KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts relating to the number of buildings, square footage, tenant and occupancy data and estimated project costs are unaudited.
1. Summary of Significant Accounting Policies:
Business
Kimco Realty Corporation (the "Company" or "Kimco"), its subsidiaries, affiliates and related real estate joint ventures are engaged principally in the operation of neighborhood and community shopping centers which are anchored generally by discount department stores, supermarkets or drugstores. The Company also provides property management services for shopping centers owned by affiliated entities, various real estate joint ventures and unaffiliated third parties.
Additionally, in connection with the Tax Relief Extension Act of 1999 (the "RMA"), which became effective January 1, 2001, the Company is permitted to participate in activities which it was precluded from previously in order to maintain its qualification as a Real Estate Investment Trust ("REIT"), so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Internal Revenue Code, as amended (the "Code"), subject to certain limitations. As such, the Company, through its taxable REIT subsidiaries, has been engaged in various retail real estate related opportunities including (i) ground-up development projects through its wholly-owned taxable REIT subsidiaries(“TRS”), which were 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 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 December 31, 2009, the Company's single largest neighborhood and community shopping center accounted for only 1.2% of the Company's annualized base rental revenues and only 1.0% of the Company’s total shopping center gross leasable area ("GLA"). At December 31, 2009, the Company’s five largest tenants were The Home Depot, TJX Companies, Sears Holdings, Wal-Mart, and Kohl’s which represented approximately 3.3%, 2.6%, 2.5%, 2.2% and 2.0%, 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.
The principal business of the Company and its consolidated subsidiaries is the ownership, development, management and operation of retail shopping centers, including complementary services that capitalize on the Company’s established retail real estate expertise. The Company does not distinguish its principal business or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single reportable segment for disclosure purposes in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Principles of Consolidation and Estimates
The accompanying Consolidated Financial Statements include the accounts of Kimco Realty Corporation (the “Company”), its subsidiaries, all of which are wholly-owned, and all entities in which the Company has a controlling interest, including where the Company has been determined to be a primary beneficiary of a variable interest entity (“VIE”) or meets certain criteria of a sole general partner or managing member in accordance with the Consolidation guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). All inter-company balances and transactions have been eliminated in consolidation.
GAAP requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate and related intangible assets and liabilities, including the assessment of impairments, equity method investments, marketable securities and other investments, as well as, depreciable lives, revenue recognition, the collectability of trade accounts receivable and the realizability of deferred tax assets. Application of these assumptions requires the exercise of judgment as to future uncertainties, and, as a result, actual results could differ from these estimates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Subsequent Events
The Company has evaluated subsequent events and transactions for potential recognition or disclosure in its consolidated financial statements.
Real Estate
Real estate assets are stated at cost, less accumulated depreciation and amortization. On a continuous basis, management assesses whether there are any indicators, including property operating performance and general market conditions, that the value of the real estate properties (including any related amortizable intangible assets or liabilities) may be impaired. A property value is considered impaired only if management’s estimate of current and projected operating cash flows (undiscounted and unleveraged) of the property over its remaining useful life is less than the net carrying value of the property. Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. To the extent impairment has occurred, the carrying value of the property would be adjusted to an amount to reflect the estimated fair value of the prope rty.
When a real estate asset is identified by management as held-for-sale, the Company ceases depreciation of the asset and estimates the sales price, net of selling costs. If, in management’s opinion, the net sales price of the asset is less than the net book value of the asset, an adjustment to the carrying value would be recorded to reflect the estimated fair value of the property.
Upon acquisition of real estate operating properties, the Company estimates the fair value of acquired tangible assets (consisting of land, building, building improvements and tenant improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), assumed debt and redeemable units issued at the date of acquisition, based on evaluation of information and estimates available at that date. Based on these estimates, the Company allocates the estimated fair value to the applicable assets and liabilities. Fair value is determined based on an exit price approach, which contemplates the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If, up to one year from the acquisition date, information regarding fair value of the assets acquired and liabilities assumed i s received and estimates are refined, appropriate adjustments are made to the purchase price allocation on a retrospective basis. The Company expenses transaction costs associated with business combinations in the period incurred.
In allocating the purchase price to identified intangible assets and liabilities of an acquired property, the value of above-market and below-market leases is estimated based on the present value of the difference between the contractual amounts to be paid pursuant to the leases and management’s estimate of the market lease rates and other lease provisions (i.e., expense recapture, base rental changes, etc.) measured over a period equal to the estimated remaining term of the lease. The capitalized above-market or below-market intangible is amortized to rental income over the estimated remaining term of the respective leases. Mortgage debt discounts or premiums are amortized into interest expense over the remaining term of the related debt instrument. Unit discounts and premiums are amortized into noncontrolling interest in income, net over the period from the date of issuance to the earliest redemption date of the units.
In determining the value of in-place leases, management considers current market conditions and costs to execute similar leases in arriving at an estimate of the carrying costs during the expected lease-up period from vacant to existing occupancy. In estimating carrying costs, management includes real estate taxes, insurance, other operating expenses, estimates of lost rental revenue during the expected lease-up periods and costs to execute similar leases including leasing commissions, legal and other related costs based on current market demand. In estimating the value of tenant relationships, management considers the nature and extent of the existing tenant relationship, the expectation of lease renewals, growth prospects and tenant credit quality, among other factors.
The value assigned to in-place leases and tenant relationships is amortized over the estimated remaining term of the leases. If a lease were to be terminated prior to its scheduled expiration, all unamortized costs relating to that lease would be written off.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the assets, as follows:
| | |
Buildings and building improvements | | 15 to 50 years |
Fixtures, leasehold and tenant improvements | | Terms of leases or useful |
(including certain identified intangible assets) | | lives, whichever is shorter |
Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations and replacements, which improve and extend the life of the asset, are capitalized. The useful lives of amortizable intangible assets are evaluated each reporting period with any changes in estimated useful lives being accounted for over the revised remaining useful life.
Real Estate Under Development
Real estate under development represents both the ground-up development of neighborhood and community shopping center projects which may be subsequently sold upon completion and projects which the Company may hold as long-term investments. These properties are carried at cost. The cost of land and buildings under development includes specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs of personnel directly involved and other costs incurred during the period of development. The Company ceases cost capitalization when the property is held available for occupancy upon substantial completion of tenant improvements, but no later than one year from the completion of major construction activity. If, in management’s opinion, the net sales price of assets he ld for resale or the current and projected undiscounted cash flows of these assets to be held as long-term investments is less than the net carrying value, the carrying value would be adjusted to an amount to reflect the estimated fair value of the property.
Investments in Unconsolidated Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting as the Company exercises significant influence, but does not control these entities. These investments are recorded initially at cost and subsequently adjusted for cash contributions and distributions. Earnings for each investment are recognized in accordance with each respective investment agreement and where applicable, based upon an allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.
The Company’s joint ventures and other real estate investments primarily consist of co-investments with institutional and other joint venture partners in neighborhood and community shopping center properties, consistent with its core business. These joint ventures typically obtain non-recourse third-party financing on their property investments, thus contractually limiting the Company’s exposure to losses primarily to the amount of its equity investment; and due to the lender’s exposure to losses, a lender typically will require a minimum level of equity in order to mitigate its risk. The Company’s exposure to losses associated with its unconsolidated joint ventures is primarily limited to its carrying value in these investments. The Company, on a selective basis, obtains unsecured financing for certain joint ventures. These unsecured financings are guaranteed by the Company with guarantees from the joint ventur e partners for their proportionate amounts of any guaranty payment the Company is obligated to make.
To recognize the character of distributions from equity investees the Company looks at the nature of the cash distribution to determine the proper character of cash flow distributions as either returns on investment, which would be included in operating activities or returns of investment, which would be included in investing activities.
On a continuous basis, management assesses whether there are any indicators, including the underlying investment property operating performance and general market conditions, that the value of the Company’s investments in unconsolidated joint ventures may be impaired. An investment’s value is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company’s estimated fair values are based upon a discounted cash flow model for each specific property that includes all estimated cash inflows and outflows over a specified holding period. Capitalization rates, discount rates and credit spreads utilized in these models are based upon rates that the Company believes to be within a reasonable range of current market rates for each respective property.
Other Real Estate Investments
Other real estate investments primarily consist of preferred equity investments for which the Company provides capital to developers and owners of real estate. The Company typically accounts for its preferred equity investments on the equity method of accounting, whereby earnings for each investment are recognized in accordance with each respective investment agreement and based upon an allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.
On a continuous basis, management assesses whether there are any indicators, including the underlying investment property operating performance and general market conditions, that the value of the Company’s Other real estate investments may be impaired. An investment’s value is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.
The Company’s estimated fair values are based upon a discounted cash flow model for each specific property that includes all estimated cash inflows and outflows over a specified holding period. Capitalization rates, discount rates and credit spreads utilized in these models are based upon rates that the Company believes to be within a reasonable range of current market rates for each respective property.
