million has been established for a portion of these deferred tax assets.
On October 31, 2006, the Company completed the merger of Pan Pacific Retail Properties Inc. (“Pan Pacific”), which had a total transaction value of approximately $4.1 billion, including Pan Pacific’s outstanding debt totaling approximately $1.1 billion. As of October 31, 2006, Pan Pacific owned interests in 138 operating properties, which comprised approximately 19.9 million square feet of GLA, located primarily in California, Oregon, Washington and Nevada.
Immediately following the merger, the Company commenced its joint venture agreements with Prudential Real Estate Investors (“PREI”) though three separate accounts managed by PREI. In accordance with the joint venture agreements, all Pan Pacific assets and respective non-recourse mortgage debt and a newly obtained $1.2 billion credit facility used to fund the transaction were transferred to the separate accounts. PREI contributed approximately $1.1 billion on behalf of institutional investors in three of its portfolios. The Company holds a 15% non-controlling ownership interest in each of the joint ventures, collectively, KimPru, with a total aggregate investment at closing of approximately $194.8 million. The Company accounts for its investment in KimPru under the equity method of accounting. In addition, the Company will manage the portfolios and earn acquisition fees, leasing commissions, property management fees and construction management fees. For the three months ended March 31, 2007, the Company earned management fees of approximately $2.7 million and other transaction related fees of approximately $6.0 million.
During the three months ended March 31, 2007, KimPru sold four operating properties, in separate transactions, for an aggregate sales price of approximately $94.3 million.
As of March 31, 2007, the KimPru portfolio was comprised of 133 shopping center properties aggregating approximately 19.4 million square feet of GLA located in 8 states.
During January 2007, the Company and PREI entered into a new joint venture in which the Company holds a 15% non-controlling interest, which acquired 16 operating properties, aggregating 3.3 million square feet of GLA, for an aggregate purchase price of approximately $822.5 million including the assumption of approximately $487.0 million in non-recourse mortgage debt. Six of these properties were transferred from a joint venture in which the Company held a 5% non-controlling ownership interest. One of the properties was transferred from a joint venture in which the Company held a 30% non-controlling ownership interest. As a result of this transaction, the Company recognized profit participation of
approximately $3.7 million and recognized 15% of its share of the gain. The Company will manage these properties and accounts for its investment in this joint venture under the equity method of accounting.
Kimco Income REIT (“KIR”) - -
The Company holds a non-controlling limited partnership interest in KIR and accounts for its investment under the equity method of accounting. Effective July 1, 2006, the Company acquired an additional 1.7% limited partnership interest in KIR, which increased the Company’s non-controlling interest to approximately 45.0%. The Company’s equity in income of KIR for the three months ended March 31, 2007 and 2006 was approximately $6.9 million and $6.4 million, respectively, which includes the Company’s share of gains from property sales of approximately $1.0 million and $0.7 million, respectively.
During the three months ended March 31, 2007, KIR disposed of an operating property for an aggregate sales price of approximately $11.8 million. This sale resulted in an aggregate gain of approximately $2.1 million of which the Company’s share was approximately $1.0 million.
In addition, KIR has a master management agreement with the Company, whereby, the Company performs services for fees relating to the management, operation, supervision and maintenance of the joint venture properties. For each of the three months ended March 31, 2007 and 2006, the Company earned management fees of approximately $0.7 million and $0.8 million, respectively.
As of March 31, 2007, the KIR portfolio was comprised of 65 properties aggregating 14.0 million square feet of GLA located in 19 states.
KROP Venture -
During 2001, the Company formed a joint venture (the “Kimco Retail Opportunity Portfolio” or “KROP”) with GE Capital Real Estate (“GECRE”), in which the Company has a 20% non-controlling interest and manages the portfolio. The Company accounts for its investment in KROP under the equity method of accounting.
During the three months ended March 31, 2007, KROP sold four operating properties for an aggregate sales price of approximately $82.9 million. These sales resulted in an aggregate gain of $20.0 million.
Additionally, during the three months ended March 31, 2007, KROP sold an operating property to the Company for an aggregate sales price of approximately $21.4 million including the assumption of $10.7 million in non-recourse mortgage debt. The Company’s share of the gain related to this transaction has been deferred.
As of March 31, 2007, the KROP portfolio was comprised of 20 shopping center properties aggregating approximately 2.7 million square feet of GLA located in 8 states. For the three months ended March 31, 2007, the Company recognized equity in income of KROP of approximately $11.0 million, including profit participation of approximately $6.7 million and gain on sale of $4.0 million. The Company recognized approximately $0.7 million of equity in income during the corresponding period in 2006. Additionally, during the three months ended March 31, 2007 and 2006, the Company earned management fees of approximately $0.7 million and $0.9 million, respectively. Also, the Company earned acquisition/disposition fees of approximately $0.3 million during the three months ended March 31, 2007.
