Item 7. Management’s Discussion and Analysis
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 U.S. 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, operation, acquisition, development and redevelopment of high-quality, open-air shopping centers and mixed-use assets 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. Therefore, our operating results depend materially on, among other things, the ability of our tenants to make required lease payments, the health and resilience of the U.S. retail sector, interest rate volatility, job growth and real estate market and overall economic conditions.
As of December 31, 2021, we owned interests in 180 operating retail properties totaling approximately 29.0 million square feet and one office property with 0.3 million square feet. Of the 180 operating retail properties, 11 contain an office component. We also owned eight development projects under construction as of this date.
Merger with RPAI
On October 22, 2021, we completed the merger with RPAI in accordance with the Agreement and Plan of Merger dated July 18, 2021 (the “Merger Agreement”), by and among the Company, its wholly owned subsidiary KRG Oak, LLC (“Merger Sub”) and RPAI, pursuant to which RPAI merged with and into Merger Sub (the “Merger”). Immediately following the closing of the Merger, Merger Sub merged with and into the Operating Partnership so that all of the assets and liabilities of the Company continue to be held at or below the Operating Partnership level. As a result of the Merger, we acquired 100 operating retail properties and five active development projects along with multiple parcels of entitled land for future value creation, creating a top five open-air shopping center REIT. The combined high-quality, open-air portfolio is a mixture of predominantly necessity-based, grocery-anchored neighborhood and community centers, combined with vibrant mixed-use assets. The Merger serves to more than double the Company’s presence in high-growth markets that have mild or temperate climates and no or relatively low income taxes, while also introducing and/or enhancing its presence in strategic gateway markets. In addition, the combined company has additional opportunities to further increase shareholder value, including leasing of pandemic-related vacancies, optimizing NOI margins, lowering the Company’s cost of capital, and completing select development projects. Pursuant to the terms of the Merger Agreement, each outstanding share of RPAI common stock converted into the right to receive 0.623 common shares of the Company plus cash in lieu of fractional Company shares. The Operating Partnership issued an equivalent amount of General Partner Units to the Parent Company.
Portfolio Update
As has become more evident since the COVID-19 pandemic began and as we began to operate as a combined company, high-quality real estate located in high-quality markets matters. Open-air centers are thriving for a variety of reasons including their ability to act as last mile fulfillment centers and their convenient and affordable nature for retailers and consumers. This includes conveniently located and easily accessible parking fields, lower operating costs as compared to other retail formats, and essential anchors that drive daily trips. In addition, the Company’s property types are particularly suited for retailers’ current and evolving 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 strength of the Company’s real estate is evidenced by our continued strong cash leasing spreads and ABR for the retail portfolio of $19.36 per square foot. The Company has continued to improve its asset quality and through its Merger with RPAI, acquired a refined portfolio of high-quality, open-air shopping centers and mixed-use assets.
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In evaluating potential acquisition, development, and redevelopment opportunities, we look for strong sub-markets where average household income, educational attainment, population density, traffic counts and daytime workforce populations are above the broader market average. We also focus on locations that are benefiting from current population migratory patterns, namely major cities in business-friendly 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 the 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 Beauty, 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
In 2021, we were able to enhance our already-strong balance sheet, increase our financial flexibility, and improve our liquidity to fund future growth with our transformative Merger with RPAI. Prior to the Merger, we had taken various steps to enhance our liquidity, including the issuance of $175.0 million of Exchangeable Notes in the first quarter of 2021 to proactively fund our 2022 debt maturities. We ended 2021 with approximately $1.0 billion of combined cash and borrowing capacity on our Revolving Facility. In addition, as of December 31, 2021, we had $153.5 million of debt principal scheduled to mature through December 31, 2022 that we expect to retire using cash on hand and short-term deposits.
The three investment grade credit ratings we maintain 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.
Results of Operations
As of December 31, 2021, we owned interests in 180 operating retail properties, one office property and eight development projects currently under construction. Of the 180 operating retail properties, 11 contain an office component. The following table sets forth the total operating properties and development projects that we owned as of December 31, 2021, 2020 and 2019:
Number of Properties
2021 2020 2019
Operating retail properties 180 83 82
Office and other components 12 4 4
Development and redevelopment projects 8 5 5
The comparability of results of operations is affected by our Merger with RPAI completed on October 22, 2021, in which we acquired 100 operating retail properties as well as five active development projects, along with the development, redevelopment, and operating property acquisition and disposition activities in 2019 through 2021. 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, 2021 and 2020 ” ) in conjunction with the discussion of these activities during those periods, which is set forth below. Results from operations for the year ended December 31, 2021 reflect the combined operation for the approximately two and a half months since the Company’s Merger with RPAI on October 22, 2021. In the future, our results of operations will reflect the combined operations for the entire period presented. Therefore, our historical financial statements may not be indicative of future operations results.
