolidation Analysis
, as required. See "Recently Issued Accounting Pronouncements" for further details. The Operating Partnership accounts for properties that are owned by joint ventures in accordance with the consolidation guidance. The Operating Partnership evaluates each joint venture and determines first whether to follow the variable interest entity ("VIE") or the voting interest entity ("VOE") model. Once the appropriate consolidation model is identified, the Operating Partnership then evaluates whether it should consolidate the joint venture. Under the VIE model, the Operating Partnership consolidates an entity when it has (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the VOE model, the Operating Partnership consolidates an entity when (i) it controls the entity through ownership of a majority voting interest if the entity is not a limited partnership or (ii) it controls the entity through its ability to remove the other partners or owners in the entity, at its discretion, when the entity is a limited partnership.
In determining whether to consolidate a VIE with the Operating Partnership, we consider all relationships between the Operating Partnership and the applicable VIE, including development agreements, management agreements and other contractual arrangements, in determining whether we have the power to direct the activities of the VIE that most significantly affect the VIE's performance. We also periodically reassess primary beneficiary status of the VIE. Prior to the adoption of ASC 2015-02, we treated one of our consolidated joint ventures as a VIE. During the
three months ended March 31, 2016
, as a result of the adoption of ASC 2015-02, we concluded that
two
additional consolidated joint ventures of the Operating Partnership were VIEs as the partners do not have substantive participating rights and we were the primary beneficiary. As a result, as of
March 31, 2016
, we owned investments in
three
joint ventures that are VIEs in which we are the primary beneficiary. As of this date, these VIEs had total debt of
$238.8 million
, which is secured by assets of the VIEs totaling
$497.8 million
. The Operating Partnership guarantees the debt of these VIEs. These conclusions did not impact the Company's financial position or results of operations.
As part of the adoption of ASC 2015-02, the Company concluded the Operating Partnership was a VIE as the limited partners do not hold kick-out rights or substantive participating rights. The Parent Company consolidates the Operating Partnership as it is the primary beneficiary in accordance with the VIE model.
Income Taxes and REIT Compliance
Parent Company
The Parent Company, which is considered a corporation for federal income tax purposes, has been organized and intends to continue to operate in a manner that will enable it to maintain its qualification as a REIT for federal income tax purposes. As a result, it generally will not be subject to federal income tax on the earnings that it distributes to the extent it distributes its “REIT taxable income” (determined before the deduction for dividends paid and excluding net capital gains) to shareholders of the Parent Company and meets certain other requirements on a recurring basis. To the extent that it satisfies this distribution requirement, but distributes less than 100% of its taxable income, it will be subject to federal corporate income tax on its undistributed REIT taxable income. REITs are subject to a number of organizational and operational requirements. If the Parent Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates for a period of four years following the year in which qualification is lost. We may also be subject to certain federal, state and local
taxes on our income and property and to federal income and excise taxes on our undistributed taxable income even if the Parent Company does qualify as a REIT. The Operating Partnership intends to continue to make distributions to the Parent Company in amounts sufficient to assist the Parent Company in adhering to REIT requirements and maintaining its REIT status.
We have elected to treat Kite Realty Holdings, LLC as a taxable REIT subsidiary of the Operating Partnership, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. This election enables us to receive income and provide services that would otherwise be impermissible for a REIT. Deferred tax assets and liabilities are established for temporary differences between the financial reporting bases and the tax bases of assets and liabilities at the tax rates expected to be in effect when the temporary differences reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Operating Partnership
The allocated share of income and loss, other than the operations of our taxable REIT subsidiary, is included in the income tax returns of the Operating Partnership's partners. Accordingly, the only federal income taxes included in the accompanying consolidated financial statements are in connection with its taxable REIT subsidiary.
