Kimco Realty Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Filing dated November 5, 2012. Kimco is a REIT focused on neighborhood and community shopping centers. At quarter-end, it had interests in 922 shopping centers totaling 134.7 million square feet; portfolio occupancy was 92.7%, up from 92.2% a year earlier.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $231.9 million | $213.0 million | $687.6 million | $647.3 million |
| Operating income | $75.0 million | $62.7 million | $202.2 million | $193.7 million |
| Net income | $57.1 million | $58.6 million | $188.6 million | $131.9 million |
| Net income attributable to Kimco | $54.9 million | $55.0 million | $177.7 million | $122.7 million |
| Net income available to common shareholders | $27.1 million | $40.1 million | $113.4 million | $78.1 million |
| Diluted earnings per common share | $0.07 | $0.10 | $0.28 | $0.19 |
| FFO per diluted share | $0.29 | $0.33 | $0.94 | $0.94 |
| Adjusted FFO per diluted share | $0.31 | $0.30 | $0.93 | $0.90 |
Q3 operating margin was approximately 32.4%, versus 29.4% in Q3 2011, calculated as operating income divided by total revenue. Same-property NOI increased 1.6% in Q3 to $219.5 million.
Cash flow, balance sheet and liquidity
- Cash from operations for the first nine months was $407.6 million, compared with $367.9 million in 2011. Investing activities used $130.1 million, versus providing $79.5 million; financing activities provided $39.1 million, versus using $392.4 million.
- Cash and cash equivalents were $429.5 million at September 30, up from $112.9 million at year-end 2011. Total assets were $10.12 billion and total equity was $5.24 billion.
- Notes payable were $3.16 billion, mortgages payable $1.02 billion and construction loans $42.9 million: approximately $4.22 billion of these reported debt balances combined. Notes payable increased from $2.98 billion at year-end; mortgages and construction loans declined overall.
- The $1.75 billion unsecured revolving facility had $14.5 million drawn and $27.2 million committed for letters of credit; management reported approximately $1.7 billion available. Kimco reported compliance with its debt covenants.
- Operating cash flow and available credit were identified as sources for planned investment and debt needs. The company reported $227.2 million of consolidated debt maturities for the remainder of 2012, assuming available extensions are used.
Material changes and notable items
- Nine-month rental revenue rose 6.5%, primarily reflecting property acquisitions, higher occupancy, completed projects and Latin American portfolio growth, partly offset by dispositions. Q3 rental revenue rose 9.2%.
- GAAP common earnings per share fell in Q3 despite higher operating income. The company recorded a $6.2 million non-cash charge related to redeeming Class F preferred stock; preferred dividends also increased. Nine-month earnings benefited from stronger joint-venture income, including transaction gains.
- FFO per diluted share was down in Q3 but flat for the nine-month period. Adjusted FFO per diluted share increased in both comparisons. FFO and adjusted FFO are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
- Property impairment charges were $37.6 million for the first nine months, including $15.2 million in discontinued operations, compared with $16.7 million in the 2011 period. Kimco sold 30 operating properties and two outparcels for $234.0 million and reported $36.5 million of gains and $14.3 million of impairment charges on those dispositions.
- Kimco acquired operating properties for an aggregate purchase price of $508.6 million during the first nine months. It issued Class I and Class J preferred shares and redeemed all Class F preferred shares. The Class G preferred redemption of $460.0 million was paid October 10, 2012; a further $15.5 million non-cash charge was expected in Q4.
Outlook, risks and contingencies
- The filing provides no specific earnings or FFO guidance. Management estimated 2012 capital commitments of $75–$85 million for redevelopment and re-tenanting, and $20–$30 million for ground-up development.
- Management described a strategy of focusing on North American shopping centers, recycling capital through property sales and reducing non-retail assets. Sales below carrying value could cause further impairments. The company also intends to pursue balance-sheet deleveraging while maintaining investment-grade ratings.
- The board declared a $0.21 common dividend for January 2013, up from the prior $0.19 quarterly dividend. The filing notes that dividend policy is reviewed quarterly and future payments depend on board decisions and capital needs.
- Risks include economic and real-estate conditions, tenant credit and lease terminations, refinancing and capital availability, interest and foreign-exchange movements, joint-venture and investment valuations, operating-cost increases and further impairments.
- The IRS proposed disallowing a capital loss related to the Valad share disposition and asserted a $40.9 million penalty tax. Kimco disputes the position and intends to defend it; management stated that audit resolutions were not expected to materially affect the financial statements.
- Four mortgage loans totaling $20.0 million were non-performing and on non-accrual status; management reported collateral values above carrying amounts. The filing also identifies future funding commitments and potential losses associated with joint ventures and development investments.
Important facts for investors to verify
- Whether occupancy, same-property NOI and rental growth persist after accounting for acquisitions, dispositions, foreign exchange and redevelopment.
- The sustainability of common-shareholder earnings and FFO, including the effects of preferred dividends, redemption costs, transaction gains and impairments.
- Upcoming consolidated and joint-venture debt maturities, refinancing terms, covenant headroom and actual revolver availability.
- Progress and realized pricing on non-strategic asset sales, and whether further impairment charges are required.
- The outcome and potential financial exposure from the IRS dispute, as well as the effect of the Class G redemption and its expected charge on Q4 results.