Property Acquisitions
During the years ended December 31, 2021, 2020 and 2019, in addition to the properties we acquired in the Merger, we acquired the following properties:
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
Nora Plaza outparcel Indianapolis, IN December 2021 23,722
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Operating Property Dispositions
During the years ended December 31, 2021 and 2019, we sold the following operating properties. We did not sell any operating properties during the year ended December 31, 2020.
Property Name MSA Disposition Date Owned GLA
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
Westside Market Dallas, TX October 2021 93,377
Development and Redevelopment Projects
During portions of the years ended December 31, 2021, 2020, and 2019, the following projects were under active development or redevelopment and removed from our operating portfolio:
Project Name MSA Transition to
Development or Redevelopment 1
Transition to
Operating Portfolio Owned
Commercial GLA
Courthouse Shadows 2
Naples, FL June 2013 Sold 124,802
Hamilton Crossing Centre 3,4
Indianapolis, IN June 2014 Pending 92,283
The Corner 3,4
Indianapolis, IN December 2015 Pending 24,000
Eddy Street Commons – Phase II South Bend, IN September 2017 December 2020 8,200
Eddy Street Commons – Phase III South Bend, IN September 2020 Pending 18,600
Glendale Town Center 3
Indianapolis, IN March 2019 December 2021 199,021
The Landing at Tradition – Phase II Port St. Lucie, FL September 2021 Pending 39,900
Carillon MOB 5
Washington, D.C. October 2021 Pending 126,000
Circle East 5
Baltimore, MD October 2021 Pending 82,000
One Loudoun Downtown – Residential
and Pads G&H Commercial 5
Washington, D.C. October 2021 Pending 67,000
Shoppes at Quarterfield 5
Baltimore, MD October 2021 Pending 58,000
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1 Transition date represents the date the property was transferred from our operating portfolio into redevelopment status. For legacy RPAI projects, the transition date represents the later of the date of the closing of the Merger and the date the project was transferred 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 will include the creation of a mixed-use development.
5 Projects were assumed as part of the Merger with RPAI in October 2021.
Net Operating Income and Same Property Net Operating Income
We use property net operating income (“NOI”), a non-GAAP financial measure, to evaluate the performance of our properties. We define NOI as income from our real estate, including lease termination fees received from tenants, less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions and certain corporate level expenses, including merger and acquisition costs. We believe that NOI is helpful to investors as a measure of our operating performance because it excludes various items included in net income that do not relate to or are not indicative of our operating performance, such as depreciation and amortization, interest expense, and impairment, if any.
We also use same property NOI (“Same Property NOI”), a non-GAAP financial measure, to evaluate the performance of our properties. Same Property NOI 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 we receive payments in excess of any accounts receivable for terminating a lease, Same Property NOI will include such excess payments as monthly rent until the earlier of the expiration of 12 months or the start date of a replacement tenant. We believe that Same Property NOI is helpful to investors as a measure of our operating performance because it includes only the NOI of properties that have been owned for the full period presented. We believe such presentation eliminates disparities in net income due to the acquisition or disposition of properties during the particular periods presented and thus provides a more consistent metric for the comparison of our properties. Same Property NOI includes the results of properties that have been owned for the entire current and prior year reporting periods.
NOI and Same Property NOI should not, however, be considered as alternatives to net income (calculated in accordance with GAAP) as indicators of our financial performance. Our computation of NOI and Same Property NOI may differ from the methodology used by other REITs and, therefore, may not be comparable to such other REITs.
When evaluating the properties that are included in the same property pool, we have established specific criteria for determining the inclusion of properties acquired or those recently under development. An acquired property is included in the same property pool when there is a full quarter of operations in both years subsequent to the acquisition date. Development and redevelopment properties are included in the same property pool four full quarters after the properties have been transferred to the operating portfolio. A redevelopment property is first excluded from the same property pool when the execution of a redevelopment plan is likely and we (a) begin recapturing space from tenants or (b) the contemplated plan significantly impacts the operations of the property. At December 31, 2021, the same property pool excluded (i) the recently completed Glendale Town Center and Eddy Street Commons – Phase II development projects, (ii) eight active development and redevelopment projects, (iii) the 2020 acquisition of Eastgate Crossing, (iv) the legacy RPAI portfolio, and (v) office properties.