Noncontrolling Interests
We report the non-redeemable noncontrolling interests in subsidiaries as equity and the amount of consolidated net income attributable to these noncontrolling interests is set forth separately in the consolidated financial statements. The noncontrolling interests in consolidated properties for the
three months ended March 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Noncontrolling interests balance January 1
|
$
|
773
|
|
|
$
|
3,364
|
|
Net income allocable to noncontrolling interests,
excluding redeemable noncontrolling interests
|
89
|
|
|
28
|
|
Distributions to noncontrolling interests
|
(164
|
)
|
|
(29
|
)
|
Noncontrolling interests balance at March 31
|
$
|
698
|
|
|
$
|
3,363
|
|
Redeemable Noncontrolling Interests - Limited Partners
Limited Partner Units are redeemable noncontrolling interests in the Operating Partnership. We classify redeemable noncontrolling interests in the Operating Partnership in the accompanying consolidated balance sheets outside of permanent equity because we may be required to pay cash to holders of Limited Partner Units upon redemption of their interests in the Operating Partnership or deliver registered shares upon their conversion. The carrying amount of the redeemable noncontrolling interests in the Operating Partnership is reflected at the greater of historical book value or redemption value with a corresponding adjustment to additional paid-in capital. At
March 31, 2016
and
December 31, 2015
, the redemption value of the redeemable noncontrolling interests exceeded the historical book value, and the balance was accordingly adjusted to redemption value.
We allocate net operating results of the Operating Partnership after preferred dividends and noncontrolling interests in the consolidated properties based on the partners’ respective weighted average ownership interest. We adjust the redeemable noncontrolling interests in the Operating Partnership at the end of each reporting period to reflect their interests in the Operating Partnership or redemption value. This adjustment is reflected in our shareholders’ and Parent Company's equity. For the
three months ended March 31, 2016
and
2015
, the weighted average interests of the Parent Company and the limited partners in the Operating Partnership were as follows:
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
Parent Company’s weighted average basic interest in
Operating Partnership
|
97.7
|
%
|
|
98.1
|
%
|
Limited partners' weighted average basic interests in
Operating Partnership
|
2.3
|
%
|
|
1.9
|
%
|
At
March 31, 2016
and
December 31, 2015
, the Parent Company's interest and the limited partners' redeemable noncontrolling ownership interests in the Operating Partnership were
97.7%
and
2.3%
and
98.1%
and
1.9%
, respectively.
Concurrent with the Parent Company’s initial public offering and related formation transactions, certain individuals received Limited Partner Units of the Operating Partnership in exchange for their interests in certain properties. The limited partners were granted the right to redeem Limited Partner Units on or after August 16, 2005 for cash or, at the Parent Company's election, common shares of the Parent Company in an amount equal to the market value of an equivalent number of common shares of the Parent Company at the time of redemption. Such common shares must be registered, which is not fully in the Parent Company’s control. Therefore, the limited partners’ interest is not reflected in permanent equity. The Parent Company also has the right to redeem the Limited Partner Units directly from the limited partner in exchange for either cash in the amount specified above or a number of its common shares equal to the number of Limited Partner Units being redeemed. For the
three months ended March 31, 2016
and
2015
, respectively,
2,000
and
3,000
Limited Partner Units were exchanged for the same number of common shares of the Parent Company.
There were
1,945,840
and
1,901,278
Limited Partner Units outstanding as of
March 31, 2016
and
December 31, 2015
, respectively. The increase in Limited Partner Units outstanding from December 31, 2015 is due primarily to non-cash compensation awards previously made to our executive officers in the form of Limited Partner Units.
Redeemable Noncontrolling Interests - Subsidiaries
Prior to the merger with Inland Diversified Real Estate Trust, Inc. ("Inland Diversified") in 2014, Inland Diversified formed joint ventures with the previous owners of certain properties and issued Class B units in
three
joint ventures that indirectly own those properties. The Class B units related to
two
of these three joint ventures remain outstanding subsequent to the merger with Inland Diversified and are accounted for as noncontrolling interests in these properties. The Class B units will become redeemable at our applicable partner’s election at future dates generally beginning in March 2017 or October 2022 based on the applicable joint venture and the fulfillment of certain redemption criteria. Beginning in June 2018 and November 2022, with respect to the applicable joint venture, the Class B units can be redeemed at the election of either our partner or us for cash or Limited Partner Units in the Operating Partnership. None of the issued Class B units have a maturity date and none are mandatorily redeemable. We consolidate these joint ventures because we control the decision making of each of the joint ventures and our joint venture partners have limited protective rights.
