Share-Based Compensation

Overview

The Company's 2013 Equity Incentive Plan (the "Plan") authorizes options to acquire common shares and other share-based compensation awards to be granted to employees and trustees for up to an additional 1,500,000 common shares of the Company. The Company accounts for its share-based compensation in accordance with the fair value recognition provisions provided under Topic 718—“Stock Compensation” in the Accounting Standards Codification.

The total share-based compensation expense, net of amounts capitalized, included in general and administrative expenses for the years ended December 31, 2018, 2017, and 2016 was $4.9 million, $5.8 million, and $5.1 million, respectively. For the years ended December 31, 2018, 2017, and 2016, total share-based compensation cost capitalized for development and leasing activities was $1.7 million, $1.7 million, and $1.5 million, respectively. The Company recognizes forfeitures as they occur.

As of December 31, 2018, there were 332,263 shares and units available for grant under the Plan.

Share Options

Pursuant to the Plan, the Company may periodically grant options to purchase common shares at an exercise price equal to the grant date fair value of the Company's common shares. Granted options typically vest over a five year period and expire 10 years from the grant date. The Company issues new common shares upon the exercise of options.

A summary of option activity under the Plan as of December 31, 2018, and changes during the year then ended, is presented below:



($ in thousands, except share and per share data)	Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term (in years)	Options		Weighted-Average Exercise Price
Outstanding at January 1, 2018				181,212		$	37.77
Granted				—		—
Exercised				(3,125	)	10.56
Expired				(117,520	)	49.16
Forfeited				—		—
Outstanding at December 31, 2018	$	20,739	1.21	60,567		$	17.08
Exercisable at December 31, 2018	$	20,739	1.21	60,567		$	17.08
Exercisable at December 31, 2017				181,212		$	37.77

There were no options granted in 2018, 2017 or 2016.

The aggregate intrinsic value of the 3,125 and 47,591 options exercised during the years ended December 31, 2018 and 2016 was $23,000 and $0.8 million, respectively. There were no options exercised in 2017.

Restricted Shares

In addition to share option grants, the Plan also authorizes the grant of share-based compensation awards in the form of restricted common shares. Under the terms of the Plan, these restricted shares, which are considered to be outstanding shares from the date of grant, typically vest over a period ranging from three to five years. The Company pays dividends on restricted shares and such dividends are charged directly to shareholders’ equity.

The following table summarizes all restricted share activity to employees and non-employee members of the Board of Trustees as of December 31, 2018 and changes during the year then ended:



	Number of Restricted Shares		Weighted Average Grant Date Fair Value per share
Restricted shares outstanding at January 1, 2018	259,107		$	24.80
Shares granted	202,043		15.35
Shares forfeited	(19,189	)	22.51
Shares vested	(128,673	)	24.44
Restricted shares outstanding at December 31, 2018	313,288		$	18.93

The following table summarizes the restricted share grants and vestings during the years ended December 31, 2018, 2017, and 2016:



($ in thousands, except share and per share data)	Number of Restricted Shares Granted	Weighted Average Grant Date Fair Value per share		Fair Value of Restricted Shares Vested
2018	202,043	$	15.35	$	2,038
2017	85,150	22.15		2,529
2016	81,603	26.87		3,313

As of December 31, 2018, there was $4.2 million of total unrecognized compensation cost related to restricted shares granted under the Plan, which is expected to be recognized in the consolidated statements of operations over a weighted-average period of 1.60 years. We expect to incur $1.7 million of this expense in 2019, $1.1 million in 2020, $0.8 million in 2021, $0.5 million in 2022, and the remainder in 2023.

Outperformance Plans

The Compensation Committee of the Board of Trustees (the “Compensation Committee”) previously adopted outperformance plans to further align the interests of our shareholders and management by encouraging our senior officers and other key employees to “outperform” and to create shareholder value. In 2014, the Compensation Committee adopted the 2014 Kite Realty Group Trust Outperformance Incentive Compensation Plan (the “2014 OPP”) under the Plan and the partnership agreement of our Operating Partnership for members of executive management and certain other employees, pursuant to which participants are eligible to earn profit interests ("LTIP Units") in the Operating Partnership based on the achievement of certain performance criteria related to the Company’s common shares. The 2014 OPP was adopted mid-year and the OPP awards granted at that time were intended to encompass OPP awards for both the 2014 and 2015 fiscal years. As a result, the Compensation Committee did not adopt an outperformance incentive compensation plan in 2015. No awards were granted under the 2014 OPP in the 2015 fiscal year.

In 2016, the Compensation Committee adopted the 2016 Kite Realty Group Trust Outperformance Incentive Compensation Plan (the “2016 OPP”) under the Plan and the partnership agreement of our Operating Partnership. Upon the adoption of the 2016 OPP, the Compensation Committee granted individual awards in the form of LTIP units that, subject to vesting and the satisfaction of other conditions, are exchangeable on a par unit value equal to the then trading price of one of our common shares. The terms of the 2016 OPP are similar to the terms of the 2014 OPP.

The Compensation Committee did not adopt an outperformance incentive compensation plan in the 2017 and 2018 fiscal years.