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The following table reflects Same Property NOI 1 and a reconciliation to net loss attributable to common shareholders for the years ended December 31, 2021 and 2020 (unaudited):
Year Ended December 31,
($ in thousands) 2021 2020 Change
Number of properties in same property pool for the period 82 82
Leased percentage at period end 93.1 % 91.4 %
Economic occupancy percentage 2
89.1 % 92.0 %
Same Property NOI $ 190,232 $ 179,325 6.1 %
Reconciliation of Same Property NOI to most
directly comparable GAAP measure:
Net operating income – same properties $ 190,232 $ 179,325
Net operating income – non-same activity 3
76,759 10,063
Total property net operating income 266,991 189,388
Other income (expense), net 1,491 (357)
General, administrative and other (33,984) (30,840)
Merger and acquisition costs (86,522) —
Depreciation and amortization (200,460) (128,648)
Interest expense (60,447) (50,399)
Gain on sales of operating properties, net 31,209 4,733
Net loss (income) attributable to noncontrolling interests 916 (100)
Net loss attributable to common shareholders $ (80,806) $ (16,223)
1 Same Property NOI excludes (i) the recently completed Glendale Town Center and Eddy Street Commons – Phase II development projects, (ii) eight active development and redevelopment projects, (iii) the 2020 acquisition of Eastgate Crossing, (iv) the legacy RPAI portfolio, and (v) 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 increased 6.1% in 2021 compared to 2020 primarily due to improved collection activity resulting in a significant reduction in bad debt expense in 2021 compared to 2020, which was more heavily impacted by the COVID-19 pandemic. When excluding the impact of 2020 collections, Same Property NOI grew by approximately 4.0%.
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 depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. FFO excludes the gain on the sale of the ground lease portfolios as these sales were part of our capital strategy distinct from our ongoing operating strategy of selling individual land parcels from time to time. FFO (a) should not be considered as an alternative to net income (calculated in accordance with GAAP) for the purpose of measuring our financial performance, (b) is not an alternative to cash 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
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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, merger and acquisition costs, the impact on earnings from employee severance, the excess of redemption value over carrying value of preferred stock redemption, and the impact of 2020 bad debt or the collection of 2020 accounts receivable previously written off (“2020 Collection Impact”), 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, 2021, 2020 and 2019 (unaudited) are as follows:
Year Ended December 31,
($ in thousands) 2021 2020 2019
Consolidated net loss $ (81,722) $ (16,123) $ (2)
Less: net income attributable to noncontrolling interests in properties (514) (528) (528)
Less: gain on sales of operating properties, net (31,209) (4,733) (38,971)
Add: impairment charges — — 37,723
Add: depreciation and amortization of consolidated and unconsolidated entities,
net of noncontrolling interests 201,834 130,091 133,184
FFO of the Operating Partnership 1
88,389 108,707 131,406
Less: Limited Partners' interests in FFO (1,945) (2,826) (3,153)
FFO attributable to Kite Realty Group Trust common shareholders 1
$ 86,444 $ 105,881 $ 128,253
FFO of the Operating Partnership 1
$ 88,389 $ 108,707 $ 131,406
Add: merger and acquisition costs 86,522 — —
Add: severance charges — 3,253 —
Add: loss on debt extinguishment — — 11,572
Less: 2020 Collection Impact (3,707) — —
FFO, as adjusted, of the Operating Partnership $ 171,204 $ 111,960 $ 142,978
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 the TRS. For informational purposes, we also provide Adjusted EBITDA, which we define as EBITDA less (i) EBITDA from unconsolidated entities, (ii) gains on sales of operating properties or impairment charges, (iii) merger and acquisition costs, (iv) other income and expense, (v) noncontrolling interest EBITDA, and (vi) other non-recurring activity or items impacting comparability from period to period. Annualized Adjusted EBITDA is Adjusted EBITDA for the most recent quarter multiplied by four. Net Debt to Adjusted EBITDA is our share of net debt divided by Annualized Adjusted EBITDA. EBITDA, Adjusted EBITDA, Annualized Adjusted EBITDA and Net Debt to Adjusted EBITDA, as calculated by us, are not comparable to EBITDA and EBITDA-related measures reported by other REITs that do not define EBITDA and EBITDA-related measures exactly as we do. EBITDA, Adjusted EBITDA and Annualized Adjusted EBITDA do not represent cash generated from operating activities in accordance with GAAP and should not be considered alternatives to net income as an indicator of performance or as alternatives to cash flows from operating activities as an indicator of liquidity.
Considering the nature of our business as a real estate owner and operator, we believe that EBITDA, Adjusted EBITDA and the ratio of Net Debt to Adjusted EBITDA are helpful to investors in measuring our operational performance because they exclude various items included in net income that do not relate to or are not indicative of our operating performance, such as gains or losses from sales of depreciated property and depreciation and amortization, which can make periodic and peer analyses of operating performance more difficult. For informational purposes, we also provide Annualized Adjusted EBITDA, adjusted as described above. We believe this supplemental information provides a meaningful measure of our operating performance. We believe presenting EBITDA and the related measures in this manner allows investors and other interested parties to form a more meaningful assessment of our operating results.
