Kimco Realty Corporation — Q2 2013 Form 10-Q
Business context and reporting period. Kimco is a REIT focused on owning and operating neighborhood and community shopping centers. This unaudited filing covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. At quarter-end, Kimco reported interests in 874 shopping centers totaling 128.0 million square feet; portfolio occupancy was 93.3%, up from 92.8% a year earlier.
Key financial metrics
Amounts below are in millions except per-share data and percentages.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $246.1 | $226.5 | $484.8 | $448.0 |
| Operating income | $49.0 | $75.6 | $128.6 | $144.3 |
| Net income attributable to Kimco | $51.1 | $69.1 | $118.9 | $122.8 |
| Net income available to common shareholders | $36.6 | $48.3 | $89.8 | $86.3 |
| Diluted EPS attributable to Kimco | $0.09 | $0.12 | $0.22 | $0.21 |
| FFO per diluted share | $0.35 | $0.34 | $0.68 | $0.65 |
| Adjusted FFO per diluted share | $0.35 | $0.31 | $0.67 | $0.62 |
- Rental-property revenue rose 8.9% in Q2 and 8.7% year to date. Management attributed growth mainly to acquisitions, improved occupancy, completed projects and leasing activity.
- Same-property NOI increased 4.0% in both Q2 and the first half, to $238.6 million and $474.0 million, respectively.
- Q2 operating income fell 35.2%, principally reflecting $35.4 million of operating impairment charges. First-half impairments totaled $81.5 million, including $45.8 million in discontinued operations, versus $34.6 million in the first half of 2012.
- Equity in joint-venture income rose to $59.5 million in Q2 from $30.4 million and to $83.6 million for six months from $65.1 million, with gains from property sales among the drivers. Q2 income from continuing operations was $77.6 million versus $75.4 million; first-half continuing income was $146.9 million versus $129.4 million.
- Operating cash flow was $265.5 million for six months, down from $275.4 million. Investing activities used $97.5 million, compared with $144.9 million; financing activities used $153.5 million versus $140.3 million provided in 2012. Cash and equivalents ended at $156.5 million, up from $141.9 million at year-end 2012.
- At June 30, total assets were $9.99 billion; notes payable were $3.28 billion and mortgages payable $1.18 billion. Total liabilities were $5.04 billion. The $1.75 billion revolving facility had $186.6 million drawn, with $1.56 billion reported available. Consolidated debt maturities for the remainder of 2013 were $359.2 million.
Material changes versus prior comparable period
- Q2 common-shareholder net income declined to $36.6 million from $48.3 million, primarily reflecting larger impairment and discontinued-operation losses; the first-half total increased to $89.8 million from $86.3 million.
- Rental revenue growth and 4.0% same-property NOI growth were accompanied by higher property costs: first-half rental-property expenses rose 9.1% and depreciation and amortization rose 5.7%.
- First-half acquisitions totaled $435.5 million across 11 properties and 2.287 million square feet. Kimco also sold 13 operating properties for $100.8 million, with a $4.4 million aggregate gain and $20.8 million of after-tax impairments.
- In May, Kimco issued $350 million of 10-year unsecured notes at 3.125%. During the first half it repaid $100 million of 6.125% notes and $75 million of 4.70% notes. Debt balances increased from year-end, including mortgages assumed in property acquisitions.
- Q2 comprehensive income attributable to Kimco was $17.0 million, versus $24.6 million, including a $35.5 million negative foreign-currency translation adjustment in Q2 2013.
Outlook, management commentary and risks
- Management described a strategy of focusing on North American neighborhood and community shopping centers, selling non-core assets and pursuing gradual deleveraging. It estimated 2013 spending of $90–$100 million on reformatting, re-tenanting and redevelopment, plus $5–$10 million on ground-up development.
- Management expected operating cash flow, its revolving facility and debt refinancing to fund remaining 2013 consolidated maturities. It stated that it was in compliance with credit-facility and senior-note covenants; reported credit-facility leverage was 45% against a limit below 60%, and fixed-charge coverage was 2.40x against a minimum of 1.50x.
- The Board declared a quarterly common dividend of $0.21 per share for October 2013. Management said the Board evaluates dividend policy quarterly; future dividends are not assured.
- Interest-rate and foreign-exchange exposures remain. Management estimated that a 1 percentage-point increase in short-term rates would have raised first-half interest expense by $3.7 million. Foreign-currency exposure is partly, not fully, mitigated by local-currency debt.
- The June sale of the Intown portfolio generated a deferred $21.7 million gain because Kimco retained a $145.2 million debt guarantee and committed to provide up to $145.2 million of financing for five years after loan maturity. The guarantee was collateralized by the buyer’s portfolio interest.
- One $23.3 million mortgage loan was in default and on non-accrual; Kimco began foreclosure proceedings on its Ontario land collateral. The filing states the collateral’s estimated fair value exceeded the loan’s carrying value.
- The IRS proposed a $40.9 million penalty tax and disallowance of a claimed capital loss related to the Valad share disposition. Kimco disputed the IRS position, planned to contest it, and said it believed it would prevail; management did not expect resolution of the tax audits to materially affect the financial statements.
- Kimco received an SEC subpoena and is cooperating with parallel SEC and DOJ investigations concerning possible Foreign Corrupt Practices Act violations involving Wal-Mart. The filing says the duration, scope and outcome could not be predicted.
- Forward-looking risks include adverse economic and real-estate conditions, tenant failures, financing and refinancing availability, interest and currency movements, asset valuations and impairments, and the performance of joint ventures and other investments.
Most important facts for investors to verify
- Whether recurring property operations and same-property NOI continue to grow, and how occupancy and leasing costs evolve.
- How much of reported earnings and FFO growth depends on joint-venture/property-sale gains, tax benefits and other adjustments rather than ongoing operations.
- Realized impairment and disposition outcomes, including the remaining properties classified as held for sale.
- Debt refinancing and liquidity against upcoming maturities, the availability of the revolving facility, and continued covenant compliance.
- Potential exposure from the Intown guarantee and financing commitment, the defaulted mortgage loan, and the IRS, SEC and DOJ matters.
- Whether announced capital spending and dividends remain supportable from operating cash flow while Kimco pursues deleveraging.