During August 2006, the Company and GECRE agreed to market for sale the remaining properties within the KROP venture.
Kimco/UBS Joint Ventures (“KUBS”) -
The Company has joint venture investments with UBS Wealth Management North American Property Fund Limited (“UBS”) in which the Company has non-controlling interests ranging from 15% to 20%. These joint ventures, (collectively “KUBS”), were established to acquire high quality retail properties primarily financed through the use of individual non-recourse mortgages. Capital contributions are only required as suitable opportunities arise and are agreed to by the Company and UBS. The Company manages the properties and accounts for its investment in these joint ventures under the equity method of accounting.
During January 2007, KUBS acquired an operating property for an aggregate purchase price of approximately $43.6 million, which included the assumption of approximately $24.8 million of non-recourse debt.
As of March 31, 2007, the KUBS portfolio was comprised of 32 operating properties aggregating approximately 5.2 million square feet of GLA located in 11 states. For the three months ended March 31, 2007 and 2006, the Company recognized equity in income of KUBS of approximately $0.2 million and $0.1 million, respectively. Additionally, during the three months ended March 31, 2007 and 2006, the Company earned management fees of approximately $1.3 million and $0.4 million, respectively.
Other Real Estate Joint Ventures -
During the three months ended March 31, 2007, the Company acquired, in separate transactions, four operating properties, through joint ventures in which the Company has non-controlling interests. These properties were acquired for an aggregate purchase price of approximately $108.9 million, including the assumption of approximately $30.6 million of non-recourse mortgage debt encumbering three of the properties. The Company accounts for its investment in these joint ventures
under the equity method of accounting. The Company’s aggregate investment in these joint ventures was approximately $12.0 million. Details of these transactions are as follows (in thousands):
| | | | Purchase Price
| |
Property Name
| Location
| Month
Acquired
| Cash
| Debt
| Total
| GLA
|
| | | | | | | |
| Cypress Towne Center (Phase I) | Houston, TX | Jan-07 (1) | $ 2,175 | $ 4,039 | $ 6,214 | 30 |
| | | | | | | |
| Perimeter Expo | Atlanta, GA | Mar-07 | 62,150 | — | 62,150 | 176 |
| | | | | | | |
| Cranberry Commons (Phase I) | Pittsburgh, PA | Mar-07 (2) | 9,961 | 18,500 | 28,461 | 150 |
| | | | | | | |
| Westgate Plaza | Tampa, FL | Mar-07 (2) | 4,000 | 8,100 | 12,100 | 100 |
| | | |
|
|
|
|
| | | | $ 78,286 | $ 30,639 | $108,925 | 456 |
| | | |
|
|
|
|
| (1) | | This property was transferred from KDI. |
| (2) | | These properties were transferred from ventures in which the Company had preferred equity investments. |
During January 2007, the Company transferred 50% of its 100% interest in a development property in Mexicali, Mexico, to a joint venture partner for approximately $6.3 million, which approximated its carrying value. As a result of this transaction, the Company has deconsolidated this entity and accounts for its remaining 50% interest under the equity method of accounting.
During the three months ended March 31, 2007, joint ventures in which the Company has non-controlling interests disposed of, in separate transactions, two properties for an aggregate sales price of approximately $125.5 million. These sales resulted in an aggregate gain of approximately $26.5 million, of which the Company’s share was approximately $12.7 million.
The Company’s maximum exposure to losses associated with its Investments and advances in real estate joint ventures is primarily limited to its carrying value in these investments. As of March 31, 2007, the Company’s carrying value in these investments approximated $1.1 billion.
7. Other Real Estate Investments
Preferred Equity Capital -
The Company maintains a preferred equity program, which provides capital to developers and owners of real estate. During the three months ended March 31, 2007, the Company provided an aggregate of approximately $27.1 million in
investment capital to developers and owners of 17 real estate properties. As of March 31, 2007, the Company’s net investment under the Preferred Equity program was approximately $415.0 million relating to 228 properties. During the three months ended March 31, 2007, the Company earned from these investments approximately $12.5 million, including $3.3 million in profit participation earned from four capital transactions. During the three months ended March 31, 2006, the Company earned approximately $9.9 million from these investments including $4.1 million in profit participation earned from two capital transactions.