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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, 2021
Consolidated net loss $ (100,155)
Adjustments to net loss:
Depreciation and amortization 109,835
Interest expense 23,061
Income tax benefit of taxable REIT subsidiary (2)
EBITDA 32,739
Adjustments to EBITDA:
Unconsolidated EBITDA 882
Merger and acquisition costs 76,564
Pro forma adjustments 1
14,368
Gain on sales of operating properties, net (3,692)
Other income and expense, net (508)
Noncontrolling interests (118)
Adjusted EBITDA 120,235
Annualized Adjusted EBITDA 2
$ 480,939
Company share of Net Debt:
Mortgage and other indebtedness, net $ 3,150,808
Less: Partner share of consolidated joint venture debt 3
(580)
Less: cash, cash equivalents, restricted cash and short-term deposits (226,644)
Plus: Company share of unconsolidated joint venture debt 30,164
Less: debt discounts, premiums and issuance costs, net (58,583)
Company share of Net Debt $ 2,895,165
Net Debt to Adjusted EBITDA 6.0x
1 Pro forma adjustments to reflect as if the properties (including the legacy RPAI portfolio) acquired during the fourth quarter of 2021 were owned for the entire period.
2 Represents Adjusted EBITDA for the three months ended December 31, 2021 (as shown in the table above) multiplied by four.
3 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.
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Comparison of Operating Results for the Years Ended December 31, 2021 and 2020
The following table reflects changes in the components of our consolidated statements of operations for the years ended December 31, 2021 and 2020:
($ in thousands) 2021 2020 Net change
2020 to 2021
Revenue:
Rental income $ 367,399 $ 257,670 $ 109,729
Other property-related revenue 4,683 8,597 (3,914)
Fee income 1,242 378 864
Total revenue 373,324 266,645 106,679
Expenses:
Property operating 55,561 41,012 14,549
Real estate taxes 49,530 35,867 13,663
General, administrative and other 33,984 30,840 3,144
Merger and acquisition costs 86,522 — 86,522
Depreciation and amortization 200,460 128,648 71,812
Total expenses 426,057 236,367 189,690
Gain on sales of operating properties, net 31,209 4,733 26,476
Operating (loss) income (21,524) 35,011 (56,535)
Interest expense (60,447) (50,399) (10,048)
Income tax benefit of taxable REIT subsidiary 310 696 (386)
Equity in loss of unconsolidated subsidiaries (416) (1,685) 1,269
Other income, net 355 254 101
Net loss (81,722) (16,123) (65,599)
Net loss (income) attributable to noncontrolling interests 916 (100) 1,016
Net loss attributable to Kite Realty Group Trust (80,806) (16,223) $ (64,583)
Property operating expense to total revenue ratio 14.9 % 15.4 % (0.5 %)
Rental income (including tenant reimbursements) increased $109.7 million, or 42.6%, due to the following:
($ in thousands) Net change
2020 to 2021
Properties or components of properties sold during 2020 or 2021 $ (2,606)
Properties under redevelopment or acquired during 2020 and/or 2021 4,243
Properties acquired in the Merger with RPAI 94,716
Properties fully operational during 2020 and 2021 and other 13,376
Total $ 109,729
The net increase of $13.4 million in rental income for properties that were fully operational during 2020 and 2021 is primarily due to improved collection activity leading to a decrease in bad debt expense, which contributed a positive variance of $10.7 million on billed rent and $5.1 million on straight-line rent. These positive variances were partially offset by lower base minimum rent of $1.7 million due to an increase in vacancies driven by the COVID-19 pandemic. The occupancy of the fully operational properties declined from 92.0% for 2020 to 89.1% for 2021.
We continued to experience strong leasing volumes in 2021 and continued to generate higher rents on new leases and renewals. The average rents for new comparable leases signed in 2021 were $21.38 per square foot compared to average expiring base rents of $17.22 per square foot in that period. The average base rents for renewals signed in 2021 were $18.09 per square foot compared to average expiring base rents of $16.92 per square foot in that period. For the entire portfolio, the spread between leased and occupied square footage is approximately 250 basis points and represents approximately $33.0 million of NOI that will come online in the future. In addition, the ABR per square foot of our operating retail portfolio continued to improve, as it increased to $19.36 per square foot as of December 31, 2021 from $18.42 per square foot as of December 31, 2020.
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Other property-related revenue primarily consists of parking revenues, gains on the sale of land and other miscellaneous activity. This revenue decreased by $3.9 million primarily as a result of lower gains on sales of undepreciated assets of $5.5 million, partially offset by a recovery in parking revenue of approximately $1.0 million.
We recorded fee income of $1.2 million and $0.4 million for the years ended December 31, 2021 and 2020, respectively, from property management and development services provided to unconsolidated joint ventures.
