KITE REALTY GROUP TRUST 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the accompanying audited consolidated financial statements and related notes thereto and Item 1A, “Risk Factors,” appearing elsewhere in this Annual Report on Form 10-K. 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. Overview In the following overview, we discuss, among other things, the status of our business and properties, the effect that current United States economic conditions is having on our retail tenants and us, and the current state of the financial markets and how it impacts our financing strategy. Our Business and Properties Kite Realty Group Trust is a publicly-held real estate investment trust which, through its majority-owned subsidiary, Kite Realty Group, L.P., owns interests in various operating subsidiaries and joint ventures engaged in the ownership and operation, acquisition, development and redevelopment of high-quality neighborhood and community shopping centers in select markets in the United States. We derive revenues primarily from activities associated with the collection of contractual rents and reimbursement payments from tenants at our properties. Our operating results therefore depend materially on, among other things, the ability of our tenants to make required lease payments, the health and resilience of the United States retail sector, interest rate volatility, job growth and real estate market and overall economic conditions. As of December 31, 2020, we owned interests in 90 operating and redevelopment properties totaling approximately 17.3 million square feet. We also owned two development projects under construction as of this date. Portfolio Update As has become more evident during the COVID-19 pandemic, strong real estate matters. The strength of the Company's real estate is evidenced by our higher rent collection rates as compared to our peers, based upon publicly reported information by each peer as of February 19, 2021. The Company has continued to improve its asset quality. In addition, the Company's property type lends itself to retailers' current needs including curbside pick-up and buying online and picking up in store (BOPIS) that we believe will benefit from tenant demand for additional space. The Company's operations were impacted by the bankruptcies of retailers during the COVID-19 pandemic. The Company had leased space to national retailers that declared bankruptcy during 2020 that comprised 5.9% of our annualized base rent. A portion of the retailers have vacated their space with us, which will lead to an expected decline in occupancy and rental revenue in 2021. Project Focus, our disposition program completed in 2019, allowed us to dispose of weaker, non-core assets and reduce our exposure to at-risk tenants and resulted in $502 million in combined sales, the majority of which net proceeds were used to repay debt. It also allowed us to focus our geographic footprint on locations that are benefiting from accelerating migration shifts. In evaluating potential acquisition, development, and redevelopment opportunities, we look for strong sub-markets where average household income, population density, traffic counts and daytime workforce populations are above the broader market average. We also focus on locations that are benefitting from current population migratory patterns, namely major cities in states with no or relatively low income taxes, and mild or temperate climates. In our largest sub-markets, household incomes are significantly higher and state income taxes are relatively lower than the medians for those broader markets. In addition to targeting sub-markets with strong consumer demographics, we focus on having the most desirable tenant mix at each center. We have aggressively targeted and executed leases with prominent grocers including Publix, Aldi, Whole Foods, and Trader Joe's, expanding retailers such as TJ Maxx, Ross Dress for Less, Burlington, and Old Navy, service and restaurant retailers and other retailers such as Ulta, REI, Five Below and Total Wine. Additionally, we have identified cost-efficient ways to relocate, re-tenant and renegotiate leases at several of our properties allowing us to attract more suitable tenants. Capital and Financing Activities Our ability to obtain capital on satisfactory terms and to refinance borrowings as they mature is affected by the condition of the economy in general and by the financial strength of properties securing borrowings. With the successful completion of Project Focus in 2019, we were able to enhance our already-strong balance sheet, increase our financial flexibility, and improve our liquidity to fund future growth. We ended 2020 with approximately $566.9 million of combined cash and borrowing capacity on our Credit Facility. In addition, as of December 31, 2020, we did not have any debt principal scheduled to mature through December 31, 2021. The amount that we may borrow under our Credit Facility is limited by the value of the assets in our unencumbered asset pool. As of December 31, 2020, the value of the assets in our unencumbered asset pool was $1.3 billion. The investment grade credit ratings we have received provide us with access to the unsecured public bond market, which we may continue to use in the future to finance acquisition activity, repay maturing debt and fix interest rates. Summary of Critical Accounting Policies and Estimates Our significant accounting policies are more fully described in Note 2 to the accompanying consolidated financial statements. As disclosed in Note 2, the preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the compilation of our financial condition and results of operations and, in some cases, require management’s most difficult, subjective, and complex judgments. Valuation of Investment Properties Management reviews operational and development projects, land parcels and intangible assets for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. This review for possible impairment requires