Two of the capital transactions described above for the three months ended March 31, 2007, were the result of the transfer of two operating properties, in separate transactions, to a joint venture in which the Company holds a 15% non-controlling interest for an aggregate price of approximately $40.6 million, including the assumption of approximately $26.6 million in non-recourse debt. These sales resulted in an aggregate profit participation of approximately $1.4 million.
Additionally, included in the capital transactions described above for the three months ended March 31, 2007, is the transfer of an operating property to the Company for approximately $4.5 million, including the assumption of $3.1 million in non-recourse mortgage debt. As a result of the Company’s continued ownership interest, the Company did not recognize any profit participation.
8. Mortgages and Other Financing Receivables
During January 2007, the Company provided approximately $7.0 million as its participation share of a $26.0 million one year bridge loan to a real estate developer. This loan bears interest at a blended fixed rate of 13% per annum and is collateralized by the real estate interest of the developer and is partially guaranteed by the developer. As of March 31, 2007, the Company’s outstanding balance on this loan participation was approximately $7.0 million.
During February 2007, the Company provided MXP 87.7 million (approximately USD $8.0 million) in two tranches to an owner of an operating property located in Guadalajara, Mexico. The loan, which is collateralized by the property, bears interest at 11% per annum. The tranches, MXP 10.8 million and MXP 76.9 million, are scheduled to mature in 2008 and 2017, respectively. The Company is entitled to a participation feature of 20% of annual cash flows after debt service and 20% of proceeds from sale or re-finance of the property. As of March 31, 2007, the outstanding balance on this loan was approximately MXP 87.7 million (approximately USD $7.9 million).
Additionally during February 2007, the Company provided a $13.0 million loan to an owner of a shopping center located in Mexico City, Mexico. The loan bears interest at LIBOR plus 2.75% and matures in August 2007. As of March 31, 2007, the outstanding balance on this loan was approximately $13.0 million.
9. Supplemental Schedule of Non-Cash Investing / Financing Activities
The following schedule summarizes the non-cash investing and financing activities of the Company for the three months ended March 31, 2007 and 2006 (in thousands):
| 2007
| 2006
|
|---|
| Acquisition of real estate interests by issuance of the | | | | | |
| Company's common stock and/or assumption of mortgage | |
| debt | | $34,713 | | $105,483 | |
| Acquisition of real estate interests by issuance of | |
| redeemable units | | $ — | | $113,493 | |
| Proceeds held in escrow through sale of real estate | |
| interests | | $ 8,144 | | $ 37,051 | |
| Acquisition of real estate interests through proceeds | |
| held in escrow | | $ — | | $ 19,218 | |
| | |
| Declaration of dividends paid in succeeding period | | $93,607 | | $ 82,258 | |
10. Incentive Plans
The Company maintains an equity participation plan (the “Plan”) pursuant to which a maximum of 42,000,000 shares of the Company’s common stock may be issued for qualified and non-qualified options and restricted stock grants. Unless otherwise determined by the Board of Directors at its sole discretion, options granted under the Plan generally vest ratably over a three or five year term, expire ten years from the date of grant and are exercisable at the market price on the date of grant. Restricted stock grants vest 100% on the fifth anniversary of the grant. In addition, the Plan provides for the granting of certain options to each of the Company’s non-employee directors (the “Independent Directors”) and permits such Independent Directors to elect to receive deferred stock awards in lieu of directors’ fees.
Effective January 1, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). Accordingly, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.
The Company recognized stock options expense of $1.6 million and $1.4 million for the three months ended March 31, 2007 and 2006, respectively. As of March 31, 2007, the Company had $18.0 million of total unrecognized compensation cost related to unvested stock compensation granted under the Company’s Plan. That
cost is expected to be recognized over a weighted average period of approximately 2.7 years.
11. Pro Forma Financial Information
As discussed in Note 2, the Company and certain of its affiliates acquired and disposed of interests in certain operating properties during the three months ended March 31, 2007. The pro forma financial information set forth below is based upon the Company’s historical Condensed Consolidated Statements of Income for the three months ended March 31, 2007 and 2006, adjusted to give effect to these transactions at the beginning of each year.