Mortgages and Other Financing Receivables
Mortgages and other financing receivables consist of loans acquired and loans originated by the Company. Loan receivables are recorded at stated principal amounts net of any discount or premium or deferred loan origination costs or fees. The related discounts or premiums on mortgages and other loans purchased are amortized or accreted over the life of the related loan receivable. The Company defers certain loan origination and commitment fees, net of certain origination costs and amortizes them as an adjustment of the loan’s yield over the term of the related loan. The Company evaluates the collectability of both interest and principal on each loan to determine whether it is impaired. A loan is considered to be impaired, when based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is considere d to be impaired, the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the value of the underlying collateral if the loan is collateralized. Interest income on performing loans is accrued as earned. Interest income on impaired loans is recognized on a cash basis.
Cash and Cash Equivalents
Cash and cash equivalents (demand deposits in banks, commercial paper and certificates of deposit with original maturities of three months or less) includes tenants' security deposits, escrowed funds and other restricted deposits approximating $18.3 million and $12.5 million for the years ended December 31, 2009 and 2008, respectively.
Cash and cash equivalent balances may, at a limited number of banks and financial institutions, exceed insurable amounts. The Company believes it mitigates risk by investing in or through major financial institutions and primarily in funds that are currently U.S. federal government insured. Recoverability of investments is dependent upon the performance of the issuers.
Marketable Securities
The Company classifies its existing marketable equity securities as available-for-sale in accordance with the FASB’s Investments-Debt and Equity Securities guidance. These securities are carried at fair market value with unrealized gains and losses reported in stockholders’ equity as a component of Accumulated other comprehensive income ("OCI"). Gains or losses on securities sold are based on the specific identification method.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
All debt securities are generally classified as held-to-maturity because the Company has the positive intent and ability to hold the securities to maturity, it is not more likely than not that the Company will be required to sell the debt security before its anticipated recovery and the Company expects to recover the security’s entire amortized cost basis even if the entity does not intend to sell. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Debt securities which contain conversion features generally are classified as available-for-sale.
On a continuous basis, management assesses whether there are any indicators that the value of the Company’s marketable securities may be impaired. A marketable security is impaired if the fair value of the security is less than the carrying value of the security and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the security over the estimated fair value in the security.
Deferred Leasing and Financing Costs
Costs incurred in obtaining tenant leases and long-term financing, included in deferred charges and prepaid expenses in the accompanying Consolidated Balance Sheets, are amortized over the terms of the related leases or debt agreements, as applicable. Such capitalized costs include salaries and related costs of personnel directly involved in successful leasing efforts.
Revenue Recognition and Accounts Receivable
Base rental revenues from rental property are recognized on a straight-line basis over the terms of the related leases. Certain of these leases also provide for percentage rents based upon the level of sales achieved by the lessee. These percentage rents are recognized once the required sales level is achieved. Rental income may also include payments received in connection with lease termination agreements. In addition, leases typically provide for reimbursement to the Company of common area maintenance costs, real estate taxes and other operating expenses. Operating expense reimbursements are recognized as earned.
Management and other fee income consists of property management fees, leasing fees, property acquisition and disposition fees, development fees and asset management fees. These fees arise from contractual agreements with third parties or with entities in which the Company has a partial noncontrolling interest. Management and other fee income, including acquisition and disposition fees, are recognized as earned under the respective agreements. Management and other fee income related to partially owned entities are recognized to the extent attributable to the unaffiliated interest.
Gains and losses from the sale of depreciated operating property and ground-up development projects are generally recognized using the full accrual method in accordance with the FASB’s real estate sales guidance, provided that various criteria relating to the terms of sale and subsequent involvement by the Company with the properties are met.
Gains and losses on transfers of operating properties result from the sale of a partial interest in properties to unconsolidated joint ventures and are recognized using the partial sale provisions of the FASB’s real estate sales guidance.
The Company makes estimates of the uncollectability of its accounts receivable related to base rents, expense reimbursements and other revenues. The Company analyzes accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. The Company’s reported net earnings is directly affected by management’s estimate of the collectability of accounts receivable.
Income Taxes
The Company has made an election to qualify, and believes it is operating so as to qualify, as a REIT for federal income tax purposes. Accordingly, the Company generally will not be subject to federal income tax, provided that distributions to its stockholders equal at least the amount of its REIT taxable income as defined under Section 856 through 860 of the Code.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In connection with the RMA, which became effective January 1, 2001, the Company is permitted to participate in certain activities which it was previously precluded from in order to maintain its qualification as a REIT, so long as these activities are conducted in entities which elect to be treated as taxable REIT subsidiaries under the Code. As such, the Company is subject to federal and state income taxes on the income from these activities.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
The Company reviews the need to establish a valuation allowance against deferred tax assets on a quarterly basis. The review includes an analysis of various factors, such as future reversals of existing taxable temporary differences, the capacity for the carryback or carryforward of any losses, the expected occurrence of future income or loss and available tax planning strategies.
Foreign Currency Translation and Transactions
Assets and liabilities of the Company’s foreign operations are translated using year-end exchange rates, and revenues and expenses are translated using exchange rates as determined throughout the year. Gains or losses resulting from translation are included in OCI, as a separate component of the Company’s stockholders’ equity. Gains or losses resulting from foreign currency transactions are translated to local currency at the rates of exchange prevailing at the dates of the transactions. The effect of the transactions gain or loss is included in the caption Other income, net in the Consolidated Statements of Operations.
Derivative/Financial Instruments
The Company measures its derivative instruments at fair value and records them in the Consolidated Balance Sheet as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract. The accounting for changes in the fair value of the derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are c onsidered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting under the Derivatives and Hedging guidance issued by the FASB (see Note 17).
Noncontrolling Interests
Noncontrolling interests represent the portion of equity that the Company does not own in those entities it consolidates. Noncontrolling interests also includes partnership units issued by consolidated subsidiaries of the Company in connection with certain property acquisitions. These units have a stated redemption value (classified as mezzanine equity) or a redemption amount based upon the Adjusted Current Trading Price, as defined, of the Company’s common stock ("Common Stock") and provide the unit holders various rates of return during the holding period. The unit holders generally have the right to redeem their units for cash at any time after one year from issuance. The Company typically has the option to settle redemption amounts in cash or Common Stock for its convertible units. The Company evaluates the terms of the partnership units issued and determines if the units are mandatorily redeemable in accor dance with the Distinguishing Liabilities from Equity guidance issued by the FASB.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company accounts and reports for noncontrolling interests in accordance with the Consolidation guidance issued by the FASB. The Company identifies its noncontrolling interests separately within the equity section on the Company’s Consolidated Balance Sheets. Redeemable units are classified as Redeemable noncontrolling interests and presented between Total liabilities and Stockholder’s equity on the Company’s Consolidated Balance Sheets. The amounts of consolidated net earnings attributable to the Company and to the noncontrolling interests are presented on the Company’s Consolidated Statements of Operations.
Earnings Per Share
The following table sets forth the reconciliation of earnings and the weighted average number of shares used in the calculation of basic and diluted earnings per share (amounts presented in thousands, except per share data):
| | | | | | |
| | 2009 | | 2008 | | 2007 |
Computation of Basic (Loss)/Income Per Share: | | | | | | |
Income from continuing operations before extraordinary gain | $ | 2,086 | $ | 248,625 | $ | 390,534 |
Total net gain on transfer or sale of operating properties, net of tax | | 3,867 | | 1,782 | | 2,708 |
Net income attributable to noncontrolling interests | | (10,003) | | (26,502) | | (44,066) |
Discontinued operations attributable to noncontrolling interests | | - | | 1,281 | | 5,740 |
Extraordinary gain attributable to noncontrolling interests | | - | | - | | 4,075 |
Preferred stock dividends | | (47,288) | | (47,288) | | (19,659) |
(Loss)/income from continuing operations before extraordinary gain available to common shareholders | | (51,338) | | 177,898 | | 339,332 |
Income from discontinued operations attributable to the Company | | 108 | | 24,716 | | 33,574 |
Extraordinary gain | | - | | - | | 50,265 |
Net (loss)/income attributable to the Company’s common shareholders | $ | (51,230) | $ | 202,614 | $ | 423,171 |
Weighted average common shares Outstanding | | 350,077 | | 257,811 | | 252,129 |
| | | | | | |
Basic (Loss)/Income Per Share attributable to the Company: | | | | | | |
(Loss)/income from continuing operations before extraordinary gain | $ | (0.15) | $ | 0.69 | $ | 1.35 |
Income from discontinued operations | | - | | 0.10 | | 0.13 |
Extraordinary gain | | - | | - | | 0.20 |
Net (loss)/income | $ | (0.15) | $ | 0.79 | $ | 1.68 |
| | | | | | |
Computation of Diluted (Loss)/Income Per Share: | | | | | | |
(Loss)/income from continuing operations before extraordinary gain available to common shareholders | $ | (51,338) | $ | 177,898 | $ | 339,332 |
Distributions on convertible units (a) | | - | | 18 | | - |
Income from continuing operations before extraordinary gain available to the Company’s common shareholders | | (51,338) | | 177,916 | | 339,332 |
Income from discontinued operations attributable to the Company | | 108 | | 24,716 | | 33,574 |
Extraordinary gain | | - | | - | | 50,265 |
Net (Loss)/income before extraordinary gain attributable to the Company’s common shareholders | $ | (51,230) | $ | 202,632 | $ | 423,171 |
Weighted average common shares outstanding – basic | | 350,077 | | 257,811 | | 252,129 |
Effect of dilutive securities: Stock options | | - | | 999 | | 4,929 |
Assumed conversion of convertible units (a) | | - | | 33 | | - |
Shares for diluted earnings per common share | | 350,077 | | 258,843 | | 257,058 |
| | | | | | |
Diluted (Loss)/Income Per Share attributable to the Company: | | | | | | |
(Loss)/income from continuing operations | $ | (0.15) | $ | 0.69 | $ | 1.32 |
Income from discontinued operations | | - | | 0.09 | | 0.13 |
Extraordinary gain | | - | | - | | 0.20 |
Net (loss)/income | $ | (0.15) | $ | 0.78 | $ | 1.65 |
(a) The effect of the assumed conversion of certain convertible units had an anti-dilutive effect upon the calculation of Income from continuing operations before extraordinary gain per share. Accordingly, the impact of such conversions has not been included in the determination of diluted earnings per share calculations.
