INCOME TAXES

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The Company elected to be taxed as a REIT under sections 856-860 of the Code, commencing with the filing of its 2015 tax return for its tax year ended December 31, 2015. So long as the Company qualifies as a REIT under the Code, the Company will not be subject to U.S. federal income tax on net taxable income that it distributes annually to its shareholders. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income taxes at regular corporate rates and may not be able to qualify as a REIT for the four subsequent taxable years. The Company is subject to certain foreign and state and local income taxes, in particular income taxes arising from its operating activities in Puerto Rico, which are included in income tax expense in the consolidated statements of income and comprehensive income. In addition, the Company’s taxable REIT subsidiary (“TRS”) is subject to income tax at regular corporate rates.

The Company satisfied its REIT distribution requirement by distributing $0.64, $0.64 and $0.60 per common share in 2023, 2022 and 2021, respectively. The distributions comprised a regular quarterly cash dividend of $0.16 per common share declared for each quarter of 2023 and 2022, respectively, as well as a regular quarterly cash dividend of $0.15 per common share declared for each quarter of 2021. The taxability of such dividends for the years ended December 31, 2023, 2022 and 2021 are as follows:

	Year Ended December 31,
	2023			2022			2021
Dividend paid per share	$	0.64		$	0.64		$	0.60
Ordinary income	88		%	100		%	100		%
Return of capital	—		%	—		%	—		%
Capital gains	12		%	—		%	—		%

For U.S. federal income tax purposes, the REIT and other minority members are partners in the Operating Partnership. As such, the partners are required to report their share of taxable income on their respective tax returns. However, the Company maintains certain non-real estate operating activities that could not be performed by the REIT, and occur through the Company’s TRS, which is subject to federal, state and local income taxes. These income taxes are included in income tax expense in the consolidated statements of income and comprehensive income.

During the year ended December 31, 2023, the REIT was subject to Puerto Rico corporate income taxes on its allocable share of the Company’s Puerto Rico operating activities. The Puerto Rico corporate income tax consists of a flat 18.5% tax rate plus a graduated income surcharge tax for a maximum corporate income tax rate of 37.5%. In addition, the REIT is subject to a 10% branch profits tax on the earnings and profits generated from its allocable share of the Company’s Puerto Rico operating activities and such tax is included in income tax expense in the consolidated statements of income and comprehensive income.

On August 30, 2023, the Company completed a mortgage refinancing at its mall in Puerto Rico, the Shops at Caguas. As a result of the refinancing and the cancellation of indebtedness for tax purposes, the Company recognized a Puerto Rico income tax expense of $16.3 million, consisting of a current tax liability of $4.7 million and a deferred tax expense of $11.6 million. The deferred tax expense is attributable to a write-down of our Puerto Rico tax basis in the Shops at Caguas for a portion of the debt forgiven. Refer to Note 6 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information on the Shops at Caguas refinancing.

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required if, based on the evidence available, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. Management’s determination of the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the underlying temporary differences become deductible. As of December 31, 2023, with the exception of certain state and local deferred tax assets, management determined that it is more likely than not that all deferred tax assets will be realized. The Company recorded a valuation allowance against certain state and local deferred tax assets because management determined it is not more likely than not that these state and local deferred tax assets will be realized. There has been no change to the valuation allowance recorded against these state and local deferred tax assets during 2023.

We account for uncertain tax positions in accordance with ASC 740 Income Taxes on the basis of a two-step process whereby (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

During the years ended December 31, 2023 and 2022, income before income taxes from the Company’s operating activities in the United States was $226.4 million and $41.2 million, respectively, and in Puerto Rico was $51.2 million and $9.1 million, respectively. For the year ended December 31, 2023, the Puerto Rico income tax expense was $18.5 million, as compared to a Puerto Rico income tax expense of $2.9 million for the year ended December 31, 2022 due to the gain previously noted on the mortgage refinancing at the Shops at Caguas. The Company recognized a $0.7 million state and local income tax benefit for the year ended December 31, 2023 related to an income tax refund from a prior period. Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for the tax effect of temporary differences between the financial reporting basis and the tax basis of taxable assets and liabilities and for the tax effect of carried forward tax attributes such as net operating losses and tax credits.

Income tax expense (benefit) for the years ended December 31, 2023, 2022 and 2021 consists of the following:

	Year Ended December 31,
(Amounts in thousands)	2023		2022		2021
Income tax expense (benefit):
Current:
U.S. federal income tax	$	4	$	11	$	—
U.S. state and local income tax	(674)		10		(1,228)
Puerto Rico income tax	4,753		78		110
Total current	4,083		99		(1,118)
Deferred:
U.S. federal income tax	—		1		5
Puerto Rico income tax	13,717		2,803		2,252
Total deferred	13,717		2,804		2,257
Total income tax expense	$	17,800	$	2,903	$	1,139

Provision for income taxes differs from the amounts computed by applying the statutory federal income tax rate to consolidated net income before income taxes as follows:

	Year Ended December 31,
(Amounts in thousands)	2023		2022		2021
Federal provision at statutory tax rate(1)	$	58,312	$	10,551	$	22,880
REIT income before income taxes not subject to federal tax provision	(58,308)		(10,539)		(22,875)
State and local income tax provision, net of federal benefit	(674)		10		225
Puerto Rico income tax provision	18,470		2,881		2,362
Change in valuation allowance	—		—		(1,453)
Total income tax expense	$	17,800	$	2,903	$	1,139

(1) Federal statutory tax rate of 21% for the years ended December 31, 2023, 2022 and 2021.

Below is a table summarizing the Company’s deferred tax assets and liabilities as of December 31, 2023 and 2022:

	Balance at
(Amounts in thousands)	December 31, 2023		December 31, 2022
Deferred tax assets:
Depreciation	$	21,586	$	37,404
Amortization of deferred financing costs	152		650
Rental revenue deemed uncollectible	410		525
Charitable contribution	7		7
Net operating loss	7		1,451
Total deferred tax assets	22,162		40,037
Deferred tax liabilities:
Mortgage liability	—		(3,021)
Straight line rent	(1,111)		(1,009)
Amortization of acquired leases	(152)		(178)
Accrued interest expense	—		(1,213)
Total deferred tax liabilities	(1,263)		(5,421)
Net deferred tax assets	$	20,899	$	34,616