Kimco Realty Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited. Unless otherwise noted, financial amounts below are in millions.
Business context and reporting period
Kimco is a REIT focused on owning, managing, developing and operating open-air shopping centers. At June 30, 2019, it had interests in 428 shopping center properties totaling 74.6 million square feet, plus 251 other property interests, primarily through preferred equity and other real estate investments. The filing describes a strategy of improving portfolio quality through dispositions, redevelopment, re-tenanting and selective investment in major U.S. markets.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $284.9 | $293.4 | $579.9 | $597.5 |
| Operating income | $107.4 | $179.6 | $241.5 | $340.5 |
| Net income attributable to Kimco | $101.0 | $165.4 | $217.2 | $309.5 |
| Net income available to common shareholders | $86.5 | $150.9 | $188.1 | $280.4 |
| Diluted EPS | $0.20 | $0.36 | $0.44 | $0.66 |
| Adjusted FFO per diluted share | $0.36 | $0.37 | $0.73 | $0.74 |
| Same-property NOI | $212.5 | $207.3 | $426.4 | $413.1 |
Revenue declined about 2.9% in both the quarter and first half. Common net income fell about 42.7% in Q2 and 32.9% for the first six months; diluted EPS declined to $0.20 and $0.44, respectively. Same-property NOI, a supplemental non-GAAP measure, increased 2.5% in Q2 and 3.2% for the first half. Management attributed the gains primarily to lease-up and rent commencements. The filing does not provide a conventional operating margin measure.
Cash flow: First-half operating cash flow was $313.5, versus $352.0 in 2018. Investing used $100.5, compared with $228.2 provided in 2018; financing used $242.6, compared with $513.1 in 2018. Cash declined $29.6 during the half to $114.0.
Debt and liquidity: At June 30, notes payable were $4,420.4 and mortgages/construction debt were $485.1, or approximately $4.91 billion combined, excluding operating lease liabilities and unconsolidated joint venture debt. Cash was $114.0. The $2.25 billion unsecured revolving facility had $135.0 drawn and $0.3 allocated to letters of credit; the facility can be increased to $2.75 billion. Kimco reported compliance with its debt covenants. Key covenant measures included 37% consolidated indebtedness to total assets and 5.3x income available for debt service to maximum annual service charge under senior note covenants.
Capital and distributions: Common dividends declared were $0.28 per share per quarter. First-half dividends paid on common and preferred shares totaled $265.2. The company reported more than 320 unencumbered property interests.
Material changes versus the prior comparable period
- Lower revenue reflected $18.8 of reduced rental revenue in Q2 and $40.6 in the first half from properties sold in 2019 and 2018. Completed projects, acquisitions, tenant buyouts and growth in the existing portfolio partly offset the reductions.
- Sale gains were substantially lower: $38.4 in the first half of 2019, versus $152.2 in 2018. Kimco sold seven operating properties and five out-parcels in the 2019 period, compared with 35 operating properties and two out-parcels in 2018.
- First-half interest expense fell $7.9 to $88.5, primarily due to debt repayments and lower borrowings. Depreciation and amortization fell $20.6, reflecting dispositions and prior-year accelerated depreciation on redevelopment assets.
- First-half impairment charges were $21.6, down from $30.5 in 2018. Adjusted FFO per diluted share declined to $0.73 for the half from $0.74.
- The adoption of lease accounting Topic 842 on January 1, 2019 added $106.0 of operating lease right-of-use assets and $98.7 of lease liabilities at adoption; comparative periods were not restated.
Outlook, management commentary, risks and unusual items
- Kimco projected $150–$200 of redevelopment and re-tenanting commitments for the remainder of 2019, and $50–$75 of development spending. Estimated remaining costs to complete active development projects were $85–$115. Management expected to fund these needs with operating cash flow, property-sale proceeds, available credit and construction financing where applicable.
- The company anticipated spending approximately $5–$15 on operating-property acquisitions during the rest of 2019. No earnings or FFO guidance is provided in the filing text.
- Management said it believed financing and refinancing alternatives were available and that debt markets were functioning well. It also stated that it intended to maintain strong debt-service and fixed-charge coverage and investment-grade ratings.
- Principal stated risks include adverse economic or local real estate conditions, tenant financial distress or lease terminations, access to financing, interest-rate volatility, operating-cost increases, asset-sale capacity, development and investment valuation, and the ability to sustain dividends. A 1 percentage-point increase in short-term rates was estimated to increase first-half interest expense by $0.9.
- First-half impairments related to properties marketed for sale; valuations relied partly on third-party offers and Level 3 discounted cash-flow estimates. Four properties were classified as held for sale at a net carrying amount of $42.7; one had a $0.3 impairment.
- Kimco collected $2.0 of Puerto Rico hurricane insurance proceeds in the first half and recognized the amount as income. As of June 30, it had collected $22.2 of property insurance proceeds and estimated approximately $30.3 in total recoveries for damaged property, subject to claims and policy terms.
- The company reported no litigation expected to have a material adverse effect and no material changes to the risk factors in its 2018 Form 10-K. Disclosure controls were assessed as effective, with no material change to internal control over financial reporting reported.
Most important facts for investors to verify
- Whether same-property NOI growth and leasing activity can offset revenue lost through continued dispositions and tenant turnover.
- Whether the $150–$200 redevelopment and re-tenanting plan and the development pipeline meet cost, timing and leasing expectations.
- Debt maturities, refinancing terms, revolver availability and covenant headroom, including exposure to variable interest rates.
- The sustainability of the $0.28 quarterly common dividend relative to recurring operating cash flow and planned capital spending.
- Realization and timing of remaining Puerto Rico insurance recoveries, and the assumptions behind property-sale valuations and impairment estimates.
- Adjusted FFO and same-property NOI are non-GAAP measures; review their definitions and reconciliations when comparing Kimco with other REITs.