certain assumptions, estimates, and significant judgment. Impairment losses for investment properties and intangible assets are measured when the undiscounted cash flows estimated to be generated by the investment properties during the expected holding period are less than the carrying amounts of those assets. The evaluation of impairment is subject to certain management assumptions including projected net operating income, anticipated hold period, expected capital expenditures and the capitalization rate used to estimate the property's residual value. Impairment losses are recorded as the excess of the carrying value over the estimated fair value of the asset. Our impairment review for land and development properties assumes we have the intent and the ability to complete the developments or projected uses for the land parcels. If we determine those plans will not be completed or our assumptions with respect to operating assets are not realized, an impairment loss may be appropriate. Depreciation may be accelerated for a redevelopment project, including partial demolition of existing structures after the asset is assessed for impairment. Operating properties will be classified as held for sale only when those properties are available for immediate sale in their present condition and for which management believes it is probable that a sale of the property will be completed within one year, among other factors. Operating properties classified as held for sale are carried at the lower of cost or fair value less estimated costs to sell. Depreciation and amortization are suspended during the held-for-sale period. Acquisition of Real Estate Investments Upon acquisition of real estate operating properties, we estimate the fair value of acquired identifiable tangible assets and identified intangible assets and liabilities, assumed debt, and any noncontrolling interest in the acquiree at the date of acquisition, based on evaluation of information and estimates available at that date. Based on these estimates, we record the estimated fair value to the applicable assets and liabilities. In making estimates of fair values, a number of sources are utilized, including information obtained as a result of pre-acquisition due diligence, marketing and leasing activities. The estimates of fair value were determined to have primarily relied upon Level 2 and Level 3 inputs, as defined below. 44 Fair value is determined for tangible assets and intangibles, including: • the fair value of the building on an as-if-vacant basis and the fair value of land determined either by comparable market data, real estate tax assessments, independent appraisals or other relevant data; • above-market and below-market in-place lease values for acquired properties, which are based on the present value (using an interest rate which reflects the risks 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. The capitalized above-market and below-market lease values are amortized as a reduction of or addition to rental income over the term of the lease. Should a tenant vacate, terminate its lease, or otherwise notify us of its intent to do so, the unamortized portion of the lease intangibles would be charged or credited to income; • the value of having a lease in place at the acquisition date. We utilize independent and internal sources for our estimates to determine the respective in-place lease values. Our estimates of value are made using 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 received during the estimated lease-up period as if the space was vacant. The value of in-place leases is amortized to expense over the remaining initial terms of the respective leases; and • the fair value of any assumed financing that is determined to be above or below market terms. We utilize third party and independent sources for our estimates to determine the respective fair value of each mortgage payable. The fair market value of each mortgage payable is amortized to interest expense over the remaining initial terms of the respective loan. We also consider whether there is any value to in-place leases that have a related customer relationship intangible value. Characteristics we consider in determining these values include the nature and extent of existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality, and expectations of lease renewals, among other factors. To date, a tenant relationship has not been developed that is considered to have a current intangible value. Revenue Recognition As a lessor of real estate assets, the Company retains substantially all of the risks and benefits of ownership and accounts for its leases as operating leases. Contractual minimum base rent, percentage rent, and expense reimbursements from tenants for common area maintenance costs, insurance and real estate taxes are our principal sources of revenue. Base minimum rents are recognized on a straight-line basis over the terms of the respective leases. Certain lease agreements contain provisions that grant additional rents based on a tenant’s sales volume (contingent overage rent). Overage rent is recognized when tenants achieve the specified sales targets as defined in their lease agreements. Overage rent is included in rental income in the accompanying consolidated statements of operations for the years ended December 31, 2020 and 2019. If we determine that collectibility is probable, we recognize income from rentals based on the methodology described above. We have accounts receivable due from tenants and are subject to the risk of tenant defaults and bankruptcies that may affect the collection of outstanding receivables. These receivables are reduced for credit loss that is recognized as a reduction to rental income. We regularly evaluate the collectibility of these lease-related receivables by analyzing past due account balances and consider such facts as the credit quality of our customer, historical write-off experience, tenant credit-worthiness and current economic trends when evaluating the collectibility of rental income. Although we estimate uncollectible receivables and provide for them through charges against income, actual experience may differ from those estimates. We recognize the sale of real estate when control transfers to the buyer. As part of our ongoing business strategy, we will, from time to time, sell land parcels and outlots, some of which are ground leased to tenants. 