Kimco Realty Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results. Kimco owns, operates, and develops open-air shopping centers; at quarter-end it held interests in 518 shopping centers totaling 84.6 million square feet across 34 U.S. states, Puerto Rico, and Canada.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior quarter-end |
|---|---|---|
| Total revenue | $293.6 million | $297.2 million |
| Operating income | $92.6 million | $99.3 million |
| Net income attributable to Kimco | $76.7 million | $140.7 million |
| Net income available to common shareholders; diluted EPS | $65.2 million; $0.15 | $129.2 million; $0.31 |
| NAREIT FFO per diluted share | $0.37 | $0.38 |
| Adjusted FFO per diluted share | $0.37 | $0.37 |
| Same-property NOI | $232.4 million; up 2.2% | $227.4 million |
| Cash from operating activities | $157.1 million | $137.0 million |
| Cash and cash equivalents | $167.5 million | $142.5 million at Dec. 31, 2016 |
| Notes payable, net | $4.053 billion | $3.927 billion at Dec. 31, 2016 |
| Mortgages payable, net | $1.072 billion | $1.139 billion at Dec. 31, 2016 |
| Total assets | $11.248 billion | $11.231 billion at Dec. 31, 2016 |
Investing activities used $65.4 million, versus $127.8 million provided in Q1 2016; financing activities used $66.7 million, versus $232.3 million used. Rental-property revenue declined 1.3%. Real estate taxes rose 11.0%, while depreciation and amortization increased 8.5%. The filing does not provide a single company-wide operating margin measure.
Kimco’s $2.25 billion unsecured revolving credit facility had $10.0 million outstanding and $0.7 million reserved for letters of credit at quarter-end. It expires in March 2021, with two six-month extension options, and has an accordion feature up to $2.75 billion. The company reported compliance with its debt covenants. Consolidated debt maturities for the remainder of 2017 were estimated at $408.0 million.
Material changes and notable items
- Net income attributable to Kimco fell to $76.7 million from $140.7 million. The prior-year quarter included materially higher gains from joint-venture property sales and operating-property dispositions. Q1 2017 also included a $10.2 million gain on gaining control of two properties previously held in joint ventures.
- Equity income from joint ventures fell to $14.7 million from $69.9 million, mainly reflecting fewer property and interest sales and lower related gains. Preferred-equity and other real estate investment income fell to $3.7 million from $10.8 million, including the absence of $6.9 million of prior-year profit participation.
- Interest expense declined to $46.5 million from $52.5 million, which management attributed to lower borrowing levels and rates. The tax line shifted from a $12.1 million provision to a $0.5 million benefit, primarily due to lower foreign taxes and a prior-year subsidiary restructuring.
- Adjusted FFO per diluted share was unchanged at $0.37; same-property NOI increased 2.2%, supported by leasing and rent commencements and lower credit losses, partly offset by lower other property income.
- Kimco issued $400 million of 3.80% senior unsecured notes due April 2027 and repaid a $250 million term loan and $59.3 million of maturing mortgage debt. Common dividends paid totaled $126.3 million; the quarterly common dividend declared was $0.27 per share.
- The company disposed of four operating properties and two out-parcels for $57.8 million, recognizing a $1.7 million aggregate gain and $1.2 million of impairment charges. It acquired four operating properties or interests for $59.6 million in total consideration.
Outlook, risks, and contingencies
- Management anticipated acquiring approximately $300–$350 million of operating properties during the remainder of 2017, committing approximately $225–$275 million to redevelopment and re-tenanting, and investing approximately $250–$300 million in development projects during 2017. Estimated costs to complete development projects were $650–$700 million. These are plans and estimates, not earnings guidance; the filing provides no clear numerical full-year EPS or FFO guidance.
- Seven U.S. development projects were in progress, with estimated aggregate project costs of $674 million. Funding was expected from operating cash flow and revolving-credit availability, among other sources.
- Management described a strategy of upgrading portfolio quality, recycling capital, simplifying the business, exiting Canada and other non-core international markets, and pursuing U.S. redevelopment and selective development. It stated that it intended to reduce leverage over time.
- Key disclosed risks include tenant financial distress or lease terminations, adverse economic and property conditions, financing and refinancing access, interest and foreign-exchange movements, acquisition and development execution, joint-venture and preferred-equity valuations, operating-cost increases, and possible impairment charges. A 1 percentage-point increase in short-term rates would have increased quarterly interest expense by approximately $0.3 million, based on reported variable-rate debt.
- Kimco disclosed an ongoing SEC investigation and parallel DOJ investigation related to possible Foreign Corrupt Practices Act violations concerning Wal-Mart. The company said it could not predict their duration, scope, or outcome. It reported no other litigation expected by management to have a material adverse effect on its properties taken as a whole.
- Kimco reported $6.8 million of cumulative foreign-currency translation gains related to Canada. A substantial liquidation of its remaining Canadian investment could require recognition of the then-unrealized gain in earnings. Management also warned that accepting disposition prices below carrying values could lead to material impairments.
Important facts for investors to verify
- Whether the decline in GAAP earnings reflects mainly lower transaction-related gains, and how recurring property operations trend alongside adjusted FFO and same-property NOI.
- Progress and realized returns on the stated 2017 acquisition, redevelopment, development, and capital-recycling plans, including project costs and funding needs.
- Debt maturities, refinancing outcomes, covenant headroom, and the effect of interest-rate changes; distinguish Kimco’s consolidated debt from debt in unconsolidated joint ventures.
- Leasing, tenant retention, credit losses, and exposure to the largest tenants; the five largest each represented 1.8%–3.5% of annualized base rent.
- Developments in the SEC/DOJ investigation and any resulting financial, operational, or disclosure consequences.
- Potential Canadian portfolio liquidation, related currency-translation gain recognition, and any additional asset-sale impairments.