Property operating expenses increased $14.5 million, or 35.5%, due to the following:
($ in thousands) Net change
2020 to 2021
Properties or components of properties sold during 2020 or 2021 $ (8)
Properties under redevelopment or acquired during 2020 and/or 2021 (27)
Properties acquired in the Merger with RPAI 14,247
Properties fully operational during 2020 and 2021 and other 337
Total $ 14,549
The net increase of $0.3 million in property operating expenses for properties that were fully operational during 2020 and 2021 is primarily due to a continued focus on cost controls over certain operating expense spend in 2021. These provided savings of $1.3 million that were partially offset by an increase in insurance costs of $0.7 million due to higher premiums across the real estate industry that were realized upon renewal.
As a percentage of rental revenue, property operating expenses decreased between years from 15.4% to 14.9%. The decrease was primarily due to an increase in revenue in 2021.
Real estate taxes increased $13.7 million, or 38.1%, primarily as a result of the Merger with RPAI as detailed below:
($ in thousands) Net change
2020 to 2021
Properties or components of properties sold during 2020 or 2021 $ (189)
Properties under redevelopment or acquired during 2020 and/or 2021 494
Properties acquired in the Merger with RPAI 13,929
Properties fully operational during 2020 and 2021 and other (571)
Total $ 13,663
The net decrease of $0.6 million in real estate taxes for properties that were fully operational during 2020 and 2021 is primarily due to successful real estate tax appeals at certain properties in the portfolio in 2021. 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 $3.1 million, or 10.2%. The increase is primarily due to incremental head count as part of the Merger and higher share-based compensation expense.
The Company incurred $86.5 million of merger and acquisition costs related to its Merger with RPAI in 2021. These costs primarily consist of fairness opinion, severance charges, legal, professional, and data migration costs.
Depreciation and amortization expense increased $71.8 million, or 55.8%, primarily as a result of the Merger with RPAI as detailed below:
($ in thousands) Net change
2020 to 2021
Properties or components of properties sold during 2020 or 2021 $ (175)
Properties under redevelopment or acquired during 2020 and/or 2021 3,062
Properties acquired in the Merger with RPAI 79,790
Properties fully operational during 2020 and 2021 and other (10,865)
Total $ 71,812
The net increase of $3.1 million in properties under redevelopment or acquired during 2020 and 2021 is primarily due to a full year of operations for Eastgate Crossing, which was acquired in 2020. The net decrease of $10.9 million in depreciation and amortization at properties fully operational during 2020 and 2021 is due to $4.0 million of accelerated depreciation
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recorded in 2020 in connection with the write-off of assets taken out of service along with certain assets being fully depreciated in the prior year.
Interest expense increased $10.0 million or 19.9%. The increase is primarily due to interest costs of $9.3 million related to debt assumed in conjunction with the Merger along with incremental interest for the Exchangeable Notes issued in March 2021.
We recorded a net gain of $31.2 million for the year ended December 31, 2021 on the sale of one operating property and a portfolio of 17 ground leases compared to a net gain of $4.7 million on the sale of one redevelopment property for the year ended December 31, 2020.
Management’s discussion of the financial condition, changes in financial condition and results of operations for the year ended December 31, 2020, 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, 2020.
Liquidity and Capital Resources
Overview
Our primary finance and capital strategy is to maintain a strong balance sheet with sufficient flexibility to fund our operating and investment activities in a cost-effective manner. We consider a number of factors when evaluating our level of indebtedness and when making decisions regarding additional borrowings or equity offerings, including the interest or dividend rate, the maturity date and the Company’s debt maturity ladder, the impact of financial metrics such as overall Company leverage levels and coverage ratios, and the Company’s ability to generate cash flow to cover debt service. We will continue to monitor the capital markets and may consider raising additional capital through the issuance of our common or preferred shares, unsecured debt securities, or other securities.
One of the benefits of the Merger was a strengthened balance sheet to provide the Company with increased liquidity, a well-staggered debt maturity ladder, and an appropriately sized development pipeline. As part of the Merger, we assumed an $850.0 million revolving line of credit, of which the borrowing capacity was $793.5 million as of December 31, 2021, along with other indebtedness.
Prior to the Merger, we had taken various steps to enhance our liquidity, including the issuance of $175.0 million of Exchangeable Notes in the first quarter of 2021 to proactively fund our 2022 debt maturities. In addition, we closed on multiple sales for net proceeds of $80.7 million during the year ended December 31, 2021, with the majority of the activity related to the sale of 17 ground leases and one operating property. As of December 31, 2021, we had approximately $93.2 million in cash on hand, $7.1 million in restricted cash and escrow deposits, $793.5 million of remaining availability under our Revolving Facility, $125.0 million of short-term deposits, and $153.5 million of debt maturities due in 2022. We believe we will have adequate liquidity over the next 12 months and beyond 2022 to operate our business and to meet our cash requirement. However, because we do not know the ultimate severity and length of the COVID-19 pandemic or the short- or long-term impact it may have on consumer behavior, and thus cannot predict the impact it will have on our tenants and on the debt and equity capital markets, we cannot estimate the ultimate impact it will have on our liquidity and capital resources.