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In addition, there were approximately 15,870,967, 13,731,767, and 3,017,400, stock options that were anti-dilutive as of December 31, 2009, 2008 and 2007, respectively.
Stock Compensation
The Company maintains an equity participation plan (the “Plan”) pursuant to which a maximum of 47,000,000 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 range of three to five years, 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 fourth or fifth anniversary of the grant or ratably over four years. In addition, the Plan provides for the granting of certain options and restricted stock 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.
The Company accounts for stock options in accordance with the FASB’s Stock Compensation guidance which requires that all share based payments to employees, including grants of employee stock options, be recognized in the statement of operations over the service period based on their fair values. Fair value is determined using the Black-Scholes option pricing formula, intended to estimate the fair value of the awards at the grant date. (See footnote 22 for additional disclosure on the assumptions and methodology.)
New Accounting Pronouncements
In June 2009, the FASB issued guidance (the “Codification”) which established the FASB’s ASC as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. This guidance was effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date of this Statement, the Codification superseded all existing non-SEC accounting and reporting guidance. All other non-grandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. The Company adopted the Codification during the third quarter of 2009 and as such has appropriately adjusted references to authoritative accounting literature appearing in this annual report on Form 10-K.
In December 2007, the FASB issued additional Business Combinations guidance. The objective of this guidance is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. To accomplish that, this guidance establishes principles and requirements for how the acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination and (iv) requires expensing of transaction costs associated with a business combination. This guidance applies prospec tively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. As of December 31, 2009 the adoption of this guidance has not had a material effect on the Company’s financial position or results of operations.
In April 2009, the FASB issued additional Business Combinations guidance, which amended and clarified the previous guidance to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This additional guidance has been applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. As of December 31, 2009 the adoption of this guidance has not had a material effect on the Company’s results of operations or financial position.
In December 2007, the FASB issued further Consolidations guidance, which establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net earnings attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of operations; changes in a parent’s ownership interest while the parent
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
retains its controlling financial interest in its subsidiary be accounted for consistently; when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value; and entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The objective of the guidance is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. This guidance was effective for fiscal years beginning on or after December 15, 2008. As required, the Company has retrospectively applied the presentation to its prior year balances in its Consolidated Financial Statements. The adoption of this guidance resulted in the recording of approximately $8.0 million in income on the Company’s Statement of Operations for th e year ended December 31, 2009 as a result of remeasuring the Company’s equity interests to fair value, in entities where there was a change in control.
In March 2008, the FASB issued Derivatives and Hedging guidance, which amends and expands the previous disclosure requirements to require qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. This guidance is to be applied prospectively for the first annual reporting period beginning on or after November 15, 2008, with early application encouraged. This guidance also encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of this guidance did not have a material impact on the Company’s disclosures.
In April 2008, the FASB issued additional Intangibles-Goodwill and Other guidance, which amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The addition to the guidance is intended to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure the fair value of the asset. This additional guidance for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements in this guidance shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
In June 2008, the FASB issued additional Earnings Per Share guidance, which classifies unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008. All prior-period earnings per share data presented are to be adjusted retrospectively. The Company’s adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
In November 2008, the FASB issued Investments-Equity Method and Joint Ventures guidance that clarifies the accounting for certain transactions and impairment considerations involving equity method investments. This guidance applies to all investments accounted for under the equity method. It was effective for fiscal years and interim periods beginning on or after December 15, 2008. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
In April 2009, the FASB issued Fair Value Measurements and Disclosures guidance that provides additional direction for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance also includes information on identifying circumstances that indicate a transaction is not orderly. Additionally, this guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance was effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In April 2009, the FASB issued Investments-Debt and Equity Securities guidance, which amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The guidance shall be effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
In April 2009, the FASB issued Financial Instruments guidance, which amends previous guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. It also requires those disclosures in summarized financial information at interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Company’s disclosures.
In May 2009, the FASB issued Subsequent Events guidance, which provides further direction to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. This guidance was effective for interim and annual reporting periods ending after June 15, 2009. The Company’s adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
In June 2009, the FASB issued Transfers and Servicing guidance, which amends the previous derecognition guidance and eliminates the exemption from consolidation for qualifying special-purpose entities. This guidance is effective for financial asset transfers occurring after the beginning of an entity's first fiscal year that begins after November 15, 2009. This guidance will be effective for the Company beginning in fiscal 2010. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position or results of operations.
In June 2009, the FASB issued Consolidation guidance, which amends the previous consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis previously required. This guidance is effective as of the beginning of the first fiscal year that begins after November 15, 2009, early adoption is prohibited. It will be effective for the Company beginning in fiscal 2010. The Company is currently assessing its joint venture investments to determine the impact the adoption of this guidance will have on the Company’s financial position and results of operations however, the Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position or results of operations.
During January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation guidance, which amends and clarifies that the decrease in ownership guidance provided in the Consolidation guidance does not apply to sales of in substance real estate. This update clarifies that an entity should apply the FASB’s real estate sales guidance to such transactions. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position or results of operations.
Reclassifications
Certain reclassifications have been made to 2007 and 2008 to (i) reflects a reclass of tax provisions and tax benefits from gain on sale of development properties and impairments to benefit from income taxes, net (ii) reflect a reclass of amortization of software development costs to depreciation and amortization from general and administrative expense and (iii) reflect a reclass of lender improvement escrow balances to other assets from accounts and notes receivable, to conform to the 2009 presentation.
2. Impairments:
On a continuous basis, management assesses whether there are any indicators, including property operating performance and general market conditions, that the value of the Company’s assets (including any related amortizable intangible assets or liabilities) may be impaired. To the extent impairment has occurred, the carrying value of the asset would be adjusted to an amount to reflect the estimated fair value of the asset.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2008 and 2009, economic conditions had continued to experience volatility resulting in further declines in the real estate and equity markets. Increases in capitalization rates, discount rates and vacancies as well as deterioration of real estate market fundamentals impacted net operating income and leasing which further contributed to declines in real estate markets in general.
As a result of the volatility and declining market conditions described above, as well as the Company’s strategy in relation to certain of its non-retail assets, the Company recognized non-cash impairment charges during 2009, aggregating approximately $175.1 million, before income tax benefit of approximately $22.5 million and noncontrolling interests of approximately $1.2 million. The Company recognized non-cash impairment charges during 2008, aggregating approximately $147.5 million, before income tax benefit of approximately $31.1 million and noncontrolling interest of approximately $1.6 million. The Company recognized non-cash impairment charges during 2007, aggregating approximately $13.8 million, before income tax benefit of approximately $5.5 million. Details of these non-cash impairment charges are as follows (in thousands):
| | | | | | |
| | 2009 | | 2008 | | 2007 |
Impairment of property carrying values | $ | 50,000 | $ | - | $ | - |
Real estate under development | | 2,100 | | 13,613 | | 8,500 |
Investments in other real estate investments | | 49,279 | | - | | - |
Marketable securities and other investments | | 30,050 | | 118,416 | | 5,296 |
Investments in real estate joint ventures | | 43,658 | | 15,500 | | - |
Total impairment charges | $ | 175,087 | $ | 147,529 | $ | 13,796 |
In addition to the impairment charges above, the Company recognized impairment charges during 2009 and 2008 of approximately $38.7 million, before an income tax benefit of approximately $11.0 million, and $11.2 million, before an income tax benefit of approximately $4.5 million, respectively, relating to certain properties held by four unconsolidated joint ventures in which the Company holds noncontrolling interests ranging from 15% to 45%. These impairment charges are included in Equity in income of joint ventures, net in the Company’s Consolidated Statements of Operations.