In 2014 and 2016, participants in the 2014 OPP and the 2016 OPP were awarded the right to earn, in the aggregate, up to $7.5 million and up to $6.0 million of share-settled awards (the “bonus pool”) if, and only to the extent which, our total shareholder return (“TSR”) performance measures were achieved for the three-year period beginning July 1, 2014 and ending June 30, 2017 and for the three-year period beginning January 4, 2016 and ending December 31, 2018, respectively. Awarded interests not earned based on the TSR measures would be forfeited.

If the TSR performance measures were achieved at the end of each three-year performance period, participants would receive their percentage interest in the bonus pool as LTIP Units in the Operating Partnership. Such LTIP Units would vest over an additional two-year service period. The compensation cost of the 2014 and 2016 Outperformance Plans were fixed as of the grant date and will be recognized regardless of whether the LTIP Units are ultimately earned, assuming the service requirement is met.

The TSR performance measures were not achieved for the 2014 and 2016 OPP and all potential awards were forfeited in 2017 and 2018, respectively.

The 2014 and 2016 awards were valued at an aggregate value of $2.3 million and $1.9 million, respectively, utilizing a Monte Carlo model simulation that takes into account various assumptions including the nature and history of the Company, financial and economic conditions affecting the Company, past results, current operations and future prospects of the Company, the historical TSR and total return volatility of the SNL U.S. REIT Index, price return volatility, dividend yields of the Company's common shares and the terms of the awards. We expect to incur $0.3 million of this expense in 2019 and $0.1 million in 2020.

Performance Awards

In 2016, the Compensation Committee established overall target values for incentive compensation for each executive officer, with 50% of the target value being granted in the form of time-based restricted share awards and the remaining 50% being granted in the form of three-year performance share awards. In 2017 and 2018, the Compensation Committee modified these targets to be 60% performance awards and 40% time-based awards.

Time-based restricted share awards were made on a discretionary basis in 2016, 2017, and 2018 based on review of each prior year's performance.

In 2016, the Compensation Committee awarded each of the four named executive officers a three-year performance award in the form of restricted performance share units ("PSUs"). The 2016 PSUs may be earned over a three-year performance period from January 1, 2016 to December 31, 2018. The performance criteria will be based on the relative total shareholder return ("TSR") achieved by the Company measured against a peer group over the three-year measurement period. Any PSUs earned at the end of the three-year period will be fully vested at that date. The total number of PSUs issued each year to the executive officers was based on a target value of $1.0 million, but may be earned in a range from 0% to 200% of the target value depending on our TSR over the measurement period in relation to the peer group. Based on the relative TSR over the 2016 PSU measurement period, we do not expect any PSUs to be earned and awarded to our executive officers in 2019.

In 2017, the Compensation Committee awarded each of the four named executive officers a three-year performance award in the form of PSUs. The PSUs may be earned over a three-year performance period from January 1, 2017 to December 31, 2019. The performance criteria will be based 50% on the absolute TSR achieved by the Company over the three-year measurement period and 50% on the relative TSR achieved by the Company measured against a peer group over the three-year measurement period. The total number of PSUs issued to the executive officers was based on a target value of $2.0 million, but may be earned in a range from 0% to 200% of the target value depending on our absolute TSR over the measurement period and our relative TSR over the measurement period in relation to the peer group.

In 2018, the Compensation Committee awarded each of the four named executive officers a three-year performance award in the form of PSUs. The PSUs may be earned over a three-year performance period from January 1, 2018 to December 31, 2020. The performance criteria will be based 60% on the relative TRS achieved by the Company measured against a peer group over the three-year measurement period and 40% on the achievement of a defined funds available for distribution ("FAD"). The total number of PSUs issued to the executive officers was based upon a target value of $2.4 million, but may be earned in a range of 0% to 200% of the target. Additionally, any PSUs earned based on the achievement of the pre-established FAD goals will be subject to adjustment(either up or down 25%) based on the Company's absolute TSR over the three-year measurement period.

The 2018, 2017 and 2016 PSUs were valued at an aggregate value of $2.2 million, $2.2 million and $1.3 million, respectively, utilizing a Monte Carlo simulation. We expect to incur $1.3 million of this expense in 2019, $0.7 million in 2020, and less than $0.1 million in 2021.

The following table summarizes the activity for time-based restricted unit awards for the year ended December 31, 2018:



	Number of Restricted Units		Weighted Average Grant Date Fair Value per unit
Restricted units outstanding at January 1, 2018	150,448		$	23.13
Restricted units granted	92,019		13.16
Restricted units vested	(117,805	)	21.19
Restricted units outstanding at December 31, 2017	124,662		$	17.60

The following table summarizes the time-based restricted unit grants and vestings during the years ended December 31, 2018, 2017, and 2016:



($ in thousands, except unit and per unit data)	Number of Restricted Units Granted	Weighted Average Grant Date Fair Value per Unit		Fair Value of Restricted Units Vested
2018	92,019	$	13.16	$	1,924
2017	44,490	23.22		1,516
2016	46,562	26.48		1,929

As of December 31, 2018, there was $1.5 million of total unrecognized compensation cost related to restricted units granted under the Plan, which is expected to be recognized in the consolidated statements of operations over a weighted-average period of 1.10 years. We expect to incur $0.8 million of this expense in 2019, $0.6 million in 2020, and the remainder in 2021.