Kimco Realty Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Kimco is a REIT focused on neighborhood and community shopping centers. At quarter-end it had interests in 727 shopping centers totaling 106.8 million square feet, plus 485 other property interests. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $294.1 million | $246.0 million | $577.5 million | $474.2 million |
| Operating income | $92.2 million | $64.5 million | $186.2 million | $139.2 million |
| Net income attributable to Kimco | $127.0 million | $89.5 million | $437.3 million | $176.5 million |
| Net income available to common shareholders | $112.4 million | $74.9 million | $408.2 million | $147.4 million |
| Diluted EPS attributable to Kimco | $0.27 | $0.18 | $0.98 | $0.36 |
| Adjusted FFO per diluted share | $0.37 | $0.35 | $0.73 | $0.69 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $339.4 million | $326.1 million |
Q2 operating margin was approximately 31.4%, compared with 26.2% a year earlier. Combined same-property NOI rose 3.4% in Q2 and 3.2% for the first half; U.S. same-property NOI rose 3.7% and 3.4%, respectively. Portfolio occupancy was 95.8%, versus 94.4% at June 30, 2014.
Net income growth substantially reflects nonrecurring or transaction-related gains, including a $139.8 million gain from gaining control of joint-venture interests during the first half and a $32.4 million gain on the sale of marketable securities. Q2 continuing-operations EPS was $0.27, versus $0.28 in Q2 2014, despite higher total net income. Adjusted FFO, a non-GAAP measure, provides a different view of recurring performance.
Balance sheet, liquidity and capital
- At June 30, 2015, total assets were $11.47 billion, total liabilities $6.24 billion and total equity $5.14 billion.
- Notes payable were $3.77 billion and mortgages payable $1.77 billion, totaling approximately $5.54 billion, compared with $4.60 billion at December 31, 2014. Cash and cash equivalents were $145.8 million.
- The $1.75 billion revolving credit facility had $225 million drawn and $1.5 billion available, after letters of credit; it expires in March 2018, with two six-month extension options. The company reported compliance with its debt covenants.
- Operating cash flow was $339.4 million in the first half. Investing used $532.9 million and financing provided $152.0 million; cash declined by $41.5 million to $145.8 million.
- Kimco issued $350 million of 30-year notes at 4.25% and entered a $650 million term loan in January. It repaid $100 million of notes due in February and assumed substantial mortgage debt with acquisitions. Management reported $406.6 million of consolidated debt maturities for the remainder of 2015 and expected to address them with operating cash flow, revolver borrowings and refinancing.
- Cash dividends paid in the first half totaled $227.0 million. The declared quarterly common dividend was $0.24 per share.
Material changes and business developments
- Rental-property revenue increased 21.8% in Q2 and 23.7% in the first half, primarily reflecting acquisitions, improved occupancy, redevelopment completions and leasing. Management attributed $49.1 million of Q2 and $101.4 million of first-half year-over-year rental revenue growth to acquisitions.
- Kimco acquired the remaining interest in the 39-property Kimstone portfolio for a gross purchase price of approximately $1.39 billion, including assumed debt, and acquired additional properties and land. The company reported a $139.8 million gain on change in control of interests related to previously held stakes in acquired properties.
- The company sold 54 operating properties and four out-parcels in the first half for $191.1 million, recognizing an aggregate $58.6 million gain. Its capital-recycling strategy targets higher-quality U.S. assets and dispositions of lesser-quality holdings.
- Impairment charges were $21.9 million in the first half, down from $100.0 million in the comparable 2014 period. The 2015 charges included property carrying-value adjustments, an investment pending sale and marketable debt securities.
- Kimco sold 6.4 million Supervalu shares in April for $58.6 million, realizing a $32.4 million gain. It also invested $190.3 million in the Safeway-related venture during the period.
Outlook, risks and contingencies
- Management anticipated spending $700–$800 million on operating-property acquisitions in 2015, $200–$250 million on redevelopment and re-tenanting, and $50–$100 million on four ground-up development projects. These are management plans, not guaranteed outcomes.
- Management stated that cash, operating flows, credit-facility access and capital-market alternatives were expected to provide required funding, and that it intended to deleverage over time while maintaining investment-grade ratings.
- Risks identified include economic and local real-estate conditions, tenant financial distress or lease terminations, access to financing and refinancing, interest-rate and currency movements, acquisition and investment valuations, operating-cost increases, and potential further impairments. Management warned that asset sales below carrying value could result in additional material impairment charges.
- The company remained subject to SEC and parallel U.S. Department of Justice investigations concerning possible Foreign Corrupt Practices Act violations in the Wal-Mart matter. Kimco said it was cooperating and could not predict the investigations’ duration, scope or outcome.
- Kimco reported a net $8.2 million cumulative foreign-currency translation loss. It said a potential near-term liquidation of its Chile investment could require the related unrealized loss to be recognized in earnings.
- The filing reported no material changes to previously disclosed risk factors and no other litigation that management believed would materially adversely affect the company’s properties as a whole.
Key facts for investors to verify
- How much of reported earnings growth is recurring, given the gains on acquired joint-venture interests, securities sales and property dispositions?
- Whether same-property NOI, occupancy and leasing performance continue to improve, and how acquisitions affect comparable-period results.
- Debt levels, the refinancing plan for remaining 2015 maturities, covenant headroom and the cost of future borrowing.
- Whether planned acquisition, redevelopment and development spending is funded as expected and produces acceptable returns.
- The outcome and potential financial consequences of the SEC/DOJ investigations, any Chile investment liquidation, and possible additional property impairments.