Kimco Realty Corporation — Q2 2017 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2017. Kimco owns, manages, develops and operates open-air shopping centers and qualifies as a REIT. At quarter-end it held interests in 511 shopping center properties totaling 84.1 million square feet, plus 376 other property interests. Its strategy emphasizes higher-quality U.S. properties, capital recycling, redevelopment and selective development, while exiting international markets.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $297.2 million | $291.5 million | $590.8 million | $588.7 million |
| Operating income | $65.9 million | $53.7 million | $158.5 million | $152.9 million |
| Net income attributable to Kimco | $143.4 million | $203.4 million | $220.1 million | $344.1 million |
| Net income available to common shareholders; diluted EPS | $131.9 million; $0.31 | $191.9 million; $0.46 | $197.0 million; $0.46 | $321.0 million; $0.77 |
| Cash flow from operations | — | $300.0 million | $215.8 million | |
| Cash and cash equivalents at period-end | — | $143.1 million | $337.8 million |
Margins: Operating margin, calculated as operating income divided by total revenue, was approximately 22.2% in Q2 2017 versus 18.4% in Q2 2016, and 26.8% for the first half versus 26.0%. The filing does not present a comparable net margin measure.
REIT operating measures: Q2 FFO per diluted share was $0.41 versus $0.38; adjusted FFO was $0.38 versus $0.37. First-half FFO per diluted share was $0.78 versus $0.76; adjusted FFO was $0.75 versus $0.74. Same-property NOI increased 0.3% in Q2 and 1.2% for the first half. FFO and NOI are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Debt and liquidity: At June 30, notes payable were $4.520 billion and mortgages payable were $870.1 million, compared with $3.927 billion and $1.139 billion, respectively, at year-end 2016. Kimco issued $400 million of 3.80% senior notes due 2027, repaid a $250 million term loan and paid off $465.5 million of maturing mortgage debt during the first half. Its $2.25 billion revolving credit facility matures in 2021, with extension options to 2022; $475 million was drawn and $0.5 million reserved for letters of credit. The company reported compliance with its debt covenants and had more than 380 unencumbered property interests. Preferred stock had an $800 million aggregate liquidation preference.
Material changes versus the prior period
- Revenue rose 2.0% in Q2 but only 0.3% in the first half. Acquisition and consolidation activity added rental revenue, partly offset by dispositions and tenant vacates.
- GAAP net income and diluted EPS declined, principally because 2016 included substantially larger gains from joint-venture property sales. First-half equity income from joint ventures fell to $27.9 million from $178.6 million.
- Q2 operating income increased, while interest expense declined year over year. First-half operating cash flow increased by $84.2 million to $300.0 million.
- Investing cash flow shifted from $311.3 million provided in first-half 2016 to $147.4 million used in first-half 2017, largely reflecting lower property-sale proceeds and fewer joint-venture liquidations, alongside increased development investment.
- Real estate under development increased to $418.6 million from $335.0 million at year-end. Total assets rose to $11.56 billion; total equity was $5.43 billion.
Outlook, commentary, risks and unusual items
- Management expected to acquire approximately $275–$325 million of operating properties during the remainder of 2017, invest approximately $150–$200 million in redevelopment and re-tenanting, and commit approximately $150–$200 million to development during the remainder of 2017. Estimated costs to complete current development projects were $600–$700 million. Funding was expected from operating cash flow, dispositions and credit-facility availability. No earnings or FFO guidance is provided in the supplied filing text.
- Management described ongoing portfolio transformation and deleveraging as priorities. The company expected regular dividends to continue, subject to quarterly Board review; a $0.27 common dividend was declared for payment in October 2017.
- Unusual first-half items included a $71.2 million gain from changes in control of property interests, $21.6 million of gains on operating-property sales, and $31.3 million of impairment charges. Impairments reflected properties marketed for sale and a property affected by unfavorable local conditions.
- Q2 other-real-estate investment income included a $34.6 million Albertsons-related distribution recognized as income because it exceeded Kimco’s carrying basis. The filing’s adjusted FFO excludes this profit participation.
- Key risks include tenant financial distress or vacancies, local economic and real-estate conditions, rising operating costs and interest rates, refinancing and capital-market access, asset-sale pricing, development execution, and valuation of joint-venture and preferred-equity investments. A 1% increase in short-term rates would have increased first-half interest expense by $2.8 million, based on variable-rate debt balances.
- The company disclosed a continuing SEC and Department of Justice investigation relating to possible Foreign Corrupt Practices Act violations involving Walmart. Kimco stated it could not predict the duration, scope or result. Management reported no other litigation expected to have a material adverse effect and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile GAAP earnings declines with FFO and same-property NOI growth, including the effect of prior-year joint-venture gains and current-period one-time items.
- Review the sustainability of rental growth given tenant vacates, lease expirations and the modest same-property NOI increase.
- Assess debt growth, upcoming maturities, variable-rate exposure, covenant headroom and the company’s stated deleveraging objective.
- Track development and redevelopment spending against budgets, completion costs and expected returns.
- Monitor impairment assumptions, capital recycling proceeds, the Albertsons investment and the outcome of the SEC/DOJ investigation.