On February 13, 2015, we acquired our partner’s redeemable interest in the City Center operating property for
$34.0 million
and other non-redeemable rights and interests held by our partner for
$0.4 million
. We funded this acquisition with a
$30 million
draw on our unsecured revolving credit facility and the remainder in Limited Partner Units in the Operating Partnership. As a result of this transaction, our guarantee of a
$26.6 million
loan on behalf of LC White Plains Retail, LLC and LC White Plains Recreation, LLC was terminated.
We classify redeemable noncontrolling interests in certain subsidiaries in the accompanying consolidated balance sheets outside of permanent equity because, under certain circumstances, we may be required to pay cash to Class B unitholders in specific subsidiaries upon redemption of their interests. The carrying amount of these redeemable noncontrolling interests is required to be reflected at the greater of initial book value or redemption value with a corresponding adjustment to additional paid-in capital. As of
March 31, 2016
and December 31, 2015, the redemption amounts of these interests did not exceed the fair value
of each interest. As of
March 31, 2016
and December 31, 2015, the redemption value of the redeemable noncontrolling interests exceeded the initial book value.
The redeemable noncontrolling interests in the Operating Partnership and subsidiaries for the
three months ended March 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Redeemable noncontrolling interests balance January 1
|
$
|
92,315
|
|
|
$
|
125,082
|
|
Acquisition of partner's interest in City Center operating property
|
—
|
|
|
(33,998
|
)
|
Net income allocable to redeemable noncontrolling interests
|
482
|
|
|
655
|
|
Distributions declared to redeemable noncontrolling interests
|
(992
|
)
|
|
(1,006
|
)
|
Other, net, including adjustments to redemption value
|
7,216
|
|
|
414
|
|
Total limited partners' interests in Operating Partnership and other redeemable noncontrolling interests balance at March 31
|
$
|
99,021
|
|
|
$
|
91,147
|
|
|
|
|
|
|
|
|
|
Limited partners' interests in Operating Partnership
|
$
|
54,921
|
|
|
$
|
46,564
|
|
Other redeemable noncontrolling interests in certain subsidiaries
|
44,100
|
|
|
44,583
|
|
Total limited partners' interests in Operating Partnership and other redeemable noncontrolling interests balance at March 31
|
$
|
99,021
|
|
|
$
|
91,147
|
|
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-9,
Revenue from Contracts with Customers
(“ASU 2014-9”). ASU 2014-9 is a comprehensive revenue recognition standard that will supersede nearly all existing GAAP revenue recognition guidance. It will also affect the existing GAAP guidance governing the sale of nonfinancial assets. The new standard’s core principle is that a company will recognize revenue when it satisfies performance obligations by transferring promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for fulfilling those performance obligations. In doing so, companies will need to exercise more judgment and make more estimates than under existing GAAP guidance.
Under the new standard, entities will now generally recognize the sale, and any associated gain or loss, of a real estate property when control of the property transfers, as long as collectability of the consideration is probable. The new standard also amends ASC 340-40,
Other Assets and Deferred Costs - Contracts with Customers.
Under ASC 340-40, incremental costs of obtaining a contract are recognized as an asset if the entity expects to recover them. Other costs related to originating a revenue transaction, such as salary expense, that is based on other qualitative or quantitative metrics likely do not meet the criteria for capitalization because they are not directly related to obtaining a contract. Upon adoption of the new standard, we expect an increase in General, administrative, and other expense on our consolidated statement of operations and a decrease in amortization expense. We are currently evaluating the impact adopting the new accounting standard and the transition method of such adoption will have on our consolidated financial statements.
ASU 2014-9 is effective for public entities for annual and interim reporting periods beginning after December 15, 2017 and early adoption is not permitted. ASU 2014-9 allows for either recognizing the cumulative effect of application (i) at the start of the earliest comparative period presented (with the option to use any or all of three practical expedients) or (ii) as a cumulative effect adjustment as of the date of initial application, with no restatement of comparative periods presented.