The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of each year, nor does it purport to represent the results of future operations. (Amounts presented in millions, except per share figures.)
| Three Months ended March 31,
|
|---|
| 2007
| 2006
|
|---|
| Revenues from rental property | | $ 159.4 | | $ 139.5 | |
| Income before extraordinary gain | | $ 100.1 | | $ 79.9 | |
| Net income | | $ 141.7 | | $ 79.9 | |
| | |
| Income before extraordinary gain per common share: | |
| Basic | | $ 0.39 | | $ 0.34 | |
|
| |
| |
| Diluted | | $ 0.38 | | $ 0.33 | |
|
| |
| |
| Net income per common share: | |
| Basic | | $ 0.55 | | $ 0.34 | |
|
| |
| |
| Diluted | | $ 0.54 | | $ 0.33 | |
|
| |
| |
12. Subsequent Event
During April 2007, the Company issued $300.0 million of ten-year Senior Unsecured Notes at an interest rate of 5.70% per annum payable semi-annually in arrears. The Notes were sold at 99.984% of par value. Net proceeds from the issuance were approximately $297.8 million, after related transaction costs of approximately $2.2 million. The proceeds from this issuance were primarily used to repay a portion of the outstanding balance under the Company’s U.S. revolving credit facility and for general corporate purposes.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This quarterly report on Form 10-Q, together with other statements and information publicly disseminated by the Company contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations include, but are not limited to, (i) general economic and local real estate conditions, (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or general downturn in their business, (iii) financing risks, such as the inability to obtain equity, debt or other sources of financing on favorable terms, (iv) changes in governmental laws and regulations, (v) the level and volatility of interest rates, (vi) the availability of suitable acquisition opportunities and (vii) increases in operating costs. Accordingly, there is no assurance that the Company’s expectations will be realized.
The following discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto. These unaudited financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods presented, and all such adjustments are of a normal recurring nature.
Executive Summary
Kimco Realty Corporation is one of the nation’s largest publicly-traded owners and operators of neighborhood and community shopping centers. As of April 23, 2007, the Company had interests in 1,365 properties, totaling approximately 175 million square feet of gross leaseable area (“GLA”) located in 45 states, Canada, Mexico, Chile and Puerto Rico.
The Company is self-administered and self-managed through present management, which has owned and managed neighborhood and community shopping centers for over 45 years. The executive officers are engaged in the day-to-day
management and operation of real estate exclusively with the Company, with nearly all operating functions, including leasing, asset management, maintenance, construction, legal, finance and accounting administered by the Company.
The Company, through its taxable REIT subsidiaries, is engaged in various retail real estate-related opportunities including (i) merchant building, through its Kimco Developers, Inc. (“KDI”) subsidiary, which is primarily engaged in the ground-up development of neighborhood and community shopping centers and the subsequent sale thereof upon completion, (ii) retail real estate advisory and disposition services, which primarily focuses on leasing and disposition strategies of retail real estate controlled by both healthy and distressed and/or bankrupt retailers and (iii) acting as an agent or principal in connection with tax deferred exchange transactions. The Company will consider other investments through taxable REIT subsidiaries should suitable opportunities arise.
In addition, the Company continues to capitalize on its established expertise in retail real estate by establishing other ventures in which the Company owns a smaller equity interest and provides management, leasing and operational support for those properties. The Company also provides preferred equity capital for real estate entrepreneurs and provides real estate capital and advisory services to both healthy and distressed retailers. The Company also makes selective investments in secondary market opportunities where a security or other investment is, in management’s judgment, priced below the value of the underlying real estate.
The Company’s strategy is to maintain a strong balance sheet while investing opportunistically and selectively. The Company intends to continue to execute its plan of delivering solid growth in earnings and dividends.
Results of Operations
Revenues from rental property increased $21.1 million or 15.4% to $158.3 million for the three months ended March 31, 2007, as compared with $137.2 million for the corresponding quarter ended March 31, 2006. This net increase resulted primarily from the combined effect of (i) the acquisition of operating properties during 2006 and the three months ended March 31, 2007, providing incremental revenue for the three months ended March 31, 2007 of $22.6 million, (ii) an overall increase in shopping center portfolio occupancy to 95.6% at March 31, 2007, as compared to 94.6% at March 31, 2006 and the completion of certain development and redevelopment projects and tenant buyouts providing incremental revenues of approximately $2.2 million for the three months ended March 31, 2007 as compared to the corresponding period last year, offset by (iii) a decrease in revenues of approximately $3.7 million for the three months ended March 31, 2007, as compared to the corresponding period last year, resulting from the transfer of operating properties to various unconsolidated joint venture entities and the sale of certain properties during 2006 and the three months ended March 31, 2007.
Rental property expenses, including depreciation and amortization, increased $19.2 million or 29.4% to $84.4 million for the three months ended March 31, 2007, as compared to $65.2 million for the corresponding quarter ended March 31, 2006. This increase is primarily due to operating property acquisitions during 2007 and 2006 which were partially offset by operating property dispositions including those transferred to various joint venture entities.
