Kimco Realty Corporation — 2014 Q2 Form 10-Q
Business context and period. Unaudited results for the three and six months ended June 30, 2014, compared with the same 2013 periods. Kimco owns and operates shopping centers; at quarter-end it reported interests in 840 shopping center properties totaling 120.6 million square feet, with portfolio occupancy of 94.4%, up from 93.3% a year earlier. Its strategy includes acquiring higher-quality U.S. retail properties, disposing of selected assets, exiting Latin America, reducing joint-venture complexity, and redeveloping properties.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $260.2 million | $227.1 million | $502.2 million | $449.4 million |
| Rental-property revenue | $251.7 million | $218.1 million | $484.6 million | $432.0 million |
| Operating income | $7.8 million | $51.2 million | $85.8 million | $123.2 million |
| Net income attributable to Kimco | $89.5 million | $51.1 million | $176.5 million | $118.9 million |
| Diluted net income per common share | $0.18 | $0.09 | $0.36 | $0.22 |
| FFO per diluted share | $0.34 | $0.35 | $0.68 | $0.68 |
| Adjusted FFO per diluted share | $0.35 | $0.35 | $0.69 | $0.67 |
Amounts are in U.S. dollars; reported financial statement figures are in thousands unless otherwise noted. Net income growth included gains on dispositions and changes in control of interests; it should not be read as equivalent to recurring operating growth. Continuing-operations diluted EPS was $0.14 in Q2 2014 versus $0.16 in Q2 2013, and $0.29 for the first half versus $0.27.
- Property operations: Same-property NOI rose 2.0% in Q2 and 1.5% for the first half; excluding foreign-currency effects, growth was 2.8% and 2.5%, respectively. Management attributed gains mainly to lease-up and rent commencements.
- Cash flow: First-half operating cash flow was $326.1 million, up from $265.5 million. Investing activities used $172.0 million versus $97.5 million; financing activities used $110.7 million versus $153.5 million. Cash ended the period at $192.2 million, compared with $148.8 million at year-end 2013.
- Debt and liquidity: Notes payable were $3.53 billion and mortgages payable $1.20 billion at June 30, 2014, versus $3.19 billion and $1.04 billion at December 31, 2013. The new $1.75 billion revolving facility had $337.6 million drawn and $1.1 million committed to letters of credit; management reported approximately $1.4 billion available. Total assets were $10.19 billion and total equity $4.75 billion.
- Credit position: The company reported compliance with debt covenants. Revolver covenant measures included total indebtedness to gross asset value of 38% against a maximum 60%, and fixed-charge coverage of 3.30x against a minimum 1.50x.
Material changes, outlook, and risks
- Rental revenue increased 15.4% in Q2 and 12.2% in the first half, primarily reflecting property acquisitions, higher occupancy, completed projects, and leasing activity. Rental-property expenses also rose, including higher real estate taxes, maintenance, and snow removal.
- First-half acquisitions totaled approximately $902.9 million across multiple transactions. Kimco also acquired remaining interests in joint ventures and recognized $69.3 million of gains from remeasuring previously held interests after obtaining control.
- Impairment charges were $90.6 million in the income statement for the first half, versus $25.2 million in 2013. The broader cash-flow/fair-value disclosures report approximately $100.0 million of total impairments, including discontinued operations. Management identified about 150 U.S. properties for sale within 18 months and warned that sales below carrying value could lead to further impairments.
- During the first half, 18 operating properties were sold for $199.8 million, generating reported gains; the filing separately notes sales of five properties in Mexico. Management’s plan to exit Latin America could trigger recognition in earnings of accumulated currency translation losses, including a $117.0 million net loss relating to Latin America at quarter-end.
- Management expected to acquire approximately $500 million to $1.0 billion of operating properties in 2014 and invest approximately $150 million to $200 million in redevelopment and re-tenanting. It anticipated funding these programs through operating cash flow, dispositions, assumed debt, and revolver availability. These are stated plans, not guaranteed outcomes.
- The company issued $500 million of 3.20% senior unsecured notes due in 2021 and repaid $294.6 million of notes maturing in June 2014. It assumed $413.5 million of mortgage debt relating to property acquisitions and paid off $233.8 million of mortgage debt.
- The board declared a quarterly common dividend of $0.225 per share, payable October 15, 2014. Management said the board reviews dividend policy quarterly.
- Key risks include tenant distress or lease terminations, property-market conditions, financing and refinancing access, interest and foreign-exchange movements, acquisition and disposition execution, joint-venture and investment valuations, operating-cost increases, and potential impairment. A subpoena-related SEC investigation and parallel DOJ investigation concerning possible Foreign Corrupt Practices Act violations were ongoing; the company said it could not predict their duration, scope, or outcome.
Important facts for investors to verify
- Reconcile the filing’s impairment-property count: the notes refer to 18 consolidated operating properties, while MD&A refers to 20 operating properties.
- Track the pace, prices, and realized gains or losses on the targeted U.S. and Latin American dispositions, including any release of currency translation losses.
- Assess recurring performance using same-property NOI and FFO alongside GAAP results, which were materially affected by impairments, dispositions, and change-in-control gains.
- Confirm acquisition and redevelopment spending against management’s 2014 targets, and monitor debt maturities, revolver availability, covenant headroom, and interest-rate exposure.
- Monitor occupancy, lease expirations, tenant credit quality, and the outcome of the SEC and DOJ investigations.