In February 2015, the FASB issued ASU 2015-02,
Consolidation: Amendments to the Consolidation Analysis
. ASU 2015-02 makes changes to both the VIE and VOE models, amended the criteria for determining VIEs and eliminated the presumption that
a general partner should consolidate a limited partnership. All reporting entities involved with limited partnerships and similar entities were required to re-evaluate whether these entities, including the Operating Partnership, are subject to the VIE or VOE model and whether they qualify for consolidation. We adopted ASU 2015-02 in the first quarter of 2016 and although we classified
two
additional consolidated joint ventures of the Operating Partnership as VIEs (for a total of
three
consolidated VIEs as of March 31, 2016), there was no material effect on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as deferred charge assets, separate from the related debt liability. ASU 2015-03 is effective for annual and interim reporting periods beginning on or after December 15, 2015. We adopted ASU 2015-03 retrospectively in the first quarter of 2016. As a result of the retrospective adoption, we reclassified unamortized deferred financing costs of
$9.0 million
and
$9.6 million
as of March 31, 2016 and December 31, 2015, respectively, from deferred costs and intangibles, net to a reduction in mortgage and other indebtedness, net on our consolidated balance sheets. Other than this reclassification, the adoption of ASU 2015-03 did not have an impact on our consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.
ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. ASU 2015-16 requires that an acquirer must recognize measurement-period adjustments in the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for annual and interim reporting periods beginning on or after December 15, 2015. We adopted ASU 2015-16 in the first quarter of 2016 and there was no effect on our consolidated financial statements as we did not have any business combinations during this period.
In February 2016, the FASB issued ASU 2016-02,
Leases
. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making certain changes to lessor accounting, including the accounting for sales-type and direct financing leases. ASU 2016-02 will be effective for annual and interim reporting periods beginning on or after December 15, 2018, with early adoption permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact adopting the new accounting standard will have on our consolidated financial statements.
Note 3. Earnings Per Share or Unit
Basic earnings per share or unit is calculated based on the weighted average number of common shares or units outstanding during the period. Diluted earnings per share or unit is determined based on the weighted average common number of shares or units outstanding during the period combined with the incremental average common shares or units that would have been outstanding assuming the conversion of all potentially dilutive common shares or units into common shares or units as of the earliest date possible.
Potentially dilutive securities include outstanding options to acquire common shares; Limited Partner Units, which may be exchanged for either cash or common shares, at the Parent Company’s option and under certain circumstances; units under our Outperformance Plan; potential settlement of redeemable noncontrolling interests in certain joint ventures; and deferred common share units, which may be credited to the personal accounts of non-employee trustees in lieu of the payment of cash compensation or the issuance of common shares to such trustees. Limited Partner Units have been omitted from the Parent Company’s denominator for the purpose of computing diluted earnings per share because the effect of including these amounts in the denominator would have no dilutive impact. Weighted average Limited Partner Units outstanding for the
three months ended March 31, 2016
and
2015
were
1.9 million
and
1.6 million
, respectively.
Approximately
0.1 million
outstanding options to acquire common shares were excluded from the computations of diluted earnings per share or unit for both the
three months ended March 31, 2016
and
2015
, because the impact was not dilutive.
Note 4. Mortgage and Other Indebtedness
Mortgage and other indebtedness consisted of the following at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
Principal
|
|
Unamortized Net Premiums
|
|
Unamortized Deferred Financing Costs
1
|
|
Total
|
Senior unsecured notes
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
(2,764
|
)
|
|
$
|
247,236
|
|
Unsecured revolving credit facility
|
68,100
|
|
|
—
|
|
|
(1,557
|
)
|
|
66,543
|
|
Unsecured term loan
|
500,000
|
|
|
—
|
|
|
(2,797
|
)
|
|
497,203
|
|
Notes payable secured by properties under construction - variable rate
|
132,776
|
|
|
—
|
|
|
(90
|
)
|
|
132,686
|
|
Mortgage notes payable - fixed rate
|
715,368
|
|
|
15,506
|
|
|
(1,385
|
)
|
|
729,489
|
|
Mortgage notes payable - variable rate
|
58,085
|
|
|
—
|
|
|
(455
|
)
|
|
57,630
|
|
Total mortgage and other indebtedness
|
$
|
1,724,329
|
|
|
$
|
15,506
|
|
|
$
|
(9,048
|
)
|
|
$
|
1,730,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
Principal
|
|
Unamortized Net Premiums
|
|
Unamortized Deferred Financing Costs
1
|
|
Total
|
Senior unsecured notes
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
(2,755
|
)
|
|
$
|
247,245
|
|
Unsecured revolving credit facility
|
20,000
|
|
|
—
|
|
|
(1,727
|
)
|
|
18,273
|
|
Unsecured term loan
|
500,000
|
|
|
—
|
|
|
(2,985
|
)
|
|
497,015
|
|
Notes payable secured by properties under construction - variable rate
|
132,776
|
|
|
—
|
|
|
(133
|
)
|
|
132,643
|
|
Mortgage notes payable - fixed rate
|
756,494
|
|
|
16,521
|
|
|
(1,555
|
)
|
|
771,460
|
|
Mortgage notes payable - variable rate
|
58,268
|
|
|
—
|
|
|
(455
|
)
|
|
57,813
|
|
Total mortgage and other indebtedness
|
$
|
1,717,538
|
|
|
$
|
16,521
|
|
|
$
|
(9,610
|
)
|
|
$
|
1,724,449
|
|
|
|
|
____________________
|
1
|
Effective March 31, 2016, we adopted ASC 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
which changes the presentation of deferred financing costs on the consolidated balance sheets. This guidance was adopted retrospectively and all prior periods have been adjusted to reflect this change in accounting principle.