Management and other fee income increased approximately $9.7 million for the three months ended March 31, 2007, as compared to the corresponding period in 2006. This increase is primarily due to increased property management fees and other transaction related fees related to the growth in the Company’s co-investment programs.
General and administrative expenses increased approximately $6.0 million to $22.7 million for the three months ended March 31, 2007, as compared to $16.7 million in the corresponding period in 2006. This increase is primarily due to personnel related costs, including the non-cash expensing of stock options granted, attributable to the growth of the Company.
Interest, dividends and other investment income decreased approximately $6.0 million to $6.2 million for the three months ended March 31, 2007, as compared to $12.3 million for the corresponding period in 2006. This decrease is primarily due to a decrease in realized gains of approximately $7.8 million resulting from the sale of certain marketable securities during the corresponding period in 2006, offset by an increase of approximately $1.6 million in interest income.
Other (expense)/income, net decreased $15.6 million to $3.7 million of an expense for the three months ended March 31, 2007, as compared to income of $11.9 million for the three months ended March 31, 2006. This decrease results primarily from the distribution of Sears Holdings Corp. common stock received in 2006 as partial settlement of the Company’s Kmart pre-petition claims.
Interest expense increased $6.7 million to $46.3 million for the three months ended March 31, 2007 as compared to $39.6 million for the corresponding period in 2006. This increase was due to higher interest rates and higher outstanding levels of debt during this period as compared to the same period in the preceding year.
Benefit/(provision) for income taxes increased $31.7 million to a benefit of $30.1 million for the three months ended March 31, 2007, as compared to a provision of $1.6 million in the corresponding period in 2006. This increase is primarily due to the reduction of approximately $24.4 million of NOL valuation allowance and a tax benefit of approximately $7.8 million from operating losses recognized in connection with the Albertson’s investment.
Income from other real estate investments decreased $3.8 million to $14.5 million for the three months ended March 31, 2007, as compared to $18.3 million for the corresponding quarter ended March 31, 2006. This decrease is primarily due to a decrease in earnings from FNC resulting from the sale of certain properties in the corresponding period in 2006, offset by an increase in earnings resulting from the Company’s Preferred Equity program which contributed income of approximately $12.5 million, including $3.3 million of profit participation earned from four capital transactions, for the quarter ended March 31, 2007, as compared to $9.9 million, including $4.1 million of profit participation earned from two capital transactions for the corresponding quarter ended March 31, 2006.
Equity in income of real estate joint ventures, net increased $13.4 million to $30.2 million for the three months ended March 31, 2007, as compared to $16.8 million for the corresponding quarter ended March 31, 2006. This increase is primarily attributable to (i) increased equity in income from the Kimco Retail Opportunity Portfolio joint venture investment (“KROP”) primarily resulting from profit participation of approximately $6.7 million and gains from the sale of four operating properties during 2007 of which the pro-rata share of gains to the Company were $4.0 million for the three months ended March 31, 2007, (ii) increase in equity in income of $11.5 million resulting from the sale of an operating property held in a joint venture in which the Company had a non-controlling interest, and (iii) the Company’s growth of its various other real estate joint ventures due to additional capital investments for the acquisition of additional operating properties by the ventures throughout 2006 and the three months ended March 31, 2007, partially offset by (iv) operating losses from the Albertson’s joint venture investment of approximately $19.5 million.
During the three months ended March 31, 2007, KDI sold, in separate transactions, five out-parcels and the residential component of a project for approximately $36.3 million and received approximately $1.3 million of proceeds from completed earn-out requirements on a previously sold project. These transactions resulted in gains of approximately $2.4 million, net of income taxes of $1.6 million.
During the three months ended March 31, 2006, KDI sold ten out-parcels, in separate transactions, for approximately $11.5 million and received approximately $5.1 million of proceeds from completed earn-out requirements on three previously sold projects. These sales resulted in gains of approximately $1.8 million, net of income taxes of $1.2 million.
During the three months ended March 31, 2007, the Company disposed of two operating properties and a portion of one operating property, in separate transactions, for an aggregate sales price of approximately $13.0 million, which resulted in an aggregate gain of approximately $3.5 million, net of income tax of approximately $0.5 million.
During the three months ended March 31, 2006, the Company (i) disposed of, one operating property for a sales price of $37.8 million which resulted in a gain of approximately $11.6 million and (ii) transferred another operating property to a joint venture in which the Company has a 20% non-controlling interest for a price of approximately $29.8 million.
