Business context and reporting period
Kimco Realty Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Kimco owns and operates neighborhood and community shopping centers and reported interests in 855 shopping-center properties totaling 125.2 million square feet, plus 583 other property interests. Management said its strategy is to focus on North American shopping centers, sell non-core assets, and strengthen the balance sheet over time.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the corresponding 2012 period.
| Metric | Third quarter 2013 | Third quarter 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $241.5 | $222.9 | $716.5 | $664.4 |
| Operating income | $8.7 | $70.8 | $134.1 | $212.3 |
| Income from continuing operations | $42.2 | $43.7 | $186.4 | $170.3 |
| Net income attributable to Kimco | $55.8 | $54.9 | $174.7 | $177.7 |
| Net income available to common shareholders | $41.2 | $27.1 | $131.0 | $113.4 |
| Diluted EPS attributable to Kimco | $0.10 | $0.07 | $0.32 | $0.28 |
| Diluted FFO per share | $0.34 | $0.29 | $1.02 | $0.94 |
| Diluted FFO as adjusted per share | $0.33 | $0.31 | $1.00 | $0.93 |
- Rental-property revenue rose 8.5% in the quarter and 8.2% year to date. Management attributed growth to property acquisitions, leasing and occupancy gains, and development and redevelopment completions. Consolidated shopping-center occupancy was 93.6%, up from 92.7% a year earlier.
- Same Property NOI, a non-GAAP measure, increased 2.3% for the quarter and 3.4% for the nine months. The company attributed the gains primarily to lease-up and rent commencements.
- Rental revenue less rent, real-estate taxes, and operating and maintenance costs was approximately 73.4% of rental revenue in both nine-month periods. This is a simple property-level measure, not Kimco’s reported GAAP operating margin.
- Operating income fell sharply despite higher revenue, principally because operating impairment charges were $74.8 in the quarter and $109.0 for the nine months, compared with none and $0.3, respectively, in the comparable periods.
- Net income available to common shareholders increased in the quarter and nine-month period, while nine-month net income attributable to Kimco declined. Results included significant joint-venture gains and other investment and disposition items; common EPS also reflects preferred dividends.
- Cash provided by operating activities was $533.8 for the nine months, versus $407.6. Investing activities provided $70.3, compared with $130.1 used in 2012; financing activities used $344.3, versus $39.1 provided. Cash and cash equivalents ended the period at $401.7, up from $141.9 at December 31, 2012.
- At September 30, consolidated notes payable were $3,254.9 and mortgages payable were $1,125.8, totaling $4,380.7, compared with $4,195.3 at year-end 2012. Cash was $401.7. Total assets were $9,953.1 and total liabilities were $5,027.0.
- The $1.75 billion revolving credit facility had $153.1 outstanding and $3.8 allocated to letters of credit; Kimco reported $1.6 billion available. The filing states the company complied with its debt covenants. Credit-facility leverage was 41% against a maximum of 60%; fixed-charge coverage was 2.78x against a minimum of 1.50x.
Material changes, outlook, and risks
- Kimco acquired properties with an aggregate purchase price of $473.1 during the nine months and received $248.0 in proceeds from sales of operating properties. It also sold 22 operating properties and three out-parcels, and sold interests in Latin American properties and joint ventures.
- Aggregate impairment charges were $167.2 for the nine months, including $66.9 on consolidated Mexico properties and $17.4 on land parcels. Management said the Mexico impairments reflected advanced sale negotiations and estimates based on expected sale prices; final amounts may change with contract terms, costs, earn-outs, and currency movements.
- Kimco sold its InTown portfolio investment in June but deferred a $21.7 gain because it retained a $145.2 debt guarantee and a commitment to provide up to $145.2 in financing after loan maturity. The guarantee and financing commitment are scheduled to extend beyond the loan’s December 2015 maturity.
- Management expected 2013 spending of approximately $90–$100 on reformatting, re-tenanting, and redevelopment, and $5–$10 on ground-up development. It reported three ground-up development projects. No earnings or FFO guidance was provided in the supplied filing text.
- The board declared a quarterly common dividend of $0.21, paid October 15, 2013, and a $0.225 quarterly dividend payable January 15, 2014, representing a 7.1% annualized increase. Management said it expects to continue regular dividends but reviews dividend policy quarterly.
- Debt actions included issuing $350.0 of 3.125% ten-year notes and $200.0 Canadian-denominated notes at 3.855%, while repaying or refinancing maturing debt. The company also entered a five-year Mexican-peso term loan at TIIE plus 1.35% (5.65% at quarter-end). Variable-rate debt exposure means a 1% rise in short-term rates would have increased nine-month interest expense by an estimated $5.3.
- Kimco identified interest rates, foreign exchange, tenant credit and lease occupancy, financing and refinancing access, asset valuations, acquisition and disposition opportunities, and international and joint-venture exposures as risks. It had $87.2 of cumulative foreign-currency translation losses; substantial liquidation of Latin American investments could require some losses to be recognized in earnings.
- The IRS proposed a $40.9 penalty tax and disallowance of a capital loss related to the Valad share disposal. Kimco disputes the position and intends to defend it; the appeals conference had not been scheduled. The company said resolutions of tax audits in the U.S., Canada, and Mexico were not expected to materially affect its financial statements.
- Kimco received an SEC subpoena in an investigation concerning possible Foreign Corrupt Practices Act violations involving Walmart and said it was cooperating with the SEC and DOJ. The filing did not provide a predictable outcome, duration, or scope. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings and FFO growth reflects recurring property operations versus joint-venture gains, asset sales, tax effects, and other non-recurring items.
- Whether the proposed Mexico property sales close, and the final proceeds, impairment charges, tax effects, and foreign-currency translation impact.
- The status and potential exposure associated with the IRS proposal and the SEC and DOJ investigations.
- Debt maturities, refinancing needs, variable-rate exposure, credit-facility availability, and compliance with financial covenants.
- Whether leasing, occupancy, Same Property NOI, and redevelopment spending support continued operating growth and the declared dividend.