Business context and reporting period
Kimco Realty Corporation’s Form 10-K covers the fiscal year ended December 31, 2017; quarterly figures below include the fourth quarter. Kimco is a REIT focused on owning and operating open-air shopping centers. At year-end, it had interests in 493 shopping centers totaling 83.2 million square feet, with the combined portfolio 96.0% leased. Its consolidated U.S. operating portfolio was 95.9% leased.
Financial and operating performance
- Revenue: Total revenue was $1.201 billion, up 2.6% from $1.171 billion in 2016. Rental-property revenue was $1.184 billion, up $31.4 million.
- Profit: Net income available to common shareholders was $372.5 million, or $0.87 per diluted share, compared with $332.6 million, or $0.79, in 2016. The 2017 result included $93.5 million of net gains on operating-property sales, $71.2 million of gains from changes in control of interests, and a $7.0 million preferred-stock redemption charge.
- REIT operating measures: FFO was $655.6 million, or $1.55 per diluted share, versus $555.7 million, or $1.32, in 2016. Adjusted FFO was $644.2 million, or $1.52 per diluted share, versus $629.4 million, or $1.50. Same-property NOI increased 1.7% for the year.
- Fourth quarter: Rental-property revenue was $310.6 million; net income attributable to Kimco was $84.6 million, and diluted earnings per common share were $0.17. Common-shareholder FFO was $160.1 million, or $0.38 per diluted share; adjusted FFO was $166.4 million, or $0.39.
- Cash flow and liquidity: Operating cash flow was $614.2 million, up from $592.1 million. Cash and cash equivalents were $238.5 million at year-end. Kimco had a $2.25 billion unsecured revolving credit facility, expandable to $2.75 billion; $8.0 million was outstanding at year-end, plus $0.5 million allocated to letters of credit.
- Debt and capital: Reported total debt was $5.479 billion, up from $5.066 billion. Weighted-average interest rate was 3.84%, and weighted-average maturity was 10.7 years. Kimco reported compliance with its debt covenants. It paid $506.2 million in dividends during 2017; declared common dividends were $1.09 per share for the year.
- Investment: Capital improvements to operating real estate totaled $206.8 million. Cash used for investing activities was $294.3 million, reflecting property improvements and development spending, partly offset by sale proceeds.
Material changes versus 2016
- Common-shareholder net income rose by $39.8 million, while adjusted FFO increased by $14.8 million. FFO growth was larger, in part, because of gains and other items excluded from adjusted FFO.
- Rental-property revenue growth reflected acquisitions and portfolio operating gains, partly offset by properties sold. Same-property NOI increased 1.7%; year-end consolidated occupancy improved to 95.9% from 95.2%.
- Equity income from joint ventures fell to $60.8 million from $218.7 million, primarily because joint ventures recorded fewer property and ownership-interest sale gains. In 2015, this line had been substantially higher at $480.4 million.
- Impairment charges declined to $67.3 million from $93.3 million. Interest expense was nearly flat year over year, but early debt-extinguishment charges fell to $1.8 million from $45.7 million.
- Debt and financing activity included $1.25 billion of new unsecured notes, repayment of $550 million in term loan/notes, and a new $2.25 billion revolving facility. Kimco also issued Class L and M preferred shares and partially redeemed Class I preferred shares.
Outlook, commentary, risks and unusual items
- Plans and spending: Kimco expected to spend approximately $225–$300 million on redevelopment and re-tenanting in 2018, and $175–$225 million on active development projects. Estimated remaining costs to complete four active development projects were $200–$250 million. Management anticipated up to approximately $50 million of operating-property acquisitions in 2018. These plans were expected to be funded through dispositions, operating cash flow and credit-facility availability. The filing does not provide formal earnings or FFO guidance.
- Retail and leasing risks: Management cited e-commerce and changing retailer space needs as risks to rents, renewals and occupancy. Other stated risks include tenant financial distress or bankruptcy, local economic weakness, competition, higher operating costs, financing availability, interest rates, development execution, joint-venture exposure, impairments and cybersecurity incidents.
- Hurricane Maria: The storm reduced 2017 rental revenue by $3.4 million. Kimco recorded a $16.0 million asset write-off and matching estimated insurance recovery, with no net-income impact from those adjustments. It had received $4.0 million in property insurance proceeds and recorded a $12.0 million receivable at year-end; additional property and business-interruption claims remained under assessment.
- Debt matter: A $12.4 million consolidated non-recourse mortgage was in default at year-end; Kimco said it was working with the special servicers on a resolution. It also identified $73.0 million of consolidated debt maturities in 2018, assuming available extensions, and $203.7 million of unconsolidated joint-venture debt maturing in 2018.
- Tax and portfolio items: The December 2017 Tax Cuts and Jobs Act prompted Kimco to remeasure deferred tax balances and record a $1.1 million tax provision. Kimco substantially liquidated its Canadian investments during 2017 and had exited South America; remaining international tax matters included Canadian and Mexican audits. Mexican tax assessments totaled $61.6 million including tax, interest and penalties; Kimco disputed the assessments and said it intended to defend its position.
- Other unusual items: Kimco recognized a $34.6 million Albertsons-related distribution in excess of carrying basis as income and ended 2017 with a 9.74% interest in Albertsons Companies. ACI announced a proposed acquisition of Rite Aid in February 2018, subject to customary closing conditions.
Important facts for investors to verify
- Reconcile reported GAAP earnings with FFO and adjusted FFO, including the contribution of property-sale gains, control-change gains and joint-venture transactions.
- Review the 2018 maturity schedule, the resolution of the $12.4 million mortgage in default, and refinancing plans for unconsolidated joint ventures.
- Monitor occupancy, same-property NOI, lease renewals and rent spreads, particularly as retailers adapt to e-commerce and store closures.
- Confirm the timing and amount of Hurricane Maria insurance collections and any remaining business-interruption losses.
- Assess the execution, leasing and funding of redevelopment and development commitments, as well as future impairment risk on assets being marketed or held for sale.
- Track the Albertsons investment and the status and potential exposure from foreign tax matters, including the disputed Mexican assessments.