|
Consolidated indebtedness, including weighted average maturities and weighted average interest rates as of
March 31, 2016
, considering the impact of interest rate swaps, is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Amount
|
|
Ratio
|
|
Weighted Average
Interest Rate
|
|
Weighted Average
Maturity (Years)
|
Fixed rate debt
1
|
$
|
1,460,714
|
|
|
84
|
%
|
|
4.12
|
%
|
|
5.3
|
Variable rate debt
|
263,615
|
|
|
16
|
%
|
|
1.97
|
%
|
|
3.7
|
Net debt premiums and issuance costs, net
|
6,458
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
Total
|
$1,730,787
|
|
100
|
%
|
|
3.80
|
%
|
|
5.1
|
|
|
|
____________________
|
1
|
Calculations on fixed rate debt include the portion of variable rate debt that has been hedged; therefore, calculations on variable rate debt exclude the portion of variable rate debt that has been hedged. $495.3 million in variable rate debt is hedged for a weighted average 1.8 years.
|
Mortgage and construction loans are collateralized by certain real estate properties and leases. Mortgage loans are generally due in monthly installments of interest and principal and mature over various terms through 2030.
Variable interest rates on mortgage and construction loans are based on LIBOR plus spreads ranging from
135
to
225
basis points. At
March 31, 2016
, the one-month LIBOR interest rate was
0.44%
. Fixed interest rates on mortgage loans range from
3.78%
to
6.78%
.
Unsecured Revolving Credit Facility and Unsecured Term Loans
We have an unsecured revolving credit facility with a total commitment of
$500 million
, a
$400 million
unsecured term loan and a
seven
-year unsecured term loan for up to
$200 million
on which we have drawn
$100 million
. The amount that we may borrow under our unsecured revolving credit facility is based on the value of the assets in our unencumbered asset pool. The senior unsecured notes and the unsecured term loans are included in the total borrowings outstanding for the purpose of determining the amount we may borrow under our unsecured revolving credit facility. Taking into account outstanding borrowings and letters of credit, we had
$377.6 million
available under our unsecured revolving credit facility for future borrowings as of
March 31, 2016
.
As of
March 31, 2016
,
$68.1 million
was outstanding under the unsecured revolving credit facility and
$500 million
was outstanding under our unsecured term loans. Additionally, we had letters of credit outstanding which totaled
$15.8 million
, against which
no
amounts were advanced as of
March 31, 2016
.
Our ability to borrow under the unsecured revolving credit facility is subject to our compliance with various restrictive and financial covenants, including with respect to liens, indebtedness, investments, dividends, mergers and asset sales. As of
March 31, 2016
, we were in compliance with all such covenants.
