KIM

Business Context and Reporting Period

Company: Kimco Realty Corporation (Kimco)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three and six months ended June 30, 2002

Business Overview: Kimco is a Real Estate Investment Trust (REIT) focused on neighborhood and community shopping centers. The company manages a portfolio of operating properties, development projects, and joint ventures, including the Kimco Income REIT (KIR), the Ward Venture (Montgomery Ward assets), the RioCan Venture (Canadian properties), and the Kimco Retail Opportunity Fund (KROP).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Rental revenues decreased 1.9% ($2.2 million) for the quarter and 3.3% ($7.9 million) for the six months compared to 2001. This was primarily driven by the bankruptcy of Kmart and Ames Department Stores, resulting in lease rejections and a drop in occupancy from 92% to 85%.
• Expense Increases: Rental property expenses increased 5.8% for the quarter and 1.7% for the six months. Increases were largely due to the Company assuming real estate tax payments for Kmart-anchored locations previously paid by the tenant, as well as higher professional fees related to tenant bankruptcies.
• Joint Venture Income Surge: Equity in income from other real estate joint ventures increased significantly ($5.3 million for the quarter; $10.9 million for six months). This was driven by profits from the Montgomery Ward asset designation rights transaction, the RioCan Venture, and the KROP joint venture.
• Net Income Growth: Despite lower rental revenues, Net Income increased to $61.1 million (quarter) and $121.9 million (six months) compared to $59.4 million and $115.4 million in 2001, respectively. This improvement was offset by gains from joint ventures and investment income.

Outlook, Risks, and Management Commentary

• Kmart Bankruptcy Impact: As of June 30, 2002, Kmart had rejected leases at 27 locations, representing approximately $29.5 million in annualized base rental revenues. The Company is actively marketing these sites but notes no assurance of leasing them at comparable rents. The Company expects to file claims for lost rent equal to three years of obligations, subject to Kmart's reorganization plan.
• Liquidity and Capital Structure: Management maintains a conservative capital structure with a target debt-to-market cap of 50% or less (currently 28%). The Company has $140.0 million outstanding on a $250.0 million revolving credit facility and established an additional $150.0 million facility in July 2002.
• Dividend Policy: The Company intends to maintain regular dividends to qualify as a REIT, funded by operating cash flows. Management aims for a conservative payout ratio to reserve capital for expansion and debt reduction.
• Market Risks: The Company faces risks related to general economic conditions, tenant insolvency (specifically Kmart), financing availability, and interest rate volatility. Approximately $367.2 million of floating-rate debt is outstanding, with $210.0 million hedged via interest rate swaps.

Investor Verification Checklist

• Kmart Lease Rejection Recovery: Verify the progress of leasing the 27 Kmart-rejected locations and the likelihood of recovering the $29.5 million in annualized revenue.
• Joint Venture Profitability: Assess the sustainability of the high income from the Ward Venture, RioCan, and KROP, as these are significant drivers of current earnings.
• Occupancy Trends: Monitor the portfolio occupancy rate (currently 85%) to ensure it stabilizes or improves following the Kmart and Ames bankruptcies.
• Debt Maturities and Hedging: Review the maturity schedule of the $1.175 billion in notes payable and the effectiveness of the interest rate swaps covering $210 million of floating-rate debt.
• Development Pipeline: Evaluate the status of the "Real estate under development" ($238.3 million) and the timeline for completion and sale of these projects.