Net income for the three months ended March 31, 2007 was $153.8 million, as compared to $96.2 million for the three months ended March 31, 2006. On a diluted per share basis, net income increased $0.19 to $0.59 for the three month period ended March 31, 2007, as compared to $0.40 for the corresponding quarter in the previous year. This increase is attributable to (i) a contribution of approximately $56.5 million related to the Albertson’s investment monetization, (ii) an increase in revenues from rental properties primarily due to the acquisition of operating properties during 2006 and the three months ended March 31, 2007 and (iii) an increase in equity in income of real estate joint ventures achieved from profit participation and gains on sale of joint venture operating properties and additional capital investments in the Company’s joint venture programs for the acquisition of additional operating properties throughout 2007 and 2006, partially offset by, (iv) a decrease in income resulting from the sale of certain marketable securities during the prior corresponding period in 2006.
Tenant Concentration
The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its properties, avoiding dependence on any single property, and a large tenant base. At March 31, 2007, the Company’s five largest tenants were The Home Depot, TJX Companies, Sears Holdings, Kohl’s, and Wal-Mart, which represented approximately 3.5%, 2.8%, 2.4%, 2.2% and 2.1%, respectively, of the Company’s annualized base rental revenues including the proportionate share of base rental revenues from properties in which the Company has less than a 100% economic interest.
Liquidity and Capital Resources
The Company’s cash flow activities are summarized as follows (in millions):
| Three Months Ended
March 31,
|
|---|
| 2007
| 2006
|
|---|
| Net cash flow provided by operating activities | | $ 196.5 | | $ 133.1 | |
| Net cash flow used for investing activities | | $(324.5 | ) | $(524.5 | ) |
| Net cash flow (used for) provided by financing activities | | $(97.0 | ) | $ 473.9 | |
Operating Activities
The Company anticipates that cash flows from operating activities will continue to provide adequate capital to fund its operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with REIT requirements in both the short term and long term. In addition, the Company anticipates that cash on hand, borrowings under its revolving credit facilities, issuance of equity and public debt, as well as other debt and equity alternatives, will provide the necessary capital required by the Company. Net cash flow provided by operating activities for the three months ended March 31, 2007, was primarily attributable to (i) cash flow from the diverse portfolio of rental properties, (ii) the acquisition of operating properties during 2007 and 2006, (iii) new leasing, expansion and re-tenanting of core portfolio properties and (iv) growth in the Company’s joint venture and Preferred Equity programs.
Investing Activities
Acquisitions and Redevelopments -
During the three months ended March 31, 2007, the Company expended approximately $138.0 million towards acquisition of and improvements to operating real estate.
The Company has an ongoing program to reformat and re-tenant its properties to maintain or enhance its competitive position in the marketplace. During the three months ended March 31, 2007, the Company expended approximately $15.8 million in connection with these major redevelopments and re-tenanting projects. The Company anticipates its capital commitment toward these and other redevelopment projects during 2007 will be approximately $125.0 million to $150.0 million. The funding of these capital requirements will be provided by cash flow from operating activities and availability under the Company’s revolving lines of credit.
Investments and Advances to Joint Ventures -
During the three months ended March 31, 2007, the Company expended approximately $57.9 million for investments and advances to real estate joint ventures and received approximately $49.2 million from reimbursements of advances to real estate joint ventures. In addition, the Company received approximately $51.5 million from reimbursement of other investments.
Ground-up Development -
The Company is engaged in ground-up development projects which consist of (i) merchant building through the Company’s wholly-owned taxable REIT subsidiary, KDI, which develops neighborhood and community shopping centers and
the subsequent sale thereof upon completion, (ii) U.S. ground-up development projects which will be held as long-term investments by the Company and (iii) various ground-up development projects located in Mexico for long-term investment. The ground-up development projects generally have substantial pre-leasing prior to the commencement of construction. As of March 31, 2007, the Company had in progress a total of 50 ground-up development projects including 25 merchant building projects, eight U.S. ground-up development projects, and 17 ground-up development projects located throughout Mexico.
During the three months ended March 31, 2007, the Company expended approximately $193.5 million in connection with the purchase of land and construction costs related to these projects. These projects are currently proceeding on schedule and substantially in line with the Company’s budgeted costs. The Company anticipates its capital commitment during 2007 toward these and other development projects will be approximately $550 million to $600 million. The proceeds from the sales of the completed ground-up development projects, proceeds from construction loans and availability under the Company’s revolving lines of credit are expected to be sufficient to fund these anticipated capital requirements.
Dispositions and Transfers -
During the three months ended March 31, 2007, the Company received net proceeds of approximately $39.6 million relating to the sale of various operating properties and ground-up development projects and approximately $12.0 million from the transfer of operating properties to various joint ventures.