Our Principal Capital Resources
For a discussion of cash generated from operations, see “Cash Flows,” beginning on page 46. In addition to cash generated from operations, our other principal capital resources are discussed below.
Over the last several years, we have made substantial progress in enhancing our liquidity position and reducing our leverage and borrowing costs. We continue to focus on a balanced approach to growth and staggering debt maturities in order to retain our financial flexibility.
As of December 31, 2021, we had approximately $793.5 million available under our Revolving Facility for future borrowings. We also had $218.2 million in cash, cash equivalents and short-term deposits as of December 31, 2021.
We were in compliance with all applicable financial covenants under our Revolving Facility, unsecured term loans, and senior unsecured notes as of December 31, 2021.
On November 16, 2021, the Company filed with the SEC a shelf registration statement on Form S-3, which is effective for a term of three years, relating to the offer and sale, from time to time, of an indeterminate amount of equity and debt
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securities. Equity securities may be offered and sold by the Parent Company, and the net proceeds of any such offerings would be contributed to the Operating Partnership in exchange for additional General Partner Units. Debt securities may be offered and sold by the Operating Partnership with the Operating Partnership receiving the proceeds. From time to time, we may issue securities under this shelf registration statement for general corporate purposes, which may include acquisitions of additional properties, repayment of outstanding indebtedness, capital expenditures, the expansion, redevelopment, and/or improvement of properties in our portfolio, working capital and other general purposes.
On February 23, 2021, the Company and the Operating Partnership entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with each of BofA Securities, Inc., Citigroup Global Markets Inc., KeyBanc Capital Markets Inc. and Raymond James & Associates, Inc., pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $150.0 million of its common shares of beneficial interest, $0.01 par value per share under an at-the-market offering program (the “ATM Program”). On November 30, 2021, the Company and the Operating Partnership amended the Equity Distribution Agreement to reflect the filing by the Company and the Operating Partnership of a shelf registration statement on November 16, 2021 with the SEC. As of December 31, 2021, the Company has not sold any common shares under the ATM Program. The Operating Partnership intends to use the net proceeds, if any, to repay borrowings under its Revolving Facility and other indebtedness and for working capital and other general corporate purposes. The Operating Partnership may also use net proceeds for acquisitions of operating properties and the development or redevelopment of properties, although there are currently no understandings, commitments or agreements to do so.
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, 2021, we had $153.5 million of secured debt scheduled to mature in 2022, excluding scheduled monthly principal payments. We believe we have sufficient liquidity to repay this obligation from cash on hand and short-term deposits.
Other Short-Term Liquidity Needs. The requirements for qualifying as a REIT and for a tax deduction for some or all of the dividends paid to shareholders necessitate that we distribute at least 90% of our taxable income on an annual basis. Such requirements cause us to have substantial liquidity needs over both the short and long term. Our short-term liquidity needs consist primarily of funds necessary to pay operating expenses associated with our operating properties, scheduled interest payments of approximately $115 million in 2022 and scheduled principal payments on our debt of approximately $3.7 million in 2022, expected dividend payments to our common shareholders and Common Unit holders, and recurring capital expenditures.
In February 2022, our Board of Trustees declared a cash distribution of $0.20 per common share and Common Unit for the first quarter of 2022. This distribution is expected to be paid on April 15, 2022 to common shareholders and Common Unit holders of record as of April 8, 2022. Future distributions, if any, are at the discretion of the Board of Trustees, who will continue to evaluate our sources and uses of capital, liquidity position, operating fundamentals, maintenance of our REIT qualification and other factors they may deem relevant.
Other short-term liquidity needs include expenditures for tenant improvements, external leasing commissions and recurring capital expenditures. During the year ended December 31, 2021, we incurred $3.8 million for recurring capital expenditures on operating properties, $14.7 million for tenant improvements and external leasing commissions, and $9.7 million to re-lease anchor space at our operating properties related to tenants open and operating as of December 31, 2021 (excluding development and redevelopment projects). We currently anticipate incurring approximately $100 million of additional major tenant improvement costs related to executed leases for currently vacant space at a number of our operating properties over the next 12 to 18 months. We believe we have the ability to fund these costs through cash flow from operations or by borrowing on the Revolving Facility.
As of December 31, 2021, we had eight development projects under construction, including five projects assumed in the Merger with RPAI. Total estimated costs for these projects are $185.6 million, of which our share is estimated to be $121.7 million. As of December 31, 2021, we have incurred $16.6 million of these costs. We anticipate incurring the majority of the remaining costs for these projects over the next 24 months and believe we have the ability to fund these projects through cash flow from operations or by borrowing on the Revolving Facility.
