Kimco Realty Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited results; dollar amounts below are in millions unless noted.
Business context
Kimco owned interests in 710 shopping-center properties totaling 104.6 million square feet, plus 451 other property interests, as of quarter-end. Its strategy was to upgrade its U.S. open-air shopping-center portfolio, simplify its joint-venture and international businesses, and pursue redevelopment. Consolidated portfolio occupancy was 95.6%, versus 95.0% a year earlier.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $288.4 | $255.2 | $865.9 | $729.4 |
| Operating income | $75.0 | $90.4 | $261.2 | $229.5 |
| Net income attributable to Kimco | $77.6 | $194.7 | $514.9 | $371.2 |
| Diluted EPS | $0.15 | $0.44 | $1.14 | $0.80 |
| Adjusted FFO per diluted share | $0.36 | $0.36 | $1.09 | $1.05 |
- Rental revenue increased 14.9% in Q3 and 20.6% year to date, driven mainly by acquisitions, improved occupancy, leasing and redevelopment; acquisition contributions were partly offset by property sales.
- Same-property NOI increased 2.4% in Q3 and 3.0% for the first nine months in the U.S.; combined same-property NOI rose 2.2% and 2.8%, respectively.
- Q3 operating income fell despite higher revenue, with depreciation and amortization rising 54.5% to $103.7 million, largely due to acquired properties and redevelopment write-offs.
- Q3 net income was down sharply against 2014, which included $91.9 million of income from discontinued operations, including property-sale gains. In 2015, nine-month earnings benefited from a $146.1 million gain on change in control of acquired joint-venture interests and a $38.5 million gain on Supervalu shares sold.
- FFO and adjusted FFO are supplemental non-GAAP measures; the filing cautions that they are not measures of liquidity and may not be comparable with other REITs.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $517.3 million, versus $510.0 million; investing cash outflow was $520.1 million, versus $72.1 million; financing cash outflow was $3.6 million, versus $432.5 million. Cash ended at $180.9 million.
- At September 30, notes payable were $3.853 billion and mortgages payable were $1.646 billion, totaling approximately $5.499 billion, compared with $4.596 billion at December 31, 2014. Total assets were $11.414 billion and total equity $5.090 billion.
- The $1.75 billion revolving credit facility had $425 million drawn and approximately $1.3 billion available, after letters of credit. Facility covenants were met; debt to gross asset value was 44% against a limit below 60%, and fixed-charge coverage was 2.79x against a minimum of 1.50x.
- Kimco issued a $650 million term loan and $350 million of 30-year notes in 2015, and assumed $710.2 million of property mortgage debt while paying off $444.9 million of mortgage debt. Management said it expected cash, credit availability and capital-market access to fund requirements and maturities.
- A 1 percentage-point increase in short-term rates would have increased nine-month interest expense by an estimated $8.3 million. The filing identifies interest rates and foreign exchange rates as principal market risks.
Outlook, material changes and risks
- Management anticipated 2015 operating-property acquisitions of approximately $700–$800 million, redevelopment and re-tenanting commitments of $175–$225 million, and ground-up development commitments of $50–$75 million.
- Management planned continued capital recycling, portfolio simplification and eventual exit from Canada, Mexico and South America. It warned that sales below carrying value could trigger additional, potentially material impairments.
- On November 3, 2015, the board declared a quarterly common dividend of $0.255 per share, a 6.3% annualized increase, payable in January 2016. The company also announced redemption of all Class H preferred stock for $175 million plus accrued dividends; it expected a $5.8 million non-cash charge in Q4 2015.
- After quarter-end, Kimco issued $500 million of seven-year notes at 3.40% and sold its interests in 19 Canadian properties for gross proceeds of CAD $477.3 million, including assumed mortgage debt. These transactions support its stated financing and simplification plans.
- The company disclosed an ongoing SEC investigation, with a parallel DOJ investigation, concerning possible Foreign Corrupt Practices Act violations related to Wal-Mart. Kimco was cooperating and said it could not predict the investigations’ duration, scope or outcome. It reported no material change to previously disclosed risk factors.
- Other risks highlighted include tenant financial distress, refinancing and capital-raising conditions, acquisition and disposition execution, joint-venture and investment valuations, operating-cost increases, impairments, foreign currency exposure and changes in interest rates.
Key facts for investors to verify
- How much reported earnings growth reflects recurring property operations versus the joint-venture control gains, securities-sale gain and property dispositions; compare with FFO and adjusted FFO.
- Whether acquisitions and new leasing sustain occupancy and same-property NOI growth, while controlling property expenses and depreciation.
- Debt growth, upcoming maturities, revolver availability, covenant headroom and sensitivity to higher interest rates.
- Execution and returns on the announced acquisition, redevelopment and development budgets, and any further asset-sale impairments.
- Completion and financial effects of the Canadian portfolio sale and Class H preferred redemption, as well as the status and potential consequences of the SEC/DOJ investigations.