Business Context and Reporting Period
Company: Kimco Realty Corporation (Kimco)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 30, 2002
Business Overview: Kimco is a Real Estate Investment Trust (REIT) focused on neighborhood and community shopping centers. The company manages its own portfolio as well as joint ventures including Kimco Income REIT (KIR), the RioCan Venture (Canada), and the Kimco Retail Opportunity Fund (KROP).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2002 | Nine Months Ended Sep 30, 2002 | Nine Months Ended Sep 30, 2001 |
|---|---|---|---|
| Revenues from Rental Property | $111.1 million | $340.6 million | $350.3 million |
| Net Income | $60.8 million | $182.7 million | $174.7 million |
| Net Income Applicable to Common Shares | $56.1 million | $168.9 million | $155.0 million |
| Diluted EPS (Net Income) | $0.53 | $1.60 | $1.60 |
| Cash Flow from Operations | N/A | $230.8 million | $253.7 million |
| Total Debt (Notes & Mortgages Payable) | $1.535 billion | $1.535 billion | $1.322 billion |
| Cash and Cash Equivalents | $43.5 million | $43.5 million | $93.8 million |
| Debt to Total Market Capitalization | 31% | 31% | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Rental revenues decreased 2.0% ($2.2 million) for the quarter and 2.8% ($9.7 million) for the nine-month period compared to 2001. This was primarily driven by the bankruptcy of Kmart and Ames Department Stores, resulting in lease rejections and a portfolio occupancy drop to 85.9% (from 92.0% in 2001).
- Expense Increases: Rental property expenses increased 5.5% for the quarter and 2.8% for the nine-month period. Increases were due to higher real estate taxes (Company assumed payments for Kmart locations) and professional fees related to tenant bankruptcies.
- Joint Venture Income: Equity in income from the Montgomery Ward asset designation rights transaction decreased significantly ($13.9 million for the quarter) as the transaction wound down. Conversely, income from KIR, RioCan, and KROP joint ventures increased due to capital investments and portfolio growth.
- Development Gains: The taxable REIT subsidiary (KDI) generated pre-tax gains of $9.2 million from the sale of development projects during the nine months ended September 30, 2002.
Outlook, Risks, and Management Commentary
- Kmart Bankruptcy Impact: Kmart rejected leases at 27 locations, representing $29.5 million in annualized base rent. Seven of these locations are encumbered by $60.8 million in non-recourse debt; debt service payments were suspended in July 2002 while negotiations with lenders continue. Management is actively marketing these sites but notes no assurance of re-leasing at comparable rents.
- Liquidity Strategy: Management maintains a conservative capital structure targeting debt-to-market-cap of 50% or less (currently 31%). The company has $400 million in unsecured revolving credit facilities ($229 million outstanding as of Sept 30, 2002) and a $200 million medium-term notes program.
- Dividend Policy: The company intends to maintain regular dividends to qualify as a REIT, funded by operating cash flows, while reserving capital for expansion and debt reduction.
- Market Risks: Key risks include general economic conditions, inability of major tenants to pay rent, financing risks, and interest rate volatility. The company utilizes interest rate swaps and foreign currency forwards to mitigate exposure on floating-rate debt and Canadian investments.
Investor Verification Checklist
- Kmart Lease Recovery: Verify the status of re-leasing the 27 Kmart locations and the outcome of negotiations regarding the $60.8 million in encumbered debt.
- Joint Venture Performance: Monitor the profitability of the RioCan and KROP ventures as they scale, given the decline in the Montgomery Ward venture income.
- Occupancy Trends: Track the portfolio occupancy rate (currently 85.9%) to ensure it stabilizes or improves following the anchor tenant bankruptcies.
- Debt Maturities: Review the maturity schedule of the $1.5 billion debt load, particularly the floating-rate portion ($444.4 million) and the revolving credit facilities expiring in 2003.
- Development Pipeline: Assess the pipeline of KDI development projects and the timing of future sales to sustain non-rental income streams.