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Share Repurchase Plan
In February 2021, the Company’s Board of Trustees approved a share repurchase program, authorizing share repurchases up to an aggregate of $150.0 million (the “Share Repurchase Program”). In February 2022, the Company extended its share repurchase program for an additional year. The Share Repurchase Program, as extended, will terminate on February 28, 2023, if not terminated or extended prior to that date. As of December 31, 2021, the Company has not repurchased any shares under its Share Repurchase Program. The Company intends to fund any future repurchases under the Share Purchase Program with cash on hand or availability under the Revolving Facility, subject to any applicable restrictions. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors.
Long-Term Liquidity Needs
Our long-term liquidity needs consist primarily of funds necessary to pay for any new development projects, redevelopment of existing properties, non-recurring capital expenditures, acquisitions of properties, payment of indebtedness at maturity and obligations under ground leases.
Selective Acquisitions, Developments and Joint Ventures . We may selectively pursue the acquisition, development and redevelopment of other properties, which would require additional capital. It is unlikely that we would have sufficient funds on hand to meet these long-term capital requirements. We would have to satisfy these needs through additional borrowings, sales of common or preferred shares, issuance of Operating Partnership units, cash generated through property dispositions and/or participation in joint venture arrangements. We cannot be certain that we would have access to these sources of capital on satisfactory terms, if at all, to fund our long-term liquidity requirements. We evaluate all future opportunities against pre-established criteria including, but not limited to, location, demographics, expected return, tenant credit quality, tenant relationships, and the amount of existing retail space. Our ability to access the capital markets will be dependent on a number of factors, including general capital market conditions.
Potential Debt Repurchases. We may from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to repurchase our senior unsecured notes maturing at various dates through September 2030 in open market transactions, by tender offer or otherwise, as market conditions warrant.
Commitments under Ground Leases. We are obligated under 12 ground leases for approximately 98 acres of land as of December 31, 2021. Most of these ground leases require fixed annual rent payments and the expiration dates of the remaining initial terms of these ground leases range from 2023 to 2092.
Capital Expenditures on Consolidated Properties
The following table summarizes cash capital expenditures for our development and redevelopment projects and other capital expenditures for the year ended December 31, 2021:
($ in thousands) Year Ended
December 31, 2021
Active development and redevelopment projects $ 22,546
Redevelopment opportunities 10
Recently completed projects and other 13,686
Anchor re-tenanting 9,662
Recurring operating capital expenditures (primarily tenant improvements) 11,409
Total $ 57,313
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, 2021.
Impact of Changes in Credit Ratings on Our Liquidity
We previously received investment grade corporate credit ratings from two nationally recognized credit rating agencies and these ratings were unchanged during 2021. We were assigned an investment grade corporate credit rating from a third nationally recognized rating agency in October 2021.
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In the future, these ratings could change based upon, among other things, the impact that prevailing economic conditions may have on our results of operations and financial condition, including as a result of the impact of the COVID-19 pandemic. 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, 2021, we had cash, cash equivalents and restricted cash of $100.4 million. We may be subject to concentrations of credit risk with regard to our cash and cash equivalents. We place our cash and short-term investments with highly rated financial institutions. While we attempt to limit our exposure at any point in time, occasionally, such cash and investments may temporarily be in excess of 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, 2021 to the Year Ended December 31, 2020
Cash provided by operating activities was $100.4 million for the year ended December 31, 2021, an increase of $4.8 million from the same period of 2020. The cash flows were positively impacted by the completion of the Merger, which generated incremental operating income, along with improved collection activity including previously deferred rent from the COVID-19 pandemic. This improvement was partially offset by costs paid as part of the Merger along with higher interest costs related to the debt assumed in the Merger.
Cash used in investing activities was $91.0 million for the year ended December 31, 2021, and $80.8 million in the same period of 2020. Highlights of significant cash sources and uses in investing activities are as follows:
• Cash acquired in the Merger with RPAI in 2021 of $15.0 million;
• Net proceeds of $80.7 million related to the sale of one operating property and 17 ground leases in 2021 and other land parcels compared to net proceeds of $23.0 million related to the sale of one redevelopment property and five parcels of land in 2020;
• Acquisition of a multi-tenant retail outparcel at Nora Plaza in 2021 and acquisition deposits for $10.4 million compared to the acquisition of Eastgate Crossing in 2020 for $65.3 million;
• Investment in a short-term interest-bearing deposit of $125.0 million using the proceeds from the March 2021 Exchangeable Notes; and
• Increase in capital expenditures of $19.0 million, partially offset by a change in construction payables of $4.4 million in 2021.