45 Results of Operations As of December 31, 2020, we owned interests in 90 operating and redevelopment properties and two development project currently under construction. The following table sets forth the total operating and redevelopment properties and development projects that we owned as of December 31, 2020, 2019 and 2018: # of Properties 2020 2019 2018 Operating Retail Properties 83 82 105 Operating Office Properties and Other 4 4 3 Redevelopment Properties 3 4 3 Total Operating and Redevelopment Properties 90 90 111 Development Projects: 2 1 1 Total All Properties 92 91 112 The comparability of results of operations is affected by our development, redevelopment, and operating property disposition activities in 2018 through 2020. Therefore, we believe it is most useful to review the comparisons of our results of operations for these years (as set forth below under “Comparison of Operating Results for the Years Ended December 31, 2020 and 2019 ” ) in conjunction with the discussion of these activities during those periods, which is set forth below. Property Acquisition Activities During the years ended December 31, 2020 and 2019, we acquired the properties listed in the table below. We did not acquire any properties in 2018. Property Name MSA Acquisition Date Owned GLA Pan Am Plaza Garage Indianapolis, IN March 2019 N/A Nora Plaza Indianapolis, IN August 2019 139,670 Eastgate Crossing Raleigh, NC December 2020 156,276 Operating Property Disposition Activities During the years ended December 31, 2020, 2019, and 2018, we sold the operating properties listed in the table below. 46 Property Name MSA Disposition Date Owned GLA Trussville Promenade Birmingham, AL February 2018 463,836 Memorial Commons Goldsboro, NC March 2018 111,022 Tamiami Crossing 1 Naples, FL June 2018 121,705 Plaza Volente 1 Austin, TX June 2018 156,296 Livingston Shopping Center 1 Newark, NJ June 2018 139,559 Hamilton Crossing Alcoa, TN November 2018 175,464 Fox Lake Crossing Chicago, IL December 2018 99,136 Lowe's Plaza Las Vegas, NV December 2018 30,210 Whitehall Pike Bloomington, IN March 2019 128,997 Beechwood Promenade Athens, GA April 2019 297,369 Village at Bay Park Green Bay, WI May 2019 82,254 Lakewood Promenade Jacksonville, FL May 2019 196,655 Palm Coast Landing Palm Coast, FL May 2019 168,352 Lowe's - Perimeter Woods Charlotte, NC May 2019 166,085 Cannery Corner Las Vegas, NV May 2019 30,738 Temple Terrace Tampa, FL June 2019 90,328 University Town Center Oklahoma City, OK June 2019 348,877 Gainesville Plaza Gainesville, FL July 2019 162,189 Bolton Plaza Jacksonville, FL July 2019 154,155 Eastgate Plaza Las Vegas, NV July 2019 96,594 Burnt Store Punta Gorda, FL July 2019 95,625 Landstown Commons Virginia Beach, VA August 2019 398,139 Lima Marketplace Fort Wayne, IN September 2019 100,461 Hitchcock Plaza Aiken, SC September 2019 252,211 Merrimack Village Center Manchester, NH September 2019 78,892 Publix at Acworth Atlanta, GA October 2019 69,628 The Centre at Panola Atlanta, GA October 2019 73,075 Beacon Hill Crown Point, IN October 2019 56,820 Bell Oaks Centre Evansville, IN November 2019 94,958 Boulevard Crossing Kokomo, IN December 2019 124,634 South Elgin Commons Chicago, IL December 2019 128,000 ____________________ 1 The Company has retained a 20% ownership interest in this property. Redevelopment Activities During portions of the years ended December 31, 2020, 2019, and 2018, the following properties were under active redevelopment and removed from our operating portfolio: 47 Property Name MSA Transition to Redevelopment 1 Transition to Operating Portfolio Owned GLA Courthouse Shadows 2 Naples, FL June 2013 Pending 124,802 Hamilton Crossing Centre 3, 4 Indianapolis, IN June 2014 Pending 89,983 City Center White Plains, NY December 2015 June 2018 363,103 Fishers Station Indianapolis, IN December 2015 September 2018 52,414 Beechwood Promenade 5 Athens, GA December 2015 December 2018 297,369 The Corner 3, 4 Indianapolis, IN December 2015 Pending 27,731 Rampart Commons Las Vegas, NV March 2016 December 2018 79,314 Burnt Store Marketplace 5 Punta Gorda, FL June 2016 March 2018 95,625 Glendale Town Center 3 Indianapolis, IN March 2019 Pending 393,002 ____________________ 1 Transition date represents the date the property was transferred from our operating portfolio into redevelopment status. 2 This property was sold in 2020. 3 This property has been identified as a redevelopment property and is not included in the operating portfolio or the same property pool. 4 This redevelopment would potentially include the creation of a mixed-use (office, retail, and multi-family) development. 5 This property was sold in 2019. Net Operating Income and Same Property Net Operating Income We use property net operating income (“NOI”), a non-GAAP financial measure, to evaluate the performance of our properties. We define NOI as income from our real estate, including lease termination fees received from tenants, less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions and certain corporate level expenses. 