The Company will continue to assess the value of its assets on an on-going basis. Based on these assessments, the Company may determine that one or more of its assets may be impaired due to a decline in value and would therefore write-down its cost basis accordingly (see Notes 6, 8, 9, 10, and 11).
3. Real Estate:
The Company’s components of Rental property consist of the following (in thousands):
| | | | |
| | December 31, |
| | 2009 | | 2008 |
Land | $ | 1,831,374 | $ | 1,394,460 |
Undeveloped Land | | 106,054 | | 1,185 |
Buildings and improvements | | | | |
Buildings | | 4,411,565 | | 3,847,544 |
Building improvements | | 1,103,798 | | 692,040 |
Tenant improvements | | 669,540 | | 633,883 |
Fixtures and leasehold improvements | | 48,008 | | 35,377 |
Other rental property (1) | | 246,217 | | 245,452 |
| | 8,416,556 | | 6,849,941 |
Accumulated depreciation and amortization | | (1,343,148) | | (1,159,664) |
Total | $ | 7,073,408 | $ | 5,690,277 |
(1) At December 31, 2009 and 2008, Other rental property consisted of intangible assets including $162,477 and $161,556 respectively, of in-place leases, $21,851 and $22,400 respectively, of tenant relationships, and $61,889 and $61,496 respectively, of above-market leases.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In addition, at December 31, 2009 and 2008, the Company had intangible liabilities relating to below-market leases from property acquisitions of approximately $196.2 million and $171.4 million, respectively. These amounts are included in the caption Other liabilities in the Company’s Consolidated Balance Sheets. The estimated amortization expense associated with the Company’s intangible assets for the future five years are as follows (in millions): 2010, $14.9; 2011, $12.3; 2012, $8.1; 2013, $5.0; and 2014, $2.2.
4. Property Acquisitions, Developments and Other Investments:
Operating property acquisitions, ground-up development costs and other investments have been funded principally through the application of proceeds from the Company's public equity and unsecured debt issuances, proceeds from mortgage and construction financings, availability under the Company’s revolving lines of credit and issuance of various partnership units.
Operating Properties
Acquisition of Operating Properties –
During the year ended December 31, 2009, the Company acquired, in separate transactions, 33 operating properties, comprising an aggregate 6.8 million square feet of a GLA, for an aggregate purchase price of approximately $955.4 million including the assumption of approximately $577.6 million of non-recourse mortgage debt encumbering 21 of the properties and $50.0 million in preferred stock. Details of these transactions are as follows (in thousands):
| | | | | | | | | | | | |
| | | | | | Purchase Price | | |
Property Name | | Location | | Month Acquired | | Cash/Net Assets and Liabilities | | Debt/ Preferred Stock Assumed | | Total | | GLA |
Novato Fair | | Novato, CA | | Jul-09 (1) | $ | 9,902 | $ | 13,524 | $ | 23,426 | | 125 |
Canby Square | | Canby, OR | | Oct-09 (2) | | 7,052 | | - | | 7,052 | | 116 |
Garrison Square | | Vancouver, WA | | Oct-09 (2) | | 3,535 | | - | | 3,535 | | 70 |
Oregon Trail Center | | Gresham, OR | | Oct-09 (2) | | 18,135 | | - | | 18,135 | | 208 |
Pioneer Plaza | | Springfield, OR | | Oct-09 (2) | | 9,823 | | - | | 9,823 | | 96 |
Powell Valley Junction | | Gresham, OR | | Oct-09 (2) | | 5,062 | | - | | 5,062 | | 107 |
Troutdale Market | | Troutdale, OR | | Oct-09 (2) | | 4,809 | | - | | 4,809 | | 90 |
Angels Camp | | Angels Camp, CA | | Nov-09 (2) | | 6,801 | | - | | 6,801 | | 78 |
Albany Plaza | | Albany, OR | | Nov-09 (2) | | 6,075 | | - | | 6,075 | | 110 |
Elverta Crossing | | Antelope, CA | | Nov-09 (2) | | 8,765 | | - | | 8,765 | | 120 |
Park Place | | Vallejo, CA | | Nov-09 (2) | | 15,655 | | - | | 15,655 | | 151 |
Medford, Center | | Medford, OR | | Nov-09 (2) | | 21,158 | | - | | 21,158 | | 335 |
PL Retail, LLC Acquisition | | Various | | Nov-09 (3) | | 210,994 | | 614,081 | | 825,075 | | 5,160 |
| | Total Acquisitions | | | $ | 327,766 | $ | 627,605 | $ | 955,371 | | 6,766 |
(1)
The Company acquired this property from a joint venture in which the Company had a 10% noncontrolling ownership interest. This transaction resulted in a gain of approximately $0.3 million as a result of remeasuring the Company’s 10% noncontrolling equity interest to fair value.
(2)
The Company acquired this property from a joint venture in which the Company had a 15% noncontrolling ownership interest. This transaction resulted in a gain of approximately $0.1 million as a result of remeasuring the Company’s 15% noncontrolling equity interest to fair value.
(3)
The Company purchased the remaining 85% interest in PL Retail LLC, an entity that indirectly owns through wholly-owned subsidiaries 21 shopping centers, in which the Company held a 15% noncontrolling interest prior to this transaction. The 21 shopping centers comprise approximately 5.2 million square feet of GLA are located in California (8 assets; 27% of GLA), Florida (6 assets; 42% of GLA), the Phoenix, Arizona metro area (2 assets; 7.3% of GLA), New Jersey (2), Long Island, New York (1), Arlington, Virginia, near metro Washington, D.C. (1) and Greenville, South Carolina (1). The Company paid a purchase price equal to approximately $175.0 million, after customary adjustments and closing prorations, which was equivalent to 85% of PL Retail LLC’s gross asset value, which equaled approximately $825 million, less the assumption of $564 million of non-recourse mortgage debt encumbering 20 properties and $50 million of per petual preferred stock. The purchase price includes approximately $20 million for the purchase of development rights for one shopping center. Subsequent to the acquisition of these properties, the Company repaid an aggregate of approximately $269 million of the non-recourse mortgage debt which encumbered 10 properties. This transaction resulted in a gain of approximately $7.6 million as a result of remeasuring the Company’s 15% noncontrolling equity interest to fair value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During the year ended December 31, 2008, the Company acquired, in separate transactions, 10 operating properties, comprising an aggregate 1.2 million square feet of a GLA, for an aggregate purchase price of approximately $215.9 million including the assumption of approximately $96.2 million of non-recourse mortgage debt encumbering four of the properties. Details of these transactions are as follows (in thousands):
| | | | | | | | | | | | |
| | | | | | Purchase Price | | |
Property Name | | Location | | Month Acquired | | Cash | | Debt Assumed | | Total | | GLA |
| | | | | | | | | | | | |
U.S. Acquisitions: | | | | | | | | | | | | |
108 West Germania | | Chicago, IL | | Jan-08 | $ | 9,250 | $ | - | $ | 9,250 | | 41 |
1429 Walnut St | | Philadelphia, PA | | Jan-08 | | 22,100 | | 6,400 | | 28,500 | | 76 |
168 North Michigan Ave | | Chicago, IL | | Jan-08 (1) | | 13,000 | | - | | 13,000 | | 74 |
118 Market St | | Philadelphia, PA | | Feb-08 (1) | | 600 | | - | | 600 | | 1 |
Alison Building | | Philadelphia, PA | | Apr-08 (1) | | 15,875 | | - | | 15,875 | | 58 |
Lorden Plaza | | Milford, NH | | Apr-08 | | 5,650 | | 26,000 | | 31,650 | | 149 |
East Windsor Village | | East Windsor, NJ | | May-08 (2) | | 10,370 | | 19,780 | | 30,150 | | 249 |
Potomac Run Plaza | | Sterling, VA | | Sep-08 (5) | | 21,430 | | 44,046 | | 65,476 | | 361 |
| | | | | | 98,275 | | 96,226 | | 194,501 | | 1,009 |
Latin American Acquisitions: | | | | | | | | | | | | |
Valinhos | | Valinhos, Brazil | | Jun-08 (3) | | 17,384 | | - | | 17,384 | | 121 |
Vicuna Mackenna | | Santiago, Chile | | Aug-08 (4) | | 4,025 | | - | | 4,025 | | 26 |
| | Total Acquisitions | | | $ | 119,684 | $ | 96,226 | $ | 215,910 | | 1,156 |
(1)
Property is scheduled for redevelopment.
(2)
The Company acquired this property from a joint venture in which the Company had an approximate 15% noncontrolling ownership interest.
(3)
The Company provided $12.2 million as part of its 70% economic interest in this newly formed joint venture for the acquisition of this operating property and land parcel. The Company has determined, under the provisions of the FASB’s Consolidation guidance, that this joint venture is a VIE and that the Company is the primary beneficiary. As such, the Company has consolidated this entity for accounting and reporting purposes.