Other Debt Activity
For the
three months ended March 31, 2016
, we had total new borrowings of
$48.1 million
and total repayments of
$41.3 million
. The major components of this activity are as follows:
|
|
•
|
In the first quarter of 2016, we retired the
$16.3 million
loan secured by our Cool Creek Commons operating property and the
$23.6 million
loan secured by our Sunland Towne Centre operating property;
|
|
|
•
|
We borrowed
$48.1 million
on the revolving credit facility to fund the above retirements of secured debt and for general business purposes; and
|
|
|
•
|
We made scheduled principal payments on indebtedness totaling
$1.4 million
in the first three months of 2016.
|
Fair Value of Fixed and Variable Rate Debt
As of
March 31, 2016
, the estimated fair value of our fixed rate debt, was
$1.1 billion
compared to the book value of
$1.0 billion
. The fair value was estimated using Level 2 and 3 inputs with cash flows discounted at current borrowing rates for similar
instruments which ranged from
3.78%
to
6.78%
. As of
March 31, 2016
, the fair value of variable rate debt was
$781.9 million
compared to the book value of
$759.0 million
. The fair value was estimated using Level 2 and 3 inputs with cash flows discounted at current borrowing rates for similar instruments which ranged from
1.79%
to
2.69%
.
Note 5. Derivative Instruments, Hedging Activities and Other Comprehensive Income
In order to manage potential future volatility relating to variable interest rate risk, we enter into interest rate hedging agreements from time to time. We do not use derivatives for trading or speculative purposes, nor do we have any derivatives that are not designated as cash flow hedges. The agreements with each of our derivative counterparties provide that, in the event of default on any of our indebtedness, we could also be declared in default on our derivative obligations.
As of
March 31, 2016
, we were party to various cash flow hedge agreements with notional amounts totaling
$648.3 million
. These hedge agreements effectively fix the interest rate underlying certain variable rate debt instruments over terms ranging from
2016 through 2020
. Utilizing a weighted average interest rate spread over LIBOR on all variable rate debt resulted in fixing the weighted average interest rate at
2.78%
.
In January 2016, we entered into
two
forward-starting interest rate swaps that will effectively fix the interest rate on
$150 million
of previously unhedged variable rate debt at
3.208%
. The effective date of the swaps is June 30, 2016, and they will expire on July 1, 2021.
These interest rate hedge 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.
As a basis for considering market participant assumptions in fair value measurements, accounting guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs for identical instruments that are classified within Level 1 and observable inputs for similar instruments that are classified within Level 2) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3). 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.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of
March 31, 2016
and
December 31, 2015
, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations are classified in Level 2 of the fair value hierarchy.
As of
March 31, 2016
the estimated fair value of our interest rate hedges was a liability of
$11.8 million
, including accrued interest of
$0.3 million
. As of
March 31, 2016
,
$11.8 million
is reflected in accounts payable and accrued expenses on the accompanying consolidated balance sheets. At
December 31, 2015
the estimated fair value of our interest rate hedges was a net liability of
$4.8 million
, including accrued interest of
$0.4 million
. As of
December 31, 2015
,
$0.2 million
is reflected in prepaid and other assets and
$5.0 million
is reflected in accounts payable and accrued expenses on the accompanying consolidated balance sheets.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to earnings over time as the hedged items are recognized in earnings. During the
three months ended March 31, 2016
and
2015
,
$1.0 million
and
$1.4 million
, respectively, were reclassified as a reduction to earnings. As the interest payments on our hedges are made over the next 12 months, we estimate the impact to interest expense to be
$4.1 million
.
Our share of net unrealized gains and losses on our interest rate hedge agreements are the only components of the change in accumulated other comprehensive loss.
Note 6. Shareholders’ Equity
Distribution Payments
Our Board of Trustees declared a cash distribution of
$0.2875
for the first quarter of 2016 to common shareholders and Common Unit holders of record as of April 6, 2016, which represents a
5.5%
increase over our previous quarterly distribution. The distribution was paid on April 13, 2016.
Outperformance Plan
In January 2016, the Compensation Committee of our Board of Trustees adopted the 2016 Outperformance Program for members of executive management and certain other employees, pursuant to which participants are eligible to earn profits interests ("LTIP Units") in the Operating Partnership based on the achievement of certain performance criteria related to the Company’s common shares. Participants in the 2016 Outperformance Plan were awarded the right to earn, in the aggregate, up to
$6 million
of share-settled awards (the “bonus pool”) if, and only to the extent of which, based on our total shareholder return (“TSR”) performance measures are achieved for the
three
-year period beginning January 4, 2016 and ending December 31, 2018. Awarded interests not earned based on the TSR measures are forfeited.