Financing Activities
It is management’s intention that the Company continually has access to the capital resources necessary to expand and develop its business. As such, the Company intends to operate with and maintain a conservative capital structure with a level of debt to total market capitalization of 50% or less. As of March 31, 2007, the Company’s level of debt to total market capitalization was 22%. In addition, the Company intends to maintain strong debt service coverage and fixed charge coverage ratios as part of its commitment to maintaining its investment-grade debt ratings. The Company may, from time-to-time, seek to obtain funds through additional equity offerings, unsecured debt financings and/or mortgage/construction loan financings and other capital alternatives in a manner consistent with its intention to operate with a conservative debt structure.
Since the completion of the Company’s IPO in 1991, the Company has utilized the public debt and equity markets as its principal source of capital for its expansion needs. Since the IPO, the Company has completed additional offerings of its public unsecured debt and equity, raising in the aggregate over $5.2 billion for the purposes of, among other things, repaying indebtedness, acquiring interests in neighborhood and community shopping centers, funding ground-up development
projects, expanding and improving properties in the portfolio and other investments.
The Company has an $850.0 million unsecured revolving credit facility, which is scheduled to expire in July 2008. This credit facility has made available funds to both finance the purchase of properties and other investments and meet any short-term working capital requirements. As of March 31, 2007, there was no outstanding balance under this credit facility.
Additionally, the Company has a Canadian denominated (“CAD”) $250.0 million unsecured credit facility with a group of banks, which is scheduled to expire in March 2008. Proceeds from this facility are used for general corporate purposes including the funding of Canadian denominated investments. As of March 31, 2007, there was no outstanding balance under this credit facility.
The Company also has a Mexican Peso denominated (“MXP”) 500.0 million unsecured revolving credit facility, which is scheduled to expire in May 2008. Proceeds from this facility are used to fund peso denominated investments. As of March 31, 2007, there was no outstanding balance under this facility.
The Company has a MTN program pursuant to which it may, from time-to-time, offer for sale its senior unsecured debt for any general corporate purposes, including (i) funding specific liquidity requirements in its business, including property acquisitions, development and redevelopment costs and (ii) managing the Company’s debt maturities.
During May 2006, the Company filed a shelf registration statement on Form S-3ASR, which is effective for a term of three-years, for the future unlimited offerings, from time-to-time, of debt securities, preferred stock, depositary shares, common stock and common stock warrants.
In addition to the public equity and debt markets as capital sources, the Company may, from time-to-time, obtain mortgage financing on selected properties and construction loans to partially fund the capital needs of its ground-up development projects. As of March 31, 2007, the Company had over 400 unencumbered property interests in its portfolio.
In connection with its intention to continue to qualify as a REIT for federal income tax purposes, the Company expects to continue paying regular dividends to its stockholders. These dividends will be paid from operating cash flows, which are expected to increase due to property acquisitions, growth in operating income in the existing portfolio and from other investments. Since cash used to pay dividends reduces amounts available for capital investment, the Company generally intends to maintain a conservative dividend payout ratio, reserving such amounts as it considers necessary for the expansion and renovation of shopping centers in its portfolio, debt reduction, the acquisition of interests in new properties and other investments as suitable opportunities arise and such other factors as the Board of Directors considers appropriate.
Although the Company receives substantially all of its rental payments on a monthly basis, it generally intends to continue paying dividends quarterly. Amounts accumulated in advance of each quarterly distribution will be invested by the Company in short-term money market or other suitable instruments. Cash dividends paid for the three months ended March 31, 2007 and 2006 were $93.2 million and $78.2 million, respectively.
Other Commitments
In June 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company adopted the provisions of FIN 48 on January 1, 2007. The Company does not have any material unrecognized tax benefits, therefore the adoption of FIN 48 did not have a material impact on the Company’s financial position or results of operations.