(4)
The Company provided a $3.0 million equity investment to a newly formed joint venture in which the Company has a 75% economic interest for the acquisition of this operating property and has determined under the provisions of the FASB’s Consolidation guidance that this joint venture is a VIE and that the Company is the primary beneficiary. As such, the Company has consolidated this entity for accounting and reporting purposes.
(5)
The Company acquired this property from a joint venture in which the Company holds a 20% noncontrolling interest.
The aggregate purchase price of the above mentioned 2009 and 2008 properties have been allocated to the tangible and intangible assets and liabilities of the properties in accordance with the FASB’s Business Combinations guidance, at the date of acquisition, based on evaluation of information and estimates available at such date. As final information regarding the fair value of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments will be made to the purchase price allocation on a retrospective basis. The allocations are finalized no later than twelve months from the acquisition date. The total aggregate fair value was allocated as follows (in thousands):
| | | | |
| | 2009 | | 2008 |
Land | $ | 317,052 | $ | 55,323 |
Buildings | | 383,666 | | 121,927 |
Below Market Rents | | (52,982) | | (8,926) |
Above Market Rents | | 38,681 | | 2,167 |
In-Place Leases | | 34,042 | | 6,879 |
Other Intangibles | | 12,602 | | 2,739 |
Building Improvements | | 182,318 | | 28,589 |
Tenant Improvements | | 27,664 | | 7,147 |
Mortgage Fair Value Adjustment | | 1,670 | | 65 |
Other Assets | | 20,088 | | - |
Other Liabilities | | (9,430) | | - |
| $ | 955,371 | $ | 215,910 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Included within the Company’s consolidated operating properties are 12 consolidated entities that are VIEs and for which the Company is the primary beneficiary. All of these entities have been established to own and operate real estate property. The Company’s involvement with these entities is through its majority ownership and management of the properties. These entities were deemed VIEs primarily based on the fact that the voting rights of the equity investors is not proportional to their obligation to absorb expected losses or receive the expected residual returns of the entity and substantially all of the entity's activities are conducted on behalf of the investor which has disproportionately fewer voting rights. The Company determined that it was the primary beneficiary of these VIEs as a result of its economic ownership percentage which provides that the Company would absorb a majority of the entity's expected losses, rec eive a majority of the entity's expected residual returns, or both.
At December 31, 2009, total assets of these VIEs were approximately $1.0 billion and total liabilities were approximately $542.1 million, including $363.4 million of non-recourse mortgage debt. The classification of these assets is primarily within real estate and the classification of liabilities are primarily within mortgages payable and noncontrolling interests in the Company’s Consolidated Balance Sheets.
The majority of the operations of these VIEs are funded with cash flows generated from the properties. Four of these entities are encumbered by third party non-recourse mortgage debt aggregating approximately $363.4 million. The Company has not provided financial support to any of these VIEs that it was not previously contractually required to provide, which consists primarily of funding any capital expenditures, including tenant improvements, which are deemed necessary to continue to operate the entity and any operating cash shortfalls that the entity may experience.
Included within the VIEs noted above is a joint venture investment which, during 2009, the Company provided a capital contribution to and another joint venture investment for which the Company entered into an amendment to its LLC agreement. These events were both considered reconsideration events under FASB’s Consolidation guidance. Such reconsideration determined that these two joint ventures were now VIEs and that the Company is the primary beneficiary of each joint venture.
Ground-Up Development -
The Company is engaged in ground-up development projects which consist of (i) U.S. ground-up development projects which will be held as long-term investments by the Company and (ii) various ground-up development projects located in Latin America for long-term investment. During 2009, the Company changed its merchant building business strategy from a sale upon completion strategy to a long-term hold strategy. Those properties previously considered merchant building have been either placed in service as long-term investment properties or included in U.S. ground-up development projects. The ground-up development projects generally have significant pre-leasing prior to the commencement of construction. As of December 31, 2009, the Company had in progress a total of 11 ground-up development projects, consisting of seven ground-up development projects located throughout Mexico, two ground-up development projects located in the U.S., one ground - -up development project located in Chile, and one ground-up development project located in Brazil.
During 2009, the Company expended approximately $9.9 million to purchase its partners noncontrolling partnership interests in five of its former merchant building projects. Since there was no change in control, these transactions resulted in an adjustment to the Company’s Paid-in capital of approximately $7.2 million.
Long-term Investment Projects -
During 2009, the Company acquired a land parcel located in Rio Claro, Brazil through a newly formed joint venture in which the Company has a 70% controlling ownership interest for a purchase price of 3.3 million Brazilian Reals (approximately USD $1.5 million). This parcel will be developed into a 48,000 square foot retail shopping center. Due to future commitments from the partners to fund construction costs throughout the construction period the Company has determined that this joint venture is a VIE and that the Company is the primary beneficiary. As such, the Company has consolidated this entity for accounting and reporting purposes.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2008, the Company acquired (i) 5 land parcels located throughout Mexico for an aggregate purchase price of approximately 368.2 million Mexican Pesos (“MXP”) (approximately USD $33.3 million), (ii) one land parcel located in Lima, Peru for a purchase price of approximately 1.9 million Peruvian Nuevo Sol (“PEN”) (approximately USD $0.7 million), (iii) two land parcels located in Chile for a purchase price of approximately 7.9 billion CLP (approximately USD $16.1 million) and (iv) one land parcel located in Hortolandia, Brazil for a purchase price of approximately 7.4 BRL (approximately USD $3.2 million). These nine land parcels will be developed into retail centers aggregating approximately 1.7 million square feet of gross leasable area with a total estimated aggregate project cost of approximately USD $195.5 million.
During 2008, the Company acquired, through an unconsolidated joint venture investment, 11 land parcels, in separate transactions, located in various cities throughout Mexico for an aggregate purchase price of approximately 554.9 million MXP (approximately USD $48.5 million) which will be held for investment or possible future development.
Additionally, during 2008, the Company acquired, through an existing consolidated joint venture, a redevelopment property in Bronx, NY, for a purchase price of approximately $5.2 million. The property will be redeveloped into a retail center with a total estimated project cost of approximately $17.7 million.
Included within the Company’s ground-up development projects at December 31, 2009 are 10 consolidated entities that are VIEs and for which the Company is the primary beneficiary. These entities were established to develop real estate property to hold as long-term investments. The Company’s involvement with these entities is through its majority ownership and management of the properties. These entities were deemed VIEs primarily based on the fact that the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support. The initial equity contributed to these entities was not sufficient to fully finance the real estate construction as development costs are funded by the partners throughout the construction period. The Company determined that it was the primary beneficiary of these VIEs as a result of its economic ownership percentage which provides that the Company would absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.
At December 31, 2009, total assets of these VIEs were approximately $276.3 million and total liabilities were approximately $32.7 million. The classification of these assets is primarily within real estate and the classification of liabilities are primarily within accounts payable and accrued expenses in the Company’s Consolidated Balance Sheets.
The majority of the projected development costs to be funded to these VIEs, aggregating approximately $41.1 million, will be funded with capital contributions from the Company and when contractually obligated by the outside partner. The Company has not provided financial support to the VIE that it was not previously contractually required to provide.
Also included within the Company’s ground-up developments at December 31, 2009, are 10 unconsolidated joint ventures, which are VIEs for which the Company is not the primary beneficiary. These joint ventures were primarily established to develop real estate property for long-term investment. These entities were deemed VIEs primarily based on the fact that the equity investment at risk was not sufficient to permit the entity to finance its activities without additional financial support. The initial equity contributed to these entities was not sufficient to fully finance the real estate construction as development costs are funded by the partners throughout the construction period. The Company determined that it was not the primary beneficiary of these VIEs based on the fact that Company would receive less than a majority of the entity's expected losses, receive less than a majority of the entity's expected residual returns, or both.
The Company’s aggregate investment in these VIEs was approximately $153.9 million as of December 31, 2009, which is included in Real estate under development in the Company’s Consolidated Balance Sheets. The Company’s maximum exposure to loss as a result of its involvement with these VIEs is estimated to be $230.6 million, which primarily represents the Company’s current investment and estimated future funding commitments. The Company has not provided financial support to these VIEs that it was not previously contractually required to provide. All future costs of development will be funded with capital contributions from the Company and the outside partner in accordance with their respective ownership percentages.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Kimsouth -
On May 12, 2006, the Company acquired an additional 48% interest in Kimsouth Realty Inc. (“Kimsouth”), a joint venture investment in which the Company had previously held a 44.5% noncontrolling interest, for approximately $22.9 million. As a result of this transaction, the Company’s total ownership increased to 92.5% and the Company became the controlling shareholder. The Company commenced consolidation of Kimsouth upon the closing date. The acquisition of the additional 48% ownership interest has been accounted for as a step acquisition with the purchase price being allocated to the identified assets and liabilities of Kimsouth. As of May 12, 2006, Kimsouth consisted of five properties, all of which have been subsequently sold and/or transferred.