If the TSR performance measures are achieved at the end of the
three
-year performance period, participants will receive their percentage interest in the bonus pool as LTIP Units in the Operating Partnership. Such LTIP Units vest over an additional
two
-year service period. The compensation cost of the 2016 Outperformance Plan is fixed as of the grant date and is recognized regardless of whether the LTIP Units are ultimately earned or if the service requirement is met.
Restricted Award Grants
In February 2016, a total of
103,685
restricted awards were granted to members of executive management and certain other employees. The restricted awards will vest ratably over periods ranging from
three
to
five
years.
Performance Awards
In February 2016, the Compensation Committee awarded each of four executive officers a
three
-year performance award in the form of restricted performance share units ("PSUs"). These PSUs may be earned over a
three
-year performance period from January 1, 2016 to December 31, 2018. The performance criteria are based on the relative total shareholder return ("TSR") achieved by the Company measured against a peer group over the
three
-year measurement period. Any PSUs earned at the end of the
three
-year period will be fully vested at that date. The total number of PSUs issued to the executive officers was based on a target value of
$1.0 million
but may be earned in a range from
0%
to
200%
of the target value depending on our TSR over the measurement period in relation to the peer group.
Note 7. Deferred Costs and Intangibles, net
Deferred costs consist primarily of acquired lease intangible assets, broker fees and capitalized salaries and related benefits incurred in connection with lease originations. Deferred leasing costs, lease intangibles and similar costs are amortized on a straight-line basis over the terms of the related leases. At
March 31, 2016
and
December 31, 2015
, deferred costs consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Acquired lease intangible assets
|
$
|
134,501
|
|
|
$
|
138,796
|
|
Deferred leasing costs and other
|
57,293
|
|
|
55,332
|
|
|
191,794
|
|
|
194,128
|
|
Less—accumulated amortization
|
(48,766
|
)
|
|
(45,854
|
)
|
Total
|
$
|
143,028
|
|
|
$
|
148,274
|
|
The accompanying consolidated statements of operations include amortization expense as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
Amortization of deferred leasing costs, lease intangibles and other
|
$
|
6,269
|
|
|
$
|
5,889
|
|
Amortization of above market lease intangibles
|
1,236
|
|
|
1,632
|
|
Amortization of deferred leasing costs, leasing intangibles and other is included in depreciation and amortization expense. The amortization of above market lease intangibles is included as a reduction to revenue.
Note 8. Deferred Revenue and Other Liabilities
Deferred revenue and other liabilities consist of unamortized fair value of in-place lease liabilities recorded in connection with purchase accounting, potential earnout payments related to property acquisitions, retainage payables for development and redevelopment projects, and tenant rent payments received in advance. The amortization of in-place lease liabilities is recognized as revenue over the remaining life of the leases (including option periods for leases with below market renewal options) through 2046. Tenant rent payments received in advance are recognized as revenue in the period to which they apply, which is typically the month following their receipt.
At
March 31, 2016
and
December 31, 2015
, deferred revenue and other liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Unamortized in-place lease liabilities
|
$
|
109,753
|
|
|
$
|
112,405
|
|
Retainage payables and other
|
5,980
|
|
|
5,636
|
|
Assumed earnout liability (Note 9)
|
1,380
|
|
|
1,380
|
|
Tenant rent payments received in advance
|
10,371
|
|
|
12,138
|
|
Total
|
$
|
127,484
|
|
|
$
|
131,559
|
|
The amortization of below market lease intangibles was
$2.4 million
for both the
three months ended March 31, 2016
and
2015
. The amortization of below market lease intangibles is included as an increase to revenue.
Note 9. Commitments and Contingencies
Other Commitments and Contingencies
We are not subject to any material litigation nor, to management’s knowledge, is any material litigation currently threatened against us. We are parties to routine litigation, claims, and administrative proceedings arising in the ordinary course of business. Management believes that such routine litigation, claims, and administrative proceedings will not have a material adverse impact on our consolidated financial statements.