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 excludes properties that have not been owned for the full period presented. It also excludes net gains from outlot sales, straight-line rent revenue, lease termination income in excess of lost rent, amortization of lease intangibles and significant prior period expense recoveries and adjustments, if any. When the Company receives 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 following: the expiration of 12 months or the start date of a replacement tenant. We believe that Same Property NOI is helpful to investors as a measure of our operating performance because it includes only the NOI of properties that have been owned for the full period presented. We believe such presentation eliminates disparities in net income due to the acquisition or disposition of properties during the particular period presented and thus provides a more consistent metric for the comparison of our properties. Same Property NOI includes the results of properties that have been owned for the entire current and prior year reporting periods. NOI and Same Property NOI should not, however, be considered as alternatives to net income (calculated in accordance with GAAP) as indicators of our financial performance. Our computation of NOI and Same Property NOI may differ from the methodology used by other REITs, and therefore may not be comparable to such other REITs. When evaluating the properties that are included in the same property pool, we have established specific criteria for determining the inclusion of properties acquired or those recently under development. An acquired property is included in the same property pool when there is a full quarter of operations in both years subsequent to the acquisition date. Development and redevelopment properties are included in the same property pool four full quarters after the properties have been transferred to the operating portfolio. A redevelopment property is first excluded from the same property pool when the execution of a redevelopment plan is likely and we 1) begin recapturing space from tenants or b) the contemplated plan significantly impacts the operations of the property. At December 31, 2020, the same property pool excluded three properties in redevelopment, one recently completed development, two acquired properties, and three commercial properties. 48 The following table reflects Same Property NOI 1 and a reconciliation to net income attributable to common shareholders for the years ended December 31, 2020 and 2019 (unaudited): ($ in thousands) Years Ended December 31, 2020 2019 % Change Leased percentage at period end 91.5 % 96.1 % Economic Occupancy percentage 2 92.1 % 92.8 % Same Property NOI $ 179,304 $ 191,970 (6.6) % Reconciliation of Same Property NOI to Most Directly Comparable GAAP Measure: Net operating income - same properties $ 179,304 $ 191,970 Net operating income - non-same activity 3 10,084 38,403 Other (expense) income, net (357) (471) General, administrative and other (30,840) (28,214) Loss on debt extinguishment — (11,572) Impairment charges — (37,723) Depreciation and amortization expense (128,648) (132,098) Interest expense (50,399) (59,268) Gains on sales of operating properties 4,733 38,971 Net income attributable to noncontrolling interests (100) (532) Net loss attributable to common shareholders $ (16,223) $ (534) ____ 1 Same Property NOI excludes (i) The Corner, Glendale Town Center, and Hamilton Crossing redevelopments, (ii) Eddy Street Commons - Phases II and III developments, (iii) the recently acquired Eastgate Crossing and Nora Plaza, and (iv) office properties. 2 Excludes leases that are signed but for which tenants have not yet commenced the payment of cash rent. Calculated as a weighted average based on the timing of cash rent commencement and expiration during the period. 3 Includes non-cash activity across the portfolio as well as net operating income from properties not included in the same property pool including properties sold during both periods. Our Same Property NOI decreased 6.6% in 2020 compared to 2019. This decrease was primarily due to bad debt expense of $12.1 million in 2020 related to certain tenants that were impacted by the COVID-19 pandemic. Funds From Operations Funds from Operations ("FFO") is a widely used performance measure for real estate companies and is provided here as a supplemental measure of 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 depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, and 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 49 depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. FFO (a) should not be considered as an alternative to net income (calculated in accordance with GAAP) for the purpose of measuring our financial performance, (b) is not an alternative to cash flow 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. For informational purposes, we have also provided FFO adjusted for loss on debt extinguishment. From time to time, the Company may report or provide guidance with respect to “NAREIT 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, gains or losses associated with the early extinguishment of debt, gains or losses associated with litigation involving the Company that is not in the normal course of business, the impact on earnings from employee severance, and the excess of redemption value over carrying value of preferred stock redemption, 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 years ended December 31, 2020, 2019 and 2018 (unaudited) are as follows: ($ in thousands) Years Ended December 31, 2020 2019 2018 Consolidated net loss $ (16,123) $ (2) $ (46,451) Less: net income attributable to noncontrolling interests in properties (528) (528) (1,151) Less: Gain on sales of operating properties (4,733) (38,971) (3,424) Add: impairment charges — 37,723 70,360 Add: depreciation and amortization of consolidated and unconsolidated entities, net of noncontrolling interests 130,091 133,184 151,856 FFO of the Operating Partnership 1 108,707 131,406 171,190 Less: Limited Partners' interests in FFO (2,826) (3,153) (4,109) FFO attributable to Kite Realty Group Trust common shareholders 1 $ 105,881 $ 128,253 $ 167,081 FFO of the Operating Partnership 1 $ 108,707 $ 131,406 $ 171,190 Add: severance charge 3,253 — — Add: loss on debt extinguishment — 11,572 — FFO, as adjusted, of the Operating Partnership $ 111,960 $ 142,978 $ 171,190 ____________________ 1 “FFO of the Operating Partnership" measures 100% of the operating performance of the Operating Partnership’s real estate properties. “FFO attributable to Kite Realty Group Trust common shareholders” reflects a reduction for the redeemable noncontrolling weighted average diluted interest in the Operating Partnership. Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) We define EBITDA, a non-GAAP financial measure, as net income before depreciation and amortization, interest expense and income tax expense of TRS. For informational purposes, we have also provided Adjusted EBITDA, which we define as EBITDA less (i) EBITDA from unconsolidated entities, (ii) gains on sales of operating properties or impairment charges, (iii) other income and expense, (iv) noncontrolling interest EBITDA and (v) other non-recurring activity or items impacting comparability from period to period. Annualized Adjusted EBITDA is Adjusted EBITDA for the most recent quarter multiplied by four. Net Debt to Adjusted EBITDA is our share of net debt divided by Annualized Adjusted EBITDA. EBITDA, Adjusted EBITDA, Annualized Adjusted EBITDA and Net Debt to Adjusted EBITDA, as calculated by us, are not comparable to EBITDA and EBITDA-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. 50 Considering the nature of our business as a real estate owner and operator, we believe that EBITDA, Adjusted EBITDA and the ratio of Net Debt to Adjusted EBITDA are helpful to investors in measuring our operational performance because they exclude various items included in net income that do not relate to or are not indicative of our operating performance, such as gains or losses from sales of depreciated property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. For informational purposes, we have also provided Annualized Adjusted EBITDA, adjusted as described above. We believe this supplemental information provides a meaningful measure of our operating performance. We believe presenting EBITDA and the related measures in this manner allows investors and other interested parties to form a more meaningful assessment of our operating results. The following table presents a reconciliation of our EBITDA, Adjusted EBITDA and Annualized Adjusted EBITDA to consolidated net income (the most directly comparable GAAP measure) and a calculation of Net Debt to Adjusted EBITDA. ($ in thousands) Three Months Ended December 31, 2020 Consolidated net loss $ (6,842) Adjustments to net income: Depreciation and amortization 31,818 Interest expense 12,284 Income tax benefit of taxable REIT subsidiary (200) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) 37,060 Adjustments to EBITDA: Unconsolidated EBITDA 352 Gain on sales of operating properties 159 Severance charges 3,253 Other income and expense, net 408 Noncontrolling interest (132) Adjusted EBITDA 41,100 Annualized Adjusted EBITDA 1 $ 164,402 Company Share of Net Debt: Mortgage and other indebtedness $ 1,170,794 Less: Partner share of consolidated joint venture debt 2 (1,102) Less: Cash, cash equivalents, and restricted cash (47,760) Plus: Company share of unconsolidated joint venture debt 22,150 Plus: Debt Premium 5,282 Company Share of Net Debt $ 1,149,364 Net Debt to Adjusted EBITDA 7.0x ____________________ 1 Represents Adjusted EBITDA for the three months ended December 31, 2020 (as shown in the table above) multiplied by four. 2 Partner share of consolidated joint venture debt is calculated based upon the partner's pro-rata ownership of the joint venture, multiplied by the related secured debt balance. Comparison of Operating Results for the Years Ended December 31, 2020 and 2019 The following table reflects changes in the components of our consolidated statements of operations for the years ended December 31, 2020 and 2019: 51 ($ in thousands) 2020 2019 Net change 2019 to 2020 Revenue: Rental income $ 257,670 $ 308,399 $ (50,729) Other property related revenue 8,597 6,326 2,271 Fee income 378 448 (70) Total revenue 266,645 315,173 (48,528) Expenses: Property operating 41,012 45,575 (4,563) Real estate taxes 35,867 38,777 (2,910) General, administrative, and other 30,840 28,214 2,626 Depreciation and amortization 128,648 132,098 (3,450) Impairment charge — 37,723 (37,723) Total expenses 236,367 282,387 (46,020) Gains on sale of operating properties, net 4,733 38,971 (34,238) Operating income 35,011 71,757 (36,746) Interest expense (50,399) (59,268) 8,869 Income tax benefit of taxable REIT subsidiary 696 282 414 Loss on debt extinguishment — (11,572) 11,572 Equity in loss of unconsolidated subsidiary (1,685) (628) (1,057) Other income (expense), net 254 (573) 827 Consolidated net income (16,123) (2) (16,121) Net income attributable to noncontrolling interests (100) (532) 432 Net (loss) income attributable to Kite Realty Group Trust (16,223) (534) $ (15,689) Property operating expense to total revenue ratio 15.4 % 14.5 % 0.9 % Rental income decreased $50.7 million, or 16.4%, due to the following: ($ in thousands) Net change 2019 to 2020 Properties sold during 2019 $ (31,809) Properties under redevelopment or acquired during 2019 and/or 2020 856 Properties fully operational during 2019 and 2020 and other (19,776) Total $ (50,729) The net decrease of $19.8 million in rental income for properties that were fully operational during 2019 and 2020 is primarily due to $17.4 million of bad debt expense for certain non-cash straight-line rent and billed rent receivables related to tenants that are financially distressed due to the COVID-19 pandemic. In addition, the Company had a reduction in minimum rent due to a decrease in occupancy due to certain closures, most notably by certain anchor tenants, such as Stein Mart, 24 Hour Fitness, and New York Sports Club that have declared bankruptcy during the COVID-19 pandemic. While leasing activity was reduced during 2020, the Company has been able to continue to generate higher rents on new leases and renewals. The average rents for new comparable leases signed in 2020 were $20.77 per square foot compared to average expiring base rents of $19.04 per square foot in that period. The average base rents for renewals signed in 2020 were $16.10 per square foot compared to average expiring base rents of $15.18 per square foot in that period. 