As of May 12, 2006, Kimsouth had approximately $133.0 million of NOL carryforwards, which could be utilized to offset future taxable income of Kimsouth. The Company evaluated the need for a valuation allowance based on projected taxable income and determined that a valuation allowance of approximately $34.2 million was required. As such, a purchase price adjustment of $17.5 million was recorded. As of December 31, 2008, Kimsouth had fully utilized its NOLs. (See Note 22 for additional information).
During 2009, the Company acquired the remaining 7.5% interest in Kimsouth for approximately $5.5 million. Since there was no change in control, this transaction resulted in an adjustment to the Company’s Additional paid in capital of approximately $3.9 million.
During June 2006, Kimsouth contributed approximately $51.0 million, of which $47.2 million or 92.5% was provided by the Company, to fund its 15% noncontrolling interest in a newly formed joint venture with an investment group to acquire a portion of Albertson’s Inc. To maximize investment returns, the investment group’s strategy with respect to this joint venture, includes refinancing, selling selected stores and the enhancement of operations at the remaining stores. Kimsouth accounts for this investment under the equity method of accounting. During 2007, this joint venture completed the disposition of certain operating stores and a refinancing of the remaining assets in the joint venture. As a result of these transactions, Kimsouth received a cash distribution of approximately $148.6 million. Kimsouth had a remaining capital commitment obligation to fund up to an additional $15.0 million for general purposes. ;This amount was included in Other liabilities in the Consolidated Balance Sheets. During March 2008, the Albertson’s partnership agreement was amended to release the Company of its remaining capital commitment obligation, as a result the Company recognized pre-tax income of $15.0 million from cash received in excess of the Company’s investment.
During 2008, the Albertson’s joint venture disposed of 121 operating properties for an aggregate sales price of approximately $564.0 million, resulting in a gain of approximately $552.3 million, of which Kimsouth’s share was approximately $73.1 million. During 2008, Kimsouth recognized equity in income from the Albertson’s joint venture of approximately $64.4 million before income taxes, including the $73.1 million of gain and $15.0 million from cash received in excess of the Company’s investment. As a result of these transactions, Kimsouth fully reduced its deferred tax asset valuation allowance and utilized all of its remaining NOL carryforwards, which provided a tax benefit of approximately $3.1 million.
Additionally, during 2008, the Albertson’s joint venture acquired six operating properties and four leasehold properties for approximately $26.0 million, including the assumption of approximately $5.8 million in non-recourse mortgage debt encumbering one of the properties.
During the year ended December 31, 2007, Kimsouth’s income from the Albertson’s joint venture aggregated approximately $49.6 million, net of income tax. This amount includes (i) an operating loss of approximately $15.1 million, net of an income tax benefit of approximately $10.1 million, (ii) distribution in excess of Kimsouth’s investment of approximately $10.4 million, net of income tax expense of approximately $6.9 million, and (iii) an extraordinary gain of approximately $54.3 million, net of income tax expense of approximately $36.2 million, resulting from purchase price allocation adjustments as determined in accordance with the FASB’s Business Combination guidance. In accordance with the FASB’s Equity Method and Joint Venture guidance, the Company has classified its 15% share of the extraordinary gain, net of income taxes, as a separate component on the Company’s Consolidated Statements of Operations.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2007, Kimsouth sold its remaining property for an aggregate sales price of approximately $9.1 million. This sale resulted in a gain of approximately $7.9 million, net of income taxes.
5. Dispositions of Real Estate:
Operating Real Estate -
During 2009, the Company disposed of, in separate transactions, portions of six operating properties and one land parcel for an aggregate sales price of approximately $28.9 million. The Company provided seller financing for two of these transactions aggregating approximately $1.4 million, which bear interest at 9% per annum and are scheduled to mature in January and March 2012. The Company evaluated these transactions pursuant to the FASB’s real estate sales guidance. These seven transactions resulted in the Company’s recognition of an aggregate net gain of approximately $4.1 million, net of income tax of $0.2 million.
Additionally, during 2009, a consolidated joint venture in which the Company has a preferred equity investment disposed of a portion of a property for a sales price of approximately $1.1 million. As a result of this capital transaction, the Company received approximately $0.1 million of profit participation. This profit participation has been recorded as Income from other real estate investments in the Company’s Consolidated Statements of Operations.
Also during 2009, a consolidated joint venture in which the Company has a controlling interest disposed of a parcel of land for approximately $4.8 million and recognized a gain of approximately $4.4 million, before income taxes and noncontrolling interest. This gain has been recorded as Other income/(expense), net in the Company’s Consolidated Statements of Operations.
During 2009, FNC Realty Corporation (“FNC”), a consolidated entity in which the Company holds a 53% controlling ownership interest, disposed of two properties, in separate transactions, for an aggregate sales price of approximately $2.4 million. These transactions resulted in an aggregate pre-tax profit of approximately $0.9 million, before noncontrolling interest of $0.5 million. This income has been recorded as Income from other real estate investments in the Company’s Consolidated Statements of Operations.
During 2008, FNC disposed of a property for a sales price of approximately $3.3 million. This transaction resulted in a pre-tax profit of approximately $2.1 million, before noncontrolling interest of $1.0 million. This income has been recorded as Income from other real estate investments in the Company’s Consolidated Statements of Operations.
During 2008, the Company disposed of seven operating properties and a portion of four operating properties, in separate transactions, for an aggregate sales price of approximately $73.0 million, which resulted in an aggregate gain of approximately $20.0 million. In addition, the Company partially recognized deferred gains of approximately $1.2 million on three properties relating to their transfer and partial sale in connection with the Kimco Income Fund II transaction described below.
During 2007, the Company transferred 11 operating properties to a wholly-owned consolidated entity, Kimco Income Fund II (“KIF II”), for an aggregate purchase price of approximately $278.2 million, including non-recourse mortgage debt of $180.9 million, encumbering 11 of the properties. During 2008, the Company transferred an additional three properties for $73.9 million, including $50.6 million in non-recourse mortgage debt. During 2008 the Company sold a 26.4% noncontrolling ownership interest in the entity to third parties for approximately $32.5 million, which approximated the Company’s cost. The Company continues to consolidate this entity.
Additionally, during 2008, the Company disposed of an operating property for approximately $21.4 million. The Company provided seller financing for approximately $3.6 million, which bears interest at 10% per annum and is scheduled to mature on May 1, 2011. Due to the terms of this financing, the Company has deferred its gain of $3.7 million from this sale.
Additionally, during 2008, a consolidated joint venture in which the Company had a preferred equity investment disposed of a property for a sales price of approximately $35.0 million. As a result of this capital transaction, the Company received approximately $3.5 million of profit participation, before noncontrolling interest of approximately $1.1 million. This profit participation has been recorded as income from other real estate investments and is reflected in Income from discontinued operating properties in the Company’s Consolidated Statements of Operations.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2007, the Company (i) disposed of six operating properties and completed partial sales of three operating properties, in separate transactions, for an aggregate sales price of approximately $40.0 million, which resulted in an aggregate net gain of approximately $6.4 million, after income taxes of approximately $1.6 million, and (ii) transferred one operating property, which was acquired in the first quarter of 2007, to a joint venture in which the Company holds a 15% noncontrolling ownership interest for an aggregate price of approximately $4.5 million, which represented the net book value.
During 2007, FNC disposed of, in separate transactions, seven properties and completed the partial sale of an additional property for an aggregate sales price of $10.4 million. These transactions resulted in pre-tax profits of approximately $4.7 million, before noncontrolling interest of $3.3 million.
Additionally, during 2007, two consolidated joint ventures in which the Company had preferred equity investments disposed of, in separate transactions, their respective properties for an aggregate sales price of approximately $66.5 million. As a result of these capital transactions, the Company received approximately $22.1 million of profit participation, before noncontrolling interest of approximately $5.6 million. This profit participation has been recorded as income from other real estate investments and is reflected in Income from discontinued operating properties in the Company’s Consolidated Statements of Operations.
Ground-up Development –
During 2009, the Company sold, in separate transactions, five out-parcels, four land parcels and three ground leases for aggregate proceeds of approximately $19.4 million. These transactions resulted in gains on sale of development properties of approximately $5.8 million, before income taxes of $2.3 million.
During 2008, the Company sold, in separate transactions, (i) two completed merchant building projects, (ii) 21 out-parcels, (iii) a partial sale of one project and (iv) a partnership interest in one project for aggregate proceeds of approximately $73.5 million and received approximately $4.1 million of proceeds from completed earn-out requirements on three previously sold merchant building projects. These sales resulted in gains of approximately $36.6 million, before income taxes of $14.6 million.