We are obligated under various completion guarantees with certain lenders and lease agreements with tenants to complete all or portions of the development and redevelopment projects. We believe we currently have sufficient financing in place to fund these projects and expect to do so primarily through existing construction loans. In addition, if necessary, we may make draws on our unsecured revolving credit facility.
As of
March 31, 2016
, we had outstanding letters of credit totaling
$15.8 million
. At that date, there were
no
amounts advanced against these instruments.
Previously Assumed Earnout Liability
We are a party to an earnout arrangement with the former seller of
one
of our operating properties, whereby we are required to pay the seller additional consideration based on whether the seller was able to lease certain vacant space at the property. The potential earnout liability was
$1.4 million
at both
March 31, 2016
and December 31, 2015. Any difference would impact earnings and be reflected in the consolidated statements of operations in the period the settlement is determined.
Note 10. Disposals of Operating Properties
During the
three months ended March 31, 2016
, we did not dispose of any operating properties.
During the fourth quarter of 2015, we sold our Four Corner operating property in Seattle, Washington, and our Cornelius Gateway operating property in Portland, Oregon, for aggregate proceeds of
$44.9 million
and a net gain of
$0.6 million
.
In March 2015, we sold
seven
properties for aggregate net proceeds of
$103.0 million
and a net gain of
$3.4 million
.
The results of these operating properties are not included in discontinued operations in the accompanying statements of operations as none of the operating properties individually, nor in the aggregate, represent a strategic shift that has had or will have a material effect on our operations or financial results.
Note 11. Acquisitions
During the
three months ended March 31, 2016
, we did not acquire any operating properties.
In 2015, we acquired
four
operating properties for total consideration of
$185.8 million
, including the assumption of an
$18.3 million
loan, which are summarized below:
|
|
|
|
|
|
|
|
|
Property Name
|
|
MSA
|
|
Acquisition Date
|
|
Owned GLA
|
Colleyville Downs
|
|
Dallas, TX
|
|
April 2015
|
|
185,848
|
|
Belle Isle Station
|
|
Oklahoma City, OK
|
|
May 2015
|
|
164,327
|
|
Livingston Shopping Center
|
|
New York
-
Newark
|
|
July 2015
|
|
139,657
|
|
Chapel Hill Shopping Center
|
|
Fort Worth / Dallas, TX
|
|
August 2015
|
|
126,755
|
|
Item 2.
Cautionary Note About Forward-Looking Statements
This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by us, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, performance, transactions or achievements, financial or otherwise, may differ materially from the results, performance, transactions or achievements, financial or otherwise, expressed or implied by the forward-looking statements. Risks, uncertainties and other factors that might cause such differences, some of which could be material, include but are not limited to:
|
|
•
|
national and local economic, business, real estate and other market conditions, particularly in light of low growth in the U.S. economy as well as economic uncertainty caused by fluctuations in the prices of oil and other energy sources;
|
|
|
•
|
financing risks, including the availability of and costs associated with sources of liquidity;
|
|
|
•
|
our ability to refinance, or extend the maturity dates of, our indebtedness;
|
|
|
•
|
the level and volatility of interest rates;
|
|
|
•
|
the financial stability of tenants, including their ability to pay rent and the risk of tenant bankruptcies;
|
|
|
•
|
the competitive environment in which we operate;
|
|
|
•
|
acquisition, disposition, development and joint venture risks;
|
|
|
•
|
property ownership and management risks;
|
|
|
•
|
our ability to maintain our status as a real estate investment trust (“REIT”) for federal income tax purposes;
|
|
|
•
|
potential environmental and other liabilities;
|
|
|
•
|
impairment in the value of real estate property we own;
|
|
|
•
|
risks related to the geographical concentration of our properties in Florida, Indiana and Texas;
|
|
|
•
|
insurance costs and coverage;
|
|
|
•
|
risks related to cybersecurity attacks and the loss of confidential information and other business disruptions;
|
|
|
•
|
other factors affecting the real estate industry generally; and
|
|
|
•
|
other uncertainties and factors identified in this Quarterly Report on Form 10-Q and, from time to time, in other reports we file with the Securities and Exchange Commission (the “SEC”) or in other documents that we publicly disseminate, including, in particular, the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31,
2015
.
|
We undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.