Kimco Realty Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are to the corresponding 2011 periods. Unaudited consolidated results. Kimco owns and operates shopping centers and also invests through joint ventures and preferred equity. At quarter-end it reported interests in 926 shopping centers totaling 135.8 million square feet, plus 894 other property interests.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $235.4 million | $220.1 million | $465.2 million | $443.7 million |
| Operating income | $55.3 million | $68.8 million | $126.6 million | $134.6 million |
| Net income attributable to Kimco | $69.1 million | $38.7 million | $122.8 million | $67.7 million |
| Net income available to common shareholders | $48.3 million | $23.9 million | $86.3 million | $38.0 million |
| Diluted net income per common share | $0.12 | $0.06 | $0.21 | $0.09 |
| FFO per diluted share (non-GAAP) | $0.34 | $0.31 | $0.65 | $0.61 |
| Adjusted FFO per diluted share (non-GAAP) | $0.31 | $0.30 | $0.62 | $0.59 |
Rental property revenue rose 7.1% in Q2 and 5.1% for the six-month period. Management attributed growth to acquisitions, improved portfolio occupancy (92.8% versus 92.0% a year earlier), leasing and rent commencements, and Latin American properties. Same Property NOI, a non-GAAP measure, increased 1.7% in Q2 to $218.4 million; management cited leasing and ancillary income, partly offset by $1.8 million of adverse foreign-exchange effects. The filing does not provide a single overall operating margin measure.
Operating income declined despite revenue growth, principally reflecting higher impairment charges: $24.5 million in Q2 versus $3.7 million, and $25.9 million for six months versus $3.7 million. Net income and EPS increased substantially, but were also supported by higher joint-venture and other investment income, property-sale gains, and tax benefits. Q2 included $42.5 million of equity income from joint ventures, versus $17.8 million a year earlier.
Cash flow, debt and liquidity
- Six-month cash flow: Operating activities provided $275.4 million, compared with $215.8 million in 2011. Investing activities used $144.9 million, versus $113.6 million provided in 2011; financing activities provided $140.3 million, versus $310.5 million used. Cash ended the period at $383.7 million, up from $112.9 million at year-end 2011.
- Debt: At June 30, notes payable were $3.161 billion, mortgages payable $990.6 million, and construction loans $40.0 million. Their combined balance was approximately $4.192 billion, compared with $4.114 billion at December 31, 2011. Six-month interest expense was $114.9 million, up from $110.9 million.
- Liquidity: The $1.75 billion unsecured revolving credit facility had $14.2 million outstanding and $26.5 million reserved for letters of credit; the filing reports $1.7 billion available. Kimco reported compliance with debt covenants, including 41% total indebtedness to gross asset value and coverage ratios above stated minimums.
- Financing actions: Kimco obtained a $400 million unsecured term loan at LIBOR plus 105 basis points, due April 2014 with extension options through April 2017. It issued $387.2 million net proceeds of 6.00% Class I preferred stock. Consolidated debt maturities for the rest of 2012 were $248.9 million; the company expected to address them with operating cash, its credit facility and refinancing.
Changes, outlook and notable items
- Kimco acquired properties for an aggregate $387.5 million during the first half, including $116.7 million of assumed debt. It sold 23 operating properties and two outparcels for $157.2 million, recording $23.2 million of gains and $8.6 million of impairment charges on those dispositions.
- Total first-half impairment charges were $34.6 million, including $8.6 million in discontinued operations. The company also recorded $3.8 million of severance expense, including $2.5 million related to an executive departure.
- Management estimated 2012 spending of $85–$95 million for reformatting, re-tenanting and redevelopment, and $20–$30 million for ground-up development. The company had four ground-up projects. It expects operating cash flow and available credit to fund these commitments; no earnings or FFO guidance is provided in the supplied filing text.
- Management described a strategy of focusing on neighborhood and community shopping centers, selling non-retail assets and recycling capital from non-strategic retail properties. It cautioned that sales below carrying value could result in further impairments. Management also stated its intention to pursue deleveraging over time and maintain investment-grade debt ratings.
- Tax dispute: The IRS proposed a $40.9 million penalty tax related to a claimed capital loss on the sale of Valad shares, while also proposing to disallow the loss. Kimco strongly disagreed, filed a protest and said it intended to defend its position. Management believed the matter would be resolved in the company’s favor; the ultimate outcome is uncertain.
- Other risks: Six loans totaling $41.5 million were in default; five loans totaling $19.1 million were on non-accrual, while one $22.4 million loan remained on accrual despite being 90 days past due. Management said collateral value exceeded the carrying amounts. Risks also include tenant credit, property valuations and impairments, refinancing and interest rates, foreign exchange, and joint-venture and preferred-equity exposures. A 1% increase in short-term rates was estimated to raise first-half interest expense by $2.3 million.
- Subsequent events: In July, Kimco issued $217.8 million net proceeds of 5.50% Class J preferred stock and called all $175 million of outstanding Class F preferred stock for redemption in August. The redemption was expected to cause a $6.2 million charge to income available to common shareholders in Q3.
Most important facts for investors to verify
- How much of the reported earnings and FFO improvement is repeatable operating growth versus property-sale, joint-venture, promote and other investment gains.
- The scale and timing of additional impairments, especially as Kimco sells non-retail and non-strategic assets.
- Refinancing outcomes for 2012 maturities, including joint-venture and preferred-equity-related property debt, and the company’s progress toward deleveraging.
- The resolution and potential financial consequences of the IRS’s proposed $40.9 million penalty tax and related capital-loss dispute.
- Performance and recovery prospects for non-performing loans, foreign investments, and joint ventures; FFO and Same Property NOI are non-GAAP measures and may not be comparable across REITs.