52 Following the completion of Project Focus in 2019 and the current year leasing activity, the quality of our operating retail portfolio continued to improve. This is evidenced by the increase in the annualized base rent per square foot to $18.42 per square foot as of December 31, 2020 from $17.83 per square foot as of December 31, 2019. Other property related revenue primarily consists of parking revenues and gains on sales of undepreciated assets. This revenue increased by $2.3 million, primarily as a result of higher gains on sales of undepreciated assets of $5.7 million partially offset by a decrease in parking revenues of $2.0 million. We recorded fee income of $0.4 million for the years ended December 31, 2020 and 2019, respectively, from property management services provided to unconsolidated joint ventures. Property operating expenses decreased $4.6 million, or 10.0%, due to the following: ($ in thousands) Net change 2019 to 2020 Properties sold during 2019 $ (4,592) Properties under redevelopment or acquired during 2019 and/or 2020 381 Properties fully operational during 2019 and 2020 and other (352) Total $ (4,563) The net decrease of $0.4 million in property operating expenses for properties that were fully operational during 2019 and 2020 is primarily due to a continued focus on cost controls over certain operating expense spend in 2020. These provided savings of $1.4 million that were partially offset by an increase in insurance costs of $1.0 million due to higher premiums across the real estate industry that were realized upon renewal. As a percentage of rental revenue, property operating expenses increased between years from 14.5% to 15.4%. The increase was mostly due to a decline in revenue in 2020 due to the impact of the COVID-19 pandemic. Real estate taxes decreased $2.9 million, or 7.5%, due to the following: ($ in thousands) Net change 2019 to 2020 Properties sold during 2019 $ (3,607) Properties under redevelopment or acquired during 2019 and/or 2020 73 Properties fully operational during 2019 and 2020 and other 624 Total $ (2,910) The net increase of $0.6 million in real estate taxes for properties that were fully operational during 2019 and 2020 is primarily due to an increase in current year tax assessments at certain operating properties. The majority of real estate tax expense is recoverable from tenants and such recovery is reflected in rental income. General, administrative and other expenses increased $2.6 million, or 9.3%. The increase is primarily due to $3.3 million of severance charges incurred during the fourth quarter of 2020. Depreciation and amortization expense decreased $3.5 million, or 2.6%, due to the following: ($ in thousands) Net change 2019 to 2020 Properties sold during 2019 $ (12,880) Properties under redevelopment or acquired during 2019 and/or 2020 1,146 Properties fully operational during 2019 and 2020 and other 8,284 Total $ (3,450) 53 The net increase of $1.1 million in properties under redevelopment or acquired during 2019 and 2020 is primarily due to a full year of operations for Nora Plaza and Pan Am Plaza Garage that were acquired in 2019. The net increase of $8.3 million in depreciation and amortization at properties fully operational during 2019 and 2020 is primarily due to accelerated depreciation of certain tenant-related assets for tenants that vacated their spaces during 2020. In 2019, we recorded impairment charges totaling $37.7 million related to a reduction in the expected holding period of certain operating properties. In 2020, we did not record any impairment charges. See additional discussion in Note 8 to the consolidated financial statements. Interest expense decreased $8.9 million or 15.0%. The decrease is due to the significant debt reduction following the successful completion of Project Focus in 2019. The Company incurred an $11.6 million loss on debt extinguishment for the year ended December 31, 2019 related to costs incurred to retire certain secured loans that were paid off in connection with property sales. There was no such activity in 2020. We recorded a net gain of $4.7 million for the year ended December 31, 2020 on the sale of one redevelopment property, compared to a net gain of $39.0 million on the sale of 23 assets for the year ended December 31, 2019. Management’s discussion of the financial condition, changes in financial condition and results of operations for the year ended December 31, 2019, with comparison to the year ended December 31, 2018, was included in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019. Liquidity and Capital Resources Overview Our primary finance and capital strategy is to maintain a strong balance sheet with sufficient flexibility to fund our operating and investment activities in a cost-effective manner. We consider a number of factors when evaluating our level of indebtedness and when making decisions regarding additional borrowings or equity offerings, including the estimated value of properties to be developed or acquired, the estimated market value of our properties and the Company as a whole upon placement of the borrowing or offering, and the ability of particular properties to generate cash flow to cover debt service. We will continue to monitor the capital markets and may consider raising additional capital through the issuance of our common or preferred shares, unsecured debt securities, or other securities. Our Principal Capital Resources For a discussion of cash generated from operations, see “Cash Flows,” beginning on page 56. In addition to cash generated from operations, we discuss below our other principal capital resources. The completion of Project Focus in 2019 has enhanced our liquidity position, reduced our leverage, and reduced our borrowing costs. We continue to focus on a balanced approach to growth and staggering and extending debt maturities