During 2007, the Company sold, in separate transactions, (i) four of its recently completed merchant building projects, (ii) 26 out-parcels, (iii) 74.3 acres of undeveloped land and (iv) completed partial sales of two projects, for an aggregate total proceeds of approximately $310.5 million and received approximately $3.3 million of proceeds from completed earn-out requirements on previously sold projects. These sales resulted in pre-tax gains of approximately $40.1 million, before income taxes of $16.0 million.
6. Adjustment of Property Carrying Values:
Impairments -
During 2009, as part of the Company’s ongoing impairment assessment, the Company determined that there were certain redevelopment mixed-use properties with estimated recoverable values that would not exceed their estimated costs. As a result, the Company recorded an aggregate impairment of property carrying values of approximately $50.0 million, representing the excess of the carrying values of 10 properties, primarily located in Philadelphia, Chicago, New York and Boston, over their estimated fair values.
Additionally, during 2009, the Company determined that there was one ground-up development project with an estimated recoverable value that would not exceed its estimated cost. As a result, the Company recorded an impairment of approximately $2.1 million, representing the excess of the carrying value of the project over its estimated fair value.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2008, the Company had determined that for two of its ground-up development projects, located in Middleburg, FL and Miramar, FL, the estimated recoverable value will not exceed their estimated cost. As a result, the Company recorded an aggregate pre-tax adjustment of property carrying value on these projects of $7.9 million, representing the excess of the carrying values of the projects over their estimated fair values.
During 2007, the Company’s recorded an aggregate pre-tax adjustment of property carrying value for two of its ground-up development projects, located in Jacksonville, FL and Anchorage, AK, of $8.5 million, representing the excess of the carrying values of the projects over their estimated fair values.
These impairments were primarily due to declines in real estate fundamentals along with adverse changes in local market conditions and the uncertainty of their recovery. The Company’s estimated fair values were based upon projected operating cash flows (discounted and unleveraged) of the property over its specified holding period. Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. Capitalization rates and discount rates utilized in these models were based upon rates that the Company believes to be within a reasonable range of current market rates for the respective properties.
7. Discontinued Operations and Assets Held for Sale:
The Company reports as discontinued operations assets held-for-sale as of the end of the current period and assets sold during the period. All results of these discontinued operations are included in a separate component of income on the Consolidated Statements of Operations under the caption Discontinued operations. This has resulted in certain reclassifications of 2009, 2008 and 2007 financial statement amounts.
The components of Income from discontinued operations for each of the three years in the period ended December 31, 2009, are shown below. These include the results of operations through the date of each respective sale for properties sold during 2009, 2008 and 2007(in thousands):
| | | | | | |
| | 2009 | | 2008 | | 2007 |
Discontinued operations: | | | | | | |
Revenues from rental property | $ | 47 | $ | 6,316 | $ | 11,468 |
Rental property expenses | | (46) | | (1,031) | | (3,783) |
Depreciation and amortization | | (48) | | (2,208) | | (3,207) |
Interest expense | | - | | (116) | | (597) |
(Loss)/income from other real estate Investments | | (9) | | 3,451 | | 34,740 |
Other (expense)/income, net | | (116) | | 165 | | (3,013) |
| | | | | | |
(Loss)/income from discontinued operating properties | | (172) | | 6,577 | | 35,608 |
| | | | | | |
Provision for income taxes | | (235) | | - | | - |
| | | | | | |
Loss on operating properties held for sale/sold | | (174) | | (598) | | (1,832) |
| | | | | | |
Gain on disposition of operating Properties | | 689 | | 20,018 | | 5,538 |
| | | | | | |
Income from discontinued operations | | 108 | | 25,997 | | 39,314 |
| | | | | | |
Net income attributable to noncontrolling interests | | - | | (1,281) | | (5,740) |
Income from discontinued operations attributable to the Company | $ | 108 | $ | 24,716 | $ | 33,574 |
During 2008, the Company classified as held-for-sale four shopping center properties comprising approximately 0.2 million square feet of GLA. The book value of each of these properties, aggregating approximately $16.2 million, net of accumulated depreciation of approximately $11.3 million, did not exceed each of their estimated fair value. As a result, no adjustment of property carrying value had been recorded. The Company’s determination of the fair value for these properties, aggregating approximately $28.6 million, was based upon executed contracts of sale with third parties less estimated selling costs. During 2009 and 2008, the Company reclassified one property previously classified as held-for-sale into held-for-use and completed the sale of three of these properties.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2007, the Company classified as held-for-sale ten shopping center properties comprising approximately 0.6 million square feet of GLA. The book value of each of these properties, aggregating approximately $80.7 million, net of accumulated depreciation of approximately $4.9 million, did not exceed each of their estimated fair values. As a result, no adjustment of property carrying value had been recorded. The Company’s determination of the fair value for each of these properties, aggregating approximately $116.8 million, was based primarily upon executed contracts of sale with third parties less estimated selling costs. During 2008 and 2007, the Company completed the sale of seven of these properties and reclassified three properties as held-for-use.
8. Investment and Advances in Real Estate Joint Ventures:
Kimco Prudential Joint Ventures ("KimPru") -
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”) through 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% noncontrolling ownership interest in each of the joint ventures, collectively, KimPru. The Company accounts for its investment in KimPru under the equity method of accounting. In addition, the Company manages the portfolios and earns acquisition fees, leasing commissions, property management fees and construction management fees.
During August 2008, KimPru entered into a $650.0 million credit facility, which bears interest at a rate of LIBOR plus 1.25% and was initially scheduled to mature in August 2009. This facility included an option to extend the maturity date for one year, subject to certain requirements including a reduction of the outstanding balance to $485.0 million. During August 2009, KimPru exercised the one-year extension option and made an additional payment to reduce the balance to $485.0 million; as such the credit facility is scheduled to mature in August 2010. Proceeds from this credit facility were used to repay the outstanding balance of $658.7 million under the $1.2 billion credit facility, referred to above, which was scheduled to mature in October 2008 and bore interest at a rate of LIBOR plus 0.45%. This facility is guaranteed by the Company with a guarantee from PREI to the Company for 85% of any guaranty payment the Company is obl igated to make. As of December 31, 2009, the outstanding balance on the credit facility was $331.0 million. This outstanding balance is anticipated to be repaid with proceeds from property sales and partner capital contributions.
During 2009, KimPru sold 22 operating properties for an aggregate sales price of approximately $214.0 million, comprised of (i) 11 operating properties sold to the Company for an aggregate sales price of approximately $106.9 million. These sales resulted in an aggregate net gain of approximately $0.9 million of which the Company’s share was approximately $0.1 million and (ii) 11 operating properties and its interest in an unconsolidated joint venture, sold in separate transactions, for an aggregate sales price of approximately $107.1 million. These sales resulted in an aggregate net loss of approximately $0.1 million. Proceeds from these property sales were used to repay a portion of the outstanding balance on the $650.0 million credit facility.
During 2008, KimPru sold four operating properties for an aggregate sales price of approximately $45.3 million. Proceeds from this property sale were used to repay a portion of the outstanding balance on the $1.2 billion credit facility.
During 2007, KimPru sold, in separate transactions, 27 operating properties, two of which were sold to the Company and one development property in separate transactions, for an aggregate sales price of approximately $517.0 million. These sales resulted in an aggregate loss of approximately $2.8 million, of which the Company’s share was approximately $0.4 million.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2009, KimPru (i) repaid approximately $52.4 million of non-recourse mortgage debt which bore interest at rates ranging from 4.92% to 8.30% and was scheduled to mature in 2009, (ii) refinanced an aggregate $46.5 million in mortgage debt encumbering four properties, which bore interest at a rate of 7.10% and matured during 2009, with $48.0 million in mortgage debt which bears interest at a rate of 7.875% and is scheduled to mature in 2016 and (iii) obtained new mortgages encumbering three properties aggregating approximately $33.0 million which bear interest at a rate of LIBOR plus 5.75% and are scheduled to mature in 2012. Proceeds from these mortgages were used to repay a portion of the outstanding balance on the $650.0 million credit facility.
During 2009, the Company recognized non-cash impairment charges of $28.5 million, against the carrying value of its investment in KimPru, reflecting an other-than-temporary decline in the fair value of its investment resulting from a further decline in the real estate markets.
In addition to the impairment charges above, KimPru recognized impairment charges during 2009 of approximately $223.1 million relating to (i) certain properties held by an unconsolidated joint venture within the KimPru joint venture based on estimated sales prices and (ii) a writedown against the carrying value of an unconsolidated joint venture, reflecting an other-than-temporary decline in the fair value of its investment resulting from a decline in the real estate markets. The Company’s share of these impairment charges were approximately $33.4 million, before income tax benefits of approximately $11.0 million, which is included in Equity in income of joint ventures, net on the Company’s Consolidated Statements of Operations.
During 2008, the Company recognized non-cash impairment charges of $15.5 million, against its carrying value of its investment in KimPru, reflecting an other-than-temporary decline in the fair value of its investment resulting from a significant decline in the real estate markets during 2008.