Cash provided by financing activities was $44.5 million for the year ended December 31, 2021, and cash used in financing activities was $20.9 million in the same period of 2020. Highlights of significant cash sources and uses in financing activities are as follows:
• In March 2021, we issued $175.0 million of Exchangeable Notes in a private placement offering to proactively fund our 2022 debt maturities. In connection with this issuance, we incurred transaction costs of $6.0 million and purchased capped calls for $9.8 million;
• In October 2021, we borrowed $40.0 million on the Revolving Facility;
• In 2021, we paid down debt by $77.6 million using a portion of the proceeds from the sale of 17 ground leases and the Exchangeable Notes;
• In 2021, we made distributions to common shareholders and Common Unit holders of $60.0 million, compared to distributions of $39.7 million in 2020;
• In March 2020, we borrowed $300.0 million on our $600.0 million unsecured revolving line of credit as a precautionary measure 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 unsecured revolving line of credit as we became incrementally more confident in the recovery from the COVID-19 pandemic; and
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• In December 2020, we borrowed $25.0 million on the $600.0 million unsecured revolving line of credit to fund a portion of the purchase price of Eastgate Crossing, which was repaid in February 2021.
Management’s discussion of the cash flows for the year ended December 31, 2019, with comparison to the year ended December 31, 2020, 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, 2020.
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 use 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 Revolving Facility.
In addition, we have provided a repayment guaranty on a $33.8 million construction loan with the development of Embassy Suites at Eddy Street Commons consistent with our 35% ownership interest. As of December 31, 2021, the current outstanding loan balance is $33.6 million, of which our share is $11.8 million.
Our share of estimated future costs for under construction and future developments and redevelopments is further discussed on page 44 in the “Short- and Long-Term Liquidity Needs” section.
Outstanding Indebtedness
The following table presents details of outstanding consolidated indebtedness as of December 31, 2021 and 2020, adjusted for hedges:
($ in thousands) December 31,
2021 December 31,
2020
Senior unsecured notes $ 1,749,635 $ 550,000
Exchangeable senior notes – fixed rate 175,000 —
Unsecured revolving credit facility 55,000 25,000
Unsecured term loans 720,000 250,000
Mortgage notes payable – fixed rate 363,577 295,966
Mortgage notes payable – variable rate 29,013 55,110
Debt discounts, premiums and issuance costs, net 58,583 (5,282)
Total mortgage and other indebtedness, net $ 3,150,808 $ 1,170,794
Consolidated indebtedness, including weighted average maturities and weighted average interest rates at December 31, 2021, is summarized below:
($ in thousands) Amount Outstanding Ratio Weighted Average
Interest Rate Weighted
Average Maturity
(in years)
Fixed rate debt 1
$ 2,853,212 92 % 4.00 % 4.6
Variable rate debt 2
239,013 8 % 3.01 % 4.2
Debt discounts, premiums and issuance costs, net 58,583 N/A N/A N/A
Total consolidated debt $ 3,150,808 100 % 3.92 % 4.6
1 Fixed rate debt includes the portion of variable rate debt that has been hedged by interest rate swaps. As of December 31, 2021, $720.0 million in variable rate debt is hedged to a fixed rate for a weighted average of 3.2 years.
2 Variable rate debt includes the portion of fixed rate debt that has been hedged by interest rate swaps. As of December 31, 2021, $155.0 million in fixed rate debt is hedged to a floating rate for a weighted average of 3.7 years.
Mortgage indebtedness is collateralized by certain real estate properties and leases and is generally repaid in monthly installments of interest and principal with maturities over various terms through 2032.
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Variable interest rates on mortgage indebtedness is based on LIBOR plus 160 basis points. At December 31, 2021, the one-month LIBOR interest rate was 0.10%. Fixed interest rates on mortgages payable range from 3.75% to 5.73%.
Critical Accounting 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 accounting principles generally accepted in the United States (“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.
Acquisition of Real Estate Investments
In accordance with ASC 805, Business Combinations , we accounted for the Merger as a business combination using the acquisition method of accounting, which requires the application of a screen test to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets to determine whether a transaction is accounted for as an asset acquisition or business combination.
Upon acquisition of real estate operating properties, including those assets acquired in the Merger with RPAI, 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.
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 that 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 and other indebtedness, including related derivative instruments, assumed. The fair market value of each is amortized to interest expense over the remaining initial terms of the respective instrument.
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, no tenant relationship has been developed that is considered to have a current intangible value.
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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. Examples of situations considered to be impairment indicators for both operating properties and development projects include, but are not limited to:
• a substantial decline in or continued low occupancy rate or cash flow;
• expected significant declines in occupancy in the near future;
• continued difficulty in leasing space;
• a significant concentration of financially troubled tenants;
• a reduction in anticipated holding period;
• a cost accumulation or delay in project completion date significantly above and beyond the original development or redevelopment estimate;
• a significant decrease in market price not in line with general market trends; and
• any other quantitative or qualitative events or factors deemed significant by the Company’s management or Board of Trustees.
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 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.
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. 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, which 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.
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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 properties, land parcels and outlots, some of which are ground-leased to tenants.
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