KIM

Business Context and Reporting Period

Company: Kimco Realty Corporation (Kimco)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: Kimco is a Real Estate Investment Trust (REIT) engaged in the ownership, acquisition, development, and management of neighborhood and community shopping centers. As of June 30, 2003, the Company held 107,338,000 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenues increased 8.5% ($18.9 million) year-over-year. This was driven by the acquisition of 10 operating properties and new leasing, partially offset by revenue declines due to Kmart and Ames Department Stores bankruptcies and the sale of development properties.
• Expense Increases: Rental property expenses rose 11.1% ($10.6 million) due to higher snow removal costs and property acquisitions. Interest expense increased $4.1 million due to higher average outstanding borrowings.
• Joint Venture Income: Equity in income from real estate joint ventures increased 26.1% ($4.0 million) to $19.3 million, primarily from the Kimco Income REIT (KIR), RioCan, and KROP ventures.
• One-Time Gains: The Company recognized a $6.3 million gain on the early extinguishment of debt related to two former Kmart sites. Additionally, gains from the sale of development properties totaled $4.2 million (net of tax) for the six-month period.
• Preferred Stock Redemption: The Company redeemed all Class A, B, and C preferred stock ($225 million) and issued new Class F preferred stock ($169 million net proceeds). This resulted in a $7.8 million deduction for original issuance costs, reducing net income available to common shareholders.

Guidance, Outlook, Risks, and Unusual Items

• Capital Strategy: Management intends to maintain a debt-to-total-market-capitalization ratio of 50% or less (currently 29%). The Company established a new $500 million unsecured revolving credit facility in June 2003.
• Merger Activity: On June 18, 2003, Kimco entered a definitive agreement to acquire Mid-Atlantic Realty Trust for approximately $444 million in equity value. The transaction is expected to close by September 15, 2003.
• Tenant Concentration Risk (Kmart): Kmart represented 3.0% of annualized base rents. As of June 30, 2003, Kmart had rejected leases at seven locations leased from Kimco, representing $3.3 million in annualized base rental revenues. The Company is negotiating with prospective tenants but notes no assurance of re-leasing at comparable rents.
• Debt Service Suspension: In May 2003, the Company suspended debt service payments on a $9.3 million non-recourse mortgage encumbering a former Kmart site in Chicago, IL, while negotiating settlement terms.
• Accounting Changes: The Company is evaluating the impact of new FASB interpretations (FIN 46, SFAS 149, SFAS 150) regarding variable interest entities and financial instrument classification.

Investor Verification Checklist

• Kmart Exposure: Verify the status of lease negotiations for the seven Kmart locations where leases were rejected and the likelihood of recovering lost rent claims.
• Mid-Atlantic Merger: Confirm the closing conditions and timeline for the $444 million acquisition of Mid-Atlantic Realty Trust.
• Debt Structure: Review the terms of the new $500 million revolving credit facility and the status of the suspended $9.3 million mortgage payment.
• Preferred Stock Impact: Assess the long-term impact of the preferred stock exchange (Class A/B/C redemption vs. Class F issuance) on future dividend obligations and earnings per share.
• Development Sales: Monitor the recognition of the $3.3 million deferred gain from KDI development sales expected in the third quarter of 2003.