KIM

Business Context and Reporting Period

Company: Kimco Realty Corporation (Kimco)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Business Overview: Kimco is a Real Estate Investment Trust (REIT) engaged in the ownership, management, and development of neighborhood and community shopping centers. The company also holds interests in joint ventures, including Kimco Income REIT (KIR) and ventures focused on distressed assets (Montgomery Ward) and Canadian retail properties (RioCan).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Rental property revenues decreased 4.6% ($5.6 million) primarily due to a drop in portfolio occupancy from 92.5% to 86.6%. This was driven by the bankruptcy of Kmart and Ames Department Stores, resulting in lease rejections and a $5.6 million revenue loss, alongside property sales totaling $3.2 million in lost revenue.
• Expense Reduction: Rental property expenses decreased 2.1% ($1.6 million). While real estate taxes increased $1.7 million (due to Kimco assuming payments for Kmart locations), operating and maintenance costs dropped $3.0 million, largely due to lower snow removal costs.
• Joint Venture Gains: Equity in income from other real estate joint ventures surged $5.5 million to $7.0 million. This was driven by $4.2 million in pre-tax profits from the Montgomery Ward asset designation rights transaction and $0.9 million from the RioCan joint venture.
• Development Sales: The taxable REIT subsidiary (KDI) sold a development project in Miamisburg, OH, generating a net gain of $2.6 million, compared to a $3.5 million gain from a Chandler, AZ sale in the prior year.

Outlook, Risks, and Management Commentary

• Kmart Bankruptcy Impact: Kmart filed for Chapter 11 protection in January 2002. As of March 31, 2002, Kmart represented 8.8% of annualized base rents. Kmart rejected leases at 15 locations ($16.3 million annualized revenue) and announced plans to close an additional 284 stores, 17 of which are leased from Kimco ($15.1 million annualized revenue). Seven of these properties are encumbered by non-recourse mortgages.
• Liquidity Strategy: Management maintains a conservative capital structure targeting debt-to-market-cap of 50% or less (currently 27%). The company has a $250 million unsecured revolving credit facility with no borrowings outstanding as of March 31, 2002, and $625.7 million available under a shelf registration statement.
• 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: Significant risks include the inability of major tenants to pay rent due to bankruptcy, general economic downturns, and interest rate volatility. The company has hedged $210 million of its $227.3 million floating-rate debt using interest rate swaps.

Investor Verification Checklist

• Kmart Lease Status: Verify the final outcome of the 17 additional Kmart locations announced for closure and the likelihood of lease assignment versus rejection.
• Re-leasing Velocity: Monitor the company's ability to re-lease the 15 rejected Kmart locations and the 17 potentially closing locations at comparable rental rates.
• Joint Venture Realization: Confirm the continued profitability and transaction completion rates of the Montgomery Ward Venture and the RioCan Canadian joint venture.
• Debt Maturities: Review the maturity schedule of the $1.3 billion in debt, particularly the $250 million credit facility expiring in August 2003.
• Occupancy Trends: Track the portfolio occupancy rate recovery from the current 86.6% level.