Kimco Realty Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed July 29, 2016. Financial statements are unaudited. Kimco is a REIT focused on open-air shopping centers. At quarter-end, it had interests in 537 shopping centers totaling 86.3 million square feet, plus 405 other property interests, primarily preferred-equity and other real estate investments.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $291.5 million | $294.1 million | $588.7 million | $577.5 million |
| Net income attributable to Kimco | $203.4 million | $127.0 million | $344.1 million | $437.3 million |
| Diluted EPS | $0.46 | $0.27 | $0.77 | $0.98 |
| FFO per diluted share | $0.38 | $0.44 | $0.76 | $0.81 |
| FFO as adjusted per diluted share | $0.37 | $0.37 | $0.74 | $0.73 |
| U.S. same-property NOI | $232.5 million | $225.5 million | $457.0 million | $446.0 million |
- Q2 rental-property revenue declined 0.7%; first-half rental-property revenue rose 2.8%. Q2 operating income was $53.7 million versus $92.2 million, reflecting higher impairment charges in 2016.
- U.S. same-property NOI increased 3.1% in Q2 and 2.5% for the first half, primarily from lease-up and rent commencements, with some offset from credit losses.
- Reported earnings were affected by gains and other nonrecurring items. Q2 included $108.7 million of equity income from joint ventures and a $46.5 million gain on change in control of interests. First-half joint-venture income included $143.2 million of the Company’s share of gains on joint-venture property and interest sales. FFO and adjusted FFO provide additional operating-performance measures and are not GAAP liquidity measures.
Balance sheet, cash flow and liquidity
- At June 30, total assets were $11.39 billion and total equity was $5.44 billion. Cash and cash equivalents were $337.8 million, up from $189.5 million at year-end 2015.
- Notes payable were $3.73 billion and mortgages payable were $1.46 billion, totaling $5.19 billion of consolidated debt, down from $5.38 billion at December 31, 2015. Interest expense was $50.5 million for Q2 and $102.9 million for the first half.
- First-half operating cash flow was $215.8 million, versus $286.0 million. Investing activities provided $311.3 million, versus $479.5 million used in 2015; financing activities used $378.9 million, versus $152.0 million provided. Cash increased $148.3 million during the period.
- The $1.75 billion revolving facility had $100.0 million outstanding and $0.8 million allocated for letters of credit; management reported $1.65 billion available. Kimco stated it was compliant with debt covenants. Its reported covenant measures included 39% consolidated indebtedness to total assets and 7.3x income available for debt service to maximum annual debt service.
- First-half dividends paid were $235.5 million. The Board declared a $0.255-per-common-share quarterly dividend for October 2016.
Changes, strategy and outlook
- Kimco’s strategy is to upgrade its U.S. portfolio through acquisitions, dispositions, redevelopment and selective development, while reducing joint ventures and exiting Canada, Mexico and South America. South America’s exit was complete and Mexico’s substantially complete.
- During the first half, Kimco sold 20 consolidated operating properties for $282.3 million, recognizing $66.2 million of after-tax gains and $7.2 million of related impairment charges. It also acquired operating properties and interests for reported aggregate purchase consideration of $244.8 million, including a $46.5 million fair-value gain related to an acquired operating property.
- Management anticipated acquiring approximately $200–$250 million of operating properties during the remainder of 2016; spending $175–$225 million on redevelopment and re-tenanting; and committing $100–$150 million to development projects. Estimated costs to complete the seven in-progress consolidated developments were $280–$300 million. These are expectations, not guarantees.
- Management said operating cash, borrowings, equity and debt-market access were expected to provide needed capital. It cited $238.5 million of consolidated debt maturities for the remainder of 2016 and anticipated funding them with operating cash, the revolver and refinancing.
Material risks, contingencies and unusual items
- Kimco planned an August 1, 2016 merger of taxable subsidiary KRS into a wholly owned LLC to simplify the structure and move qualifying assets into the REIT. The filing said the $66.4 million net deferred tax asset would require a full valuation allowance at the merger, and identified four KRS properties for sale; a $50.7 million impairment was recorded in Q2 in connection with the reassessed holding periods.
- After quarter-end, Kimco called certain notes and a mortgage for early repayment. It anticipated prepayment charges of $26.0 million on Canadian notes, $12.0 million on other notes and $9.8 million on a mortgage. These anticipated charges were not reflected as incurred at June 30.
- Kimco reported an ongoing SEC investigation, with a parallel DOJ investigation, concerning possible Foreign Corrupt Practices Act violations related to Wal-Mart. The Company said it could not predict the investigations’ duration, scope or outcome. It reported no other litigation expected by management to materially affect operations and no material changes to previously disclosed risk factors.
- Principal risks identified include tenant financial distress or lease failures, economic and real-estate conditions, financing and refinancing access, interest and foreign-exchange movements, property and investment valuations, impairments, and execution of acquisitions, dispositions and development.
Investor facts to verify
- How much of Q2 and first-half earnings and joint-venture income arose from property sales, change-in-control gains and other nonrecurring items, versus recurring property operations.
- The realized impact of the KRS merger, the expected deferred-tax valuation allowance, and any subsequent KRS property sales or additional impairments.
- Completion and actual costs of the announced debt redemptions, including prepayment charges, and the financing of 2016 maturities and development commitments.
- Whether same-property NOI growth, leasing activity and management’s acquisition, redevelopment and development plans track the outlook disclosed in this filing.
- Developments in the SEC and DOJ investigations and any resulting financial or operational consequences.