in order to retain our financial flexibility. As of December 31, 2020, we had approximately $523 million available under our Credit Facility for future borrowings based on the unencumbered asset pool allocated to the unsecured revolving credit facility. We also had $43.6 million in cash and cash equivalents as of December 31, 2020. We were in compliance with all applicable financial covenants under our Credit Facility, our unsecured term loans, and our senior unsecured notes as of December 31, 2020. We have on file with the SEC a shelf registration statement on Form S-3 relating to the offer and sale, from time to time, of an indeterminate amount of equity and debt securities. Equity securities may be offered and sold by the Parent Company, and the net proceeds of any such offerings would be contributed to the Operating Partnership in exchange for additional General Partner Units. Debt securities may be offered and sold by the Operating Partnership with the Operating Partnership receiving the proceeds. From time to time, we may issue securities under this shelf registration statement to fund the repayment of long-term debt upon maturity, for other general corporate purposes or as otherwise set forth in the applicable prospectus 54 supplement. We plan to file a new shelf registration statement on Form S-3 prior to or upon expiration of the current registration statement. 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 December 31, 2020, we did not have any debt scheduled to mature in 2021, excluding scheduled monthly principal payments. Other Short-Term Liquidity Needs. The requirements for qualifying as a REIT and for a tax deduction for some or all of the dividends paid to shareholders necessitate that we distribute at least 90% of our taxable income on an annual basis. Such requirements cause us to have substantial liquidity needs over both the short term and the long term. Our short-term liquidity needs consist primarily of funds necessary to pay operating expenses associated with our operating properties, interest expense and scheduled principal payments on our debt, expected dividend payments to our common shareholders and to Common Unit holders, and recurring capital expenditures. In February 2021, our Board of Trustees declared a cash distribution of $0.17 per common share and Common Unit for the first quarter of 2021. This distribution is expected to be paid on or about April 15, 2021 to common shareholders and Common Unit holders of record as of April 8, 2021. Other short-term liquidity needs also include expenditures for tenant improvements, renovation costs, external leasing commissions and recurring capital expenditures. During the year ended December 31, 2020, we incurred $1.7 million of costs for recurring capital expenditures on operating properties, $12.0 million of costs for tenant improvements and external leasing commissions, and $17.4 million to re-lease anchor space at our operating properties related to tenants open and operating as of December 31, 2020 (excluding development and redevelopment properties). We currently anticipate incurring approximately $16 million to $20 million of additional major tenant improvements costs related to releasing vacant space at a number of our operating properties. As of December 31, 2020, we had two development projects under construction: Eddy Street Commons in South Bend, Indiana and Glendale Town Center in Indianapolis, Indiana. Total estimated costs for these projects are $56.9 million, of which our share is estimated to be $12.6 million. We anticipate incurring the majority of the remaining costs for the projects over the next 18 months. We believe we have the ability to fund these projects through cash flow from operations or by borrowing on the Credit Facility. Long-Term Liquidity Needs Our long-term liquidity needs consist primarily of funds necessary to pay for any new development projects, redevelopment of existing properties, non-recurring capital expenditures, acquisitions of properties, and payment of indebtedness at maturity. Potential Redevelopment Opportunities. We are currently evaluating additional redevelopment of several other properties. We believe we will have sufficient funding for these projects through cash flow from operations, borrowings on our Credit Facility and proceeds from asset sales. Selective Acquisitions, Developments and Joint Ventures . We may selectively pursue the acquisition and development of other properties, which would require additional capital. It is unlikely that we would have sufficient funds on hand to meet these long-term capital requirements, requiring us 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 in the market. Our ability to access the capital markets will be dependent on a number of factors, including general capital market conditions. 55 Capitalized Expenditures on Consolidated Properties The following table summarizes cash capital expenditures for our development and redevelopment properties and other capital expenditures for the year ended December 31, 2020: Year Ended ($ in thousands) December 31, 2020 Developments $ 2,919 Redevelopment Opportunities 308 Recently completed redevelopments and other 4,244 Big Box Surge activity 17,998 Recurring operating capital expenditures (primarily tenant improvement payments) 12,797 Total $ 38,266 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 year ended December 31, 2020. Impact of Changes in Credit Ratings on Our Liquidity We have been assigned investment grade corporate credit ratings from two nationally recognized credit rating agencies. These ratings were unchanged during 2020. In the future, the ratings could change based upon, among other things, the impact that prevailing economic conditions may have on our results of operations and financial condition. Credit rating reductions by one or more rating agencies could also adversely affect our access to funding sources, the cost and other terms of obtaining funding, as well as our overall financial condition, operating results and cash flow. Cash Flows As of December 31, 2020, we had cash and cash equivalents on hand of $43.6 million. We may be subject to concentrations of credit risk with regard to our cash and cash equivalents. We place our cash and short-term cash investments with highly rated financial institutions. While we attempt to limit our exposure at any point in time, occasionally, such cash and investments may temporarily be in excess of FDIC and SIPC insurance limits. We also maintain certain compensating balances in several financial institutions in support of borrowings from those institutions. Such compensating balances were not material to the consolidated balance sheets. Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019 Cash provided by operating activities was $95.5 million for the year ended December 31, 2020, a decrease of $42.4 million from the same period of 2019. The cash flows were negatively impacted due to the significant property sales activity throughout 2019 and reduced collection activity due to the COVID-19 pandemic. Cash used in investing activities was $80.8 million for the year ended December 31, 2020, as compared to cash provided by investing activities of $416.6 million in the same period of 2019. The major changes in cash used in and provided by investing activities are as follows: • Net proceeds of $23.0 million related to the sale of one redevelopment property and five parcels of land in 2020 compared to sale proceeds of $529.4 million from the sale of 23 assets in 2019; • Acquisition of Eastgate Crossing in 2020 for $65.3 million compared to the acquisition of Nora Plaza and Pan Am Plaza Parking Garage in 2019 for $58.2 million; and • Decrease in capital expenditures of $15.0 million, partially offset by a change in construction payables of $2.4 million in 2020. 56 Cash used in financing activities was $20.9 million for the year ended December 31, 2020, compared to cash used in financing activities of $547.2 million in the same period of 2019. Highlights of significant cash sources and uses in financing activities during 2020 are as follows: • In March 2020, we borrowed $300.0 million on the Credit Facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 pandemic; • During the remainder of 2020, we repaid the $300.0 million borrowing on the Credit Facility as we became incrementally more confident in the recovery from the COVID-19 pandemic; • We borrowed $25.0 million on the Credit Facility to fund a portion of the purchase price of Eastgate Crossing; • In 2019, we used the proceeds from the sale of operating properties to pay down $395.5 million of secured and unsecured debt; • In 2019, we paid $14.5 million of debt extinguishment costs; and • In 2020, we made distributions to common shareholders and Common Unit holders of $39.7 million, compared to distributions of $137.1 million in 2019. Management’s discussion of the cash flows for the year ended December 31, 2018, with comparison to the year ended December 31, 2019, was included in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019. Other Matters Financial Instruments We are exposed to capital market risk, such as changes in interest rates. In order to reduce the volatility relating to interest rate risk, we may enter into interest rate hedging arrangements from time to time. We do not utilize derivative financial instruments for trading or speculative purposes. Obligations in Connection with Projects Under Construction We are obligated under various completion guarantees with tenants to complete tenant-specific spaces currently under construction. We believe we currently have sufficient financing in place to fund our investment in any existing or future projects through cash from operations or borrowings on our Credit Facility. In addition, we have provided a repayment guaranty on a $33.8 million construction loan with the development of Embassy Suites at the University of Notre Dame consistent with our 35% ownership interest. As of December 31, 2020, the current outstanding loan balance is $33.6 million, of which our share is $11.8 million. Our share of estimated future costs for under construction and future developments and redevelopments is further discussed on page 55 in the "Short and Long-Term Liquidity Needs" section. Outstanding Indebtedness The following table presents details of outstanding consolidated indebtedness as of December 31, 2020 and 2019 adjusted for hedges: 57 ($ in thousands) December 31, 2020 December 31, 2019 Senior unsecured notes $ 550,000 $ 550,000 Unsecured revolving credit facility 25,000 — Unsecured term loans 250,000 250,000 Mortgage notes payable - fixed rate 295,966 297,472 Mortgage notes payable - variable rate 55,110 55,830 Net debt premiums and issuance costs, net (5,282) (6,722) Total mortgage and other indebtedness $ 1,170,794 $ 1,146,580 Consolidated indebtedness, including weighted average maturities and weighted average interest rates at December 31, 2020, is summarized below: ($ in thousands) Outstanding Amount Ratio Weighted Average Interest Rate Weighted Average Maturity (in years) Fixed Rate Debt $ 1,095,966 94 % 4.17 % 5.0 Variable Rate Debt 1 80,110 6 % 1.60 % 1.5 Net Debt Premiums and Issuance Costs, Net (5,282) N/A N/A N/A Total Consolidated Debt $ 1,170,794 100 % 4.00 % 4.7 _______ 1 Fixed rate debt includes, and variable rate date excludes, the portion of such debt that has been hedged by interest rate derivatives. As of December 31, 2020, $250 million in variable rate debt is hedged for a weighted average of 2.2 years. Mortgage indebtedness is collateralized by certain real estate properties and leases. Mortgage indebtedness is generally repaid in monthly installments of interest and principal and matures over various terms through 2030. Variable interest rates on mortgage indebtedness is based on LIBOR plus 160 basis points. At December 31, 2020, the one-month LIBOR interest rate was 0.14%. Fixed interest rates on mortgage loans range from 3.78% to 5.73%. 58