Effects of Inflation
Many of the Company’s leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive payment of additional rent calculated as a percentage of tenants’ gross sales above pre-determined thresholds, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses often include increases based upon changes in the consumer price index or similar inflation indices. In addition, many of the Company’s leases are for terms of less than 10 years, which permits the Company to seek to increase rents to market rates upon renewal. Most of the Company’s leases require the tenant to pay an allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation. The Company periodically evaluates its exposure to short-term interest rates and foreign currency exchange rates and will, from time to time, enter into interest rate protection agreements and/or foreign currency hedge agreements which mitigate, but do not eliminate, the effect of changes in interest rates on its floating-rate debt and fluctuations in foreign currency exchange rates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company’s primary market risk exposure is interest rate risk. The following table presents the Company’s aggregate fixed rate and variable rate domestic and foreign debt obligations outstanding as of March 31, 2007, with corresponding weighted-average interest rates sorted by maturity date. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency. The instruments actual cash flows are denominated in U.S. dollars and Canadian dollars, as indicated by geographic description ($ in USD equivalent in thousands).
| 2007
| 2008
| 2009
| 2010
| 2011
| 2012+
| Total
| Fair
Value
|
|---|
| U.S Dollar | | | | | | | | | | | | | | | | | |
| Denominated | |
| Secured Debt | |
| Fixed Rate | | $26,168 | | $91,684 | | $59,564 | | $19,637 | | $49,425 | | $319,530 | | $566,008 | | $613,264 | |
| | |
| Average | |
| Interest Rate | | 8.06% | | 7.19% | | 7.32% | | 8.40% | | 7.32% | | 6.48% | | 6.89% | |
| | | | | | | | | | | | | | | | | | |
| Variable Rate | | $104,681 | | $149,600 | | $39,037 | | $16,400 | | — | | $4,537 | | $314,255 | | $314,255 | |
| | |
| Average | |
| Interest Rate | | 7.13% | | 6.92% | | 6.95% | | 7.32% | | — | | 6.46% | | 7.01% | |
| | |
| Unsecured Debt | |
| Fixed Rate | | $250,009 | | $125,568 | | $180,000 | | $76,357 | | $362,658 | | $1,445,545 | | $2,440,137 | | $2,468,858 | |
| | |
| Average Interest | |
| Rate | | 6.83% | | 4.61% | | 6.98% | | 5.55% | | 6.36% | | 5.50% | | 5.83% | |
| | | | | | | | | | | | | | | | | | |
| Variable Rate | | $5,993 | | — | | — | | — | | — | | — | | $5,993 | | $5,993 | |
| | |
| Average | |
| Interest Rate | | 7.87% | | — | | — | | — | | — | | — | | 7.87% | |
| | |
| Canadian Dollar | |
| Denominated | |
| Unsecured Debt | |
| Fixed Rate | | — | | — | | — | | $129,909 | | — | | $173,214 | | $303,123 | | $303,129 | |
| Average Interest Rate | | — | | — | | — | | 4.45% | | — | | 5.18% | | 4.87% | |
Based on the Company’s variable-rate debt balances, interest expense would have increased by approximately $0.8 million for the three months ended March 31, 2007 if short-term interest rates were 1% higher.
��As of March 31, 2007, the Company had Canadian investments totaling CAD $450.3 million (approximately USD $390.0 million) comprised of a real estate joint venture investments and marketable securities. In addition, the Company has Mexican real estate investments of approximately MXP 6.0 billion (approximately
USD $543.5 million). The foreign currency exchange risk has been partially mitigated through the use of local currency denominated debt and a cross currency swap (the “CC Swap”) with major financial institutions. The Company is exposed to credit risk in the event of non-performance by the counter-party to the CC Swap. The Company believes it mitigated its credit risk by entering into the CC Swap with major financial institutions.
The Company has not, and does not plan to, enter into any derivative financial instruments for trading or speculative purposes. As of March 31, 2007, the Company had no other material exposure to market risk.
Item 4. Controls and Procedures
The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not presently involved in any litigation, nor to its knowledge is any litigation threatened against the Company or its subsidiaries, that in management’s opinion, would result in any material adverse effect on the Company’s ownership, management or operation of its properties, or which is not covered by the Company’s liability insurance.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibits - -
4.1 Agreement to File Instruments
Kimco Realty Corporation (the “Registrant”) hereby agrees to file with the Securities and Exchange Commission, upon request of the Commission, all instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries, and for any of its unconsolidated subsidiaries for which financial statements are required to be filed, and for which the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis.
10.1 Second Amended and Restated 1998 Equity Participation Plan.
31.1 Certification of the Company’s Chief Executive Officer, Milton Cooper, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Company’s Chief Financial Officer, Michael V. Pappagallo, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Company’s Chief Executive Officer, Milton Cooper, and the Company’s Chief Financial Officer, Michael V. Pappagallo, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | KIMCO REALTY CORPORATION |
| | |
| | |
May 8, 2007
(Date) | /s/ Milton Cooper
Milton Cooper
Chairman of the Board |
| | |
| | |
| | |
May 8, 2007
(Date) | /s/ Michael V. Pappagallo
Michael V. Pappagallo
Chief Financial Officer |