In addition to the impairment charges above, KimPru recognized impairment charges during 2008 of approximately $74.6 million, of which the Company’s share was $11.2 million, before an income tax benefit of approximately $4.5 million, relating to certain properties held by an unconsolidated joint venture within the KimPru joint venture that are deemed held-for-sale or were transitioned from held-for-sale to held-for-use properties.
During January 2007, the Company and PREI entered into a new joint venture in which the Company holds a 15% noncontrolling interest (“KimPru II”), 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% noncontrolling ownership interest. One of the properties was transferred from a joint venture in which the Company held a 30% noncontrolling ownership interest. As a result of this transaction, the Company recognized profit participation of approximately $3.7 million and recognized its share of the gain. The Company accounts for its investment in KimPru II under the equity method of accounting. In addition, the Company manages the portfolios and ea rns acquisition fees, leasing commissions, property management fees and construction management fees.
During June 2009, the Company recognized a non-cash impairment charge of $4.0 million, against the carrying value of KimPru II. This impairment reflects an other-than-temporary decline in the fair value of its investment resulting from a further decline in the real estate markets.
In addition to the impairment charges above, during 2009, KimPru II recognized non-cash impairment charges relating to two properties aggregating approximately $11.4 million based on estimated sales price. The Company’s share of these impairment charges were approximately $1.7 million, which is included in Equity in income of joint ventures, net on the Company’s Consolidated Statements of Operations. These operating properties were sold, in separate transactions, during 2009 for an aggregate sales price of approximately $43.5 million, which resulted in no gain or loss.
The Company’s estimated fair values relating to the impairment assessments above are based upon discounted cash flow models that include all estimated cash inflows and outflows over a specified holding period and where applicable, any estimated debt premiums. Capitalization rates, discount rates and credit spreads utilized in these models are based upon rates that the Company believes to be within a reasonable range of current market rates for the respective properties.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2009, the KimPru and KimPru II portfolios were comprised of 97 shopping center properties aggregating approximately 16.3 million square feet of GLA located in 12 states.
For the year ended December 31, 2009, two of the ventures within KimPru (PRK Holdings I LLC and PRK Holdings II LLC) are considered significant subsidiaries of the Company based upon reaching certain income thresholds per the Securities and Exchange Commission’s (“SEC”) Regulation S-X Rule 3-09. The Company’s equity in income from each of these ventures for the year ended December 31, 2009, exceeded 20% of the Company’s income from continuing operations, as such the Company has included audited financial statements of these ventures as Exhibit 99.3 and Exhibit 99.4 to this annual report on Form 10-K. Additionally, the Company’s equity in income from KimPru II for the year ended December 31, 2009, exceeded 10% of the Company’s income from continuing operations, as such the Company is providing summarized financial information for KimPru II as follows (in millions):
| | | | |
| | KimPru II |
| | December 31, |
| | 2009 | | 2008 |
Assets: | | | | |
Real estate, net | $ | 731.3 | $ | 797.5 |
Other assets | | 22.6 | | 23.7 |
| $ | 753.9 | $ | 821.2 |
Liabilities and Members' Capital: | | | | |
Notes payable | $ | - | $ | - |
Mortgages payable | | 442.8 | | 481.9 |
Other liabilities | | 9.6 | | 10.9 |
Noncontrolling interests | | - | | - |
Members' capital | | 301.5 | | 328.4 |
| $ | 753.9 | $ | 821.2 |
| | | | | | |
| | KimPru II |
| | December 31, |
| | 2009 | | 2008 | | 2007 |
Revenues from rental properties | $ | 69.6 | $ | 73.6 | $ | 65.7 |
| | | | | | |
Operating expenses | | (18.8) | | (19.5) | | (17.5) |
Interest expense | | (24.8) | | (25.0) | | (24.4) |
Depreciation and amortization | | (23.2) | | (26.5) | | (18.2) |
Impairments | | (11.4) | | - | | - |
Other income/(expense), net | | 11.0 | | 0.1 | | 0.4 |
| | (67.2) | | (70.9) | | (59.7) |
(Loss)/income from continuing operations | | 2.4 | | 2.7 | | 6.0 |
Discontinued operations: | | | | | | |
(Loss)/income from discontinued operations | | (7.0) | | 0.2 | | 0.3 |
Loss on disposition of properties | | (4.5) | | - | | - |
Net (loss)/income | $ | (9.1) | $ | 2.9 | $ | 6.3 |
Kimco Income Operating Partnership, L.P. ("KIR") -
The Company holds a 45% noncontrolling limited partnership interest in KIR and has a master management agreement whereby the Company performs services for fees relating to the management, operation, supervision and maintenance of the joint venture properties.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2009, KIR repaid three maturing non-recourse mortgages aggregating approximately $40.3 million, which bore interest at 7.57%. KIR also obtained five new non-recourse mortgages on four previously unencumbered properties aggregating approximately $45.9 million bearing interest at rates ranging from 6.30% to 7.25% with maturity dates ranging from 2012 to 2019.
In addition, during 2009, KIR refinanced approximately $27.2 million of mortgage debt encumbering one property, which bore interest at a rate of 8.3% and matured during 2009, with new mortgage debt of approximately $27.5 million which bears interest at 7.25% and is scheduled to mature in 2014.
During 2008, KIR repaid 16 non-recourse mortgages aggregating approximately $209.6 million, which were scheduled to mature in 2008 and bore interest at rates ranging from 6.57% to 7.28%. Proceeds from eight individual non-recourse mortgages obtained during 2008, aggregating approximately $218.3 million, bearing interest at rates ranging from 6.0% to 6.5% with maturity dates ranging from 2015 to 2018 were used to fund these repayments.
During 2008, KIR disposed of one operating property for a sales price of approximately $1.9 million. This sale resulted in an aggregate loss of approximately $0.6 million of which the Company’s share was approximately $0.3 million.
During 2007, KIR disposed of three operating properties, in separate transactions, for an aggregate sales price of approximately $149.3 million. These sales resulted in an aggregate gain of approximately $46.0 million of which the Company’s share was approximately $20.7 million.
During 2009, KIR recognized an impairment charge relating to one property of approximately $5.0 million. The Company’s share of this impairment charge was approximately $2.3 million which is included in Equity in income of joint ventures, net on the Company’s Consolidated Statements of Operations. This operating property is currently in foreclosure proceedings with the third party mortgage lender.
KIR’s estimated fair value relating to the impairment assessment above was based upon a discounted cash flow model that include all estimated cash inflows and outflows over a specified holding period. Capitalization rates and discount rates utilized in this model were based upon rates that the Company believes to be within a reasonable range of current market rates for the respective property.
As of December 31, 2009, the KIR portfolio was comprised of 62 shopping center properties aggregating approximately 13.1 million square feet of GLA located in 18 states.
For the year ended December 31, 2009, KIR is considered a significant subsidiary of the Company based upon reaching certain income thresholds per the SEC Regulation S-X Rule 3-09. The Company’s equity in income from KIR for the year ended December 31, 2009, exceeded 20% of the Company’s income from continuing operations, as such the Company has included audited financial statements of KIR as Exhibit 99.2 to this annual report on Form 10-K.
RioCan Investments -
During October 2001, the Company formed three joint ventures (collectively, the "RioCan Ventures") with RioCan Real Estate Investment Trust ("RioCan"), in which the Company has 50% noncontrolling interests, to acquire retail properties and development projects in Canada. The acquisition and development projects are to be sourced and managed by RioCan and are subject to review and approval by a joint oversight committee consisting of RioCan management and the Company’s management personnel. Capital contributions will only be required as suitable opportunities arise and are agreed to by the Company and RioCan.
During 2009, the RioCan Ventures refinanced approximately $30.3 million in mortgage debt with approximately $46.1 million in mortgage debt which bears interest at rates ranging from 5.90% to 6.82% and maturity dates ranging from five years to ten years.
Additionally, during June 2008, the RioCan Ventures, through a newly formed joint venture, acquired 10 operating properties, aggregating 1.1 million square feet of GLA, for an aggregate purchase price of approximately $153.4 million, including the assumption of approximately $81.1 million in non-recourse mortgage debt.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2009, the RioCan Ventures, were comprised of 45 operating properties and one joint venture investment consisting of approximately 9.3 million square feet of GLA.
The Company’s equity in income from the Riocan Ventures for the year ended December 31, 2009, exceeded 10% of the Company’s income from continuing operations, as such the Company is providing summarized financial information for the RioCan Ventures as follows (in millions):
| | | | |
| | December 31, |
| | 2009 | | 2009 |
Assets: | | | | |
Real estate, net | $ | 1,137.4 | $ | 993.5 |
Other assets | | 24.3 | | 24.3 |
| $ | 1,161.7 | $ | 1,017.8 |
Liabilities and Members' Capital: | | | | |
Mortgages payable | $ | 899.4 | $ | 767.8 |
Other liabilities | | 16.4 | | 14.0 |
Members' capital | | 245.9 | | 236.0 |
| $