Kimco Realty Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Kimco owns and operates open-air shopping centers; at quarter-end it had interests in 534 centers totaling 86.3 million square feet, plus 390 other property interests. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $285.1 | $288.4 | $873.8 | $865.9 |
| Operating income | $76.1 | $75.0 | $229.0 | $261.2 |
| Net income (loss) attributable to Kimco | $(43.5) | $77.6 | $300.6 | $514.9 |
| Common diluted EPS | $(0.13) | $0.15 | $0.63 | $1.14 |
| FFO per diluted common share | $0.18 | $0.40 | $0.94 | $1.21 |
| Adjusted FFO per diluted common share | $0.38 | $0.36 | $1.12 | $1.09 |
- Cash flow, nine months: Operating activities provided $444.5, versus $462.6 in 2015. Investing activities provided $248.2, versus $465.5 used in 2015. Financing activities used $711.8, versus $3.6 in 2015. Cash ended at $170.5, down from $189.5 at year-end 2015.
- Balance sheet: Total assets were $11.21 billion; total liabilities were $5.69 billion. Notes payable were $3.79 billion and mortgages payable $1.21 billion. Stockholders’ equity was $5.30 billion.
- Liquidity and debt: The company had a $1.75 billion unsecured revolving facility, with $225 million drawn and $0.7 million allocated to letters of credit. It also had a $650 million term loan maturing January 2017, with three one-year extension options. The filing reports compliance with debt covenants. Cash plus short-term marketable securities totaled $178.7 million.
- Operating performance: U.S. same-property NOI rose 3.3% in Q3 and 2.9% for the first nine months year over year. Rental-property revenue fell 1.4% in Q3 but increased 1.4% year to date.
Changes versus prior periods
- Q3 shifted from $77.6 million of company-attributable net income to a $43.5 million loss. Nine-month attributable income declined to $300.6 million from $514.9 million.
- The filing attributes much of the earnings decline to a $63.5 million deferred-tax valuation allowance following the KRS merger, $45.7 million of debt-extinguishment charges, higher impairments, and lower gains on property and securities sales. Q3 also had lower property-sale gains and lower investment income than the comparable quarter.
- Nine-month impairment charges increased to $68.1 million from $28.0 million. Rental-property revenue growth year to date reflected acquisitions, redevelopment and leasing gains, partly offset by dispositions.
- Interest expense fell to $149.5 million for nine months from $162.7 million. The company issued $650 million of notes and repaid or prepaid unsecured and mortgage debt; total debt balances were lower in mortgages but slightly higher in notes versus year-end.
- Nine-month common dividends paid were $354.1 million, versus $340.7 million. Common shares outstanding increased from 413.4 million at year-end to 425.0 million, including issuance through the ATM program.
Outlook, management commentary, risks and unusual items
- Management’s strategy is to upgrade the portfolio through dispositions and selective U.S. acquisitions, reduce joint-venture exposure, exit international markets, and invest in redevelopment and development. It reported that the South American exit was complete and the Mexico exit substantially complete.
- For the remainder of 2016, Kimco anticipated $240–$275 million of operating-property acquisitions, $100–$125 million of redevelopment and re-tenanting commitments, and $100–$125 million of development commitments. Estimated costs to complete six development projects were $270–$300 million. The filing provides no formal earnings or FFO guidance.
- The board declared a quarterly common dividend of $0.27 per share in October 2016, a 5.9% annualized increase, payable in January 2017. Management said dividends are expected to continue, subject to quarterly board review.
- Debt refinancing included $500 million of 2.8% notes due 2026, used partly to redeem $290.9 million of 5.70% notes due 2017. Early debt repayments generated $45.7 million of charges. Management cited functioning unsecured debt markets and said it believed viable financing and refinancing alternatives were available.
- Three properties were held for sale at a carrying value of $13.4 million. Nine-month impairment charges included $50.7 million related to assets in KRS reevaluated after the merger, as well as impairments connected to dispositions and the capital-recycling program.
- Mexican tax authorities assessed former property-holding entities for $33.7 million in taxes, $16.6 million in interest and $11.4 million in penalties. Kimco appealed, believes no amounts are payable and intends to defend its position; the outcome is uncertain.
- Kimco disclosed an ongoing SEC and DOJ investigation related to possible Foreign Corrupt Practices Act violations involving Walmart. It said it could not predict the investigation’s duration, scope or result. The filing reported no material changes to previously disclosed risk factors.
- Other risks cited include tenant distress or lease terminations, property and investment valuations, financing and refinancing access, interest and foreign-exchange fluctuations, operating-cost increases, and execution of acquisitions, dispositions and development. A $38 million balance on two non-recourse mortgages was in default; the company was working with special servicers on resolution.
Important facts for investors to verify
- How much of the Q3 and year-to-date earnings decline reflects nonrecurring tax and debt charges, versus underlying property operations; compare GAAP results with FFO and adjusted FFO.
- Leasing, occupancy and same-property NOI trends, and whether the planned acquisitions, redevelopment and development commitments meet return and funding expectations.
- Debt maturities and refinancing plans, especially the January 2017 term loan, the defaulted $38 million mortgages, and joint-venture maturities.
- Potential exposure and timing of resolution for the Mexican tax assessments and the SEC/DOJ investigation.
- Progress and proceeds from international and other asset dispositions, including any further impairment risk and recognition of the Canadian currency translation gain.
- Impact of ATM share issuance and the increased dividend on per-share cash generation and capital allocation.