Kimco Realty Corporation — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unaudited; financial amounts below are in U.S. dollars, generally millions. Kimco is a REIT focused on owning and operating neighborhood and community shopping centers. At quarter-end, it held interests in 1,454 properties totaling approximately 150 million square feet across the U.S., Canada, Mexico and South America.
Financial performance and position
- Revenue: Rental property revenue was $210.5 million in Q3, up 10.7% from $190.1 million; nine-month revenue was $635.0 million, up 11.3% from $570.3 million. Management attributed the increases mainly to acquisitions and, to a lesser extent, improved occupancy and completed projects. Consolidated shopping-center occupancy was 91.7%, versus 91.3% a year earlier.
- Profit and per-share results: Q3 net income attributable to Kimco was $30.3 million, versus $40.1 million; income available to common shareholders was $17.5 million, or $0.04 per diluted share, versus $28.3 million, or $0.07. For nine months, common-shareholder income was $69.3 million, or $0.17 per diluted share, compared with a loss of $91.6 million, or $0.27 per share, in 2009. The year-to-date improvement chiefly reflected substantially lower impairment charges and higher joint-venture and other real estate investment income.
- Cash flow: Nine-month operating cash flow was $358.2 million, compared with $321.9 million. Investing activities provided $74.1 million, versus using $55.0 million, reflecting increased property-sale proceeds and lower development spending. Financing activities used $396.2 million, versus $262.4 million. Cash rose to $158.1 million from $122.1 million at year-end 2009.
- Debt and liquidity: Notes, mortgages and construction loans totaled approximately $4.04 billion at September 30, versus $4.43 billion at December 31, 2009. Kimco reported $2.99 billion of notes payable, $1.02 billion of mortgages and $29.5 million of construction loans. It also held $236.9 million in marketable securities. Revolving credit commitments totaled approximately $1.7 billion; $145 million was drawn on the U.S. facility and none on the Canadian facility. The company reported compliance with its debt covenants.
- Other indicators: Rental property expenses rose 7.1% in Q3 and 10.8% year to date; depreciation and amortization rose 9.9% and 5.3%, respectively. Interest expense increased to $57.8 million for Q3 and $171.6 million for nine months. The filing does not provide a clearly stated conventional operating margin.
Material changes and capital actions
- Q3 results included $10.8 million of early debt-extinguishment charges. For the first nine months, reported impairment charges were substantially below 2009 levels; the cash flow statement adds back $12.8 million of impairment charges in 2010, compared with $149.2 million in 2009.
- Kimco issued $300 million of 4.30% unsecured notes due 2018, using proceeds in part to repay higher-coupon notes due in 2011; it also issued CAD $150 million of unsecured notes at 5.99% due 2018. It repaid approximately $194.5 million of property mortgages, incurring $4.3 million in related early-extinguishment charges.
- In August, Kimco issued 7 million Class H depositary shares, yielding approximately $169.2 million net at a 6.90% cumulative dividend rate. Proceeds were used primarily to repay approximately $150 million of mortgages and for general corporate purposes.
- The common dividend declared for the first nine months was $0.48 per share, compared with $0.56 in the comparable 2009 period. On November 2, 2010, the board declared a further $0.18-per-share quarterly dividend, payable January 18, 2011.
- Kimco sold properties, including assets transferred to newly formed joint ventures in which it retained noncontrolling interests. Management described a strategy of disposing of certain non-core investments over time and pursuing deleveraging while focusing on shopping centers.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected near-term growth to be constrained by limited real estate transaction activity. It anticipated remaining 2010 capital commitments of approximately $5–10 million for redevelopment and $5–15 million for development, to be funded by operating cash flow, loan commitments and revolver availability.
- Management said credit markets had improved and refinancing alternatives appeared viable, but it continued to prepare for possible deterioration. Remaining 2010 maturities included $81.5 million of unconsolidated joint-venture debt and $183.9 million of debt associated with the preferred-equity program; anticipated repayment sources included refinancing and partner contributions.
- Risks cited include economic weakness, tenant bankruptcies or store closures, refinancing and capital-market access, interest and foreign-exchange movements, impairment valuations, and the performance of joint ventures and investments. Management did not expect identified retailer closures to materially affect overall performance, but acknowledged that weak conditions could delay lease commencements or renewals.
- Kimco had issued a CAD $66 million letter of credit related to a Canadian Revenue Agency tax assessment dispute. Management stated that it believed it had a defense. The filing reported no litigation expected by management to have a material adverse effect and no material changes to previously disclosed risk factors.
- The company extended its $1.5 billion U.S. revolving facility to October 2012 and its CAD $250 million facility to March 2012. It reported covenant headroom at September 30, 2010; for example, total indebtedness to gross asset value was 45% against a 60% maximum.
Most important facts for investors to verify
- Whether rental growth and the small year-over-year occupancy improvement persist, and how much growth reflects acquisitions rather than existing-property performance.
- Debt maturities, refinancing costs and the company’s capacity to meet projected joint-venture and preferred-equity-related maturities and remaining development commitments.
- The quality and recoverability of joint-venture, preferred-equity, marketable-security and other investment balances, including the assumptions underlying impairment valuations.
- The outcome and potential cash or collateral consequences of the Canadian tax dispute, and whether the CAD $66 million letter of credit remains outstanding.
- The sustainability of common and preferred dividends in light of operating cash flow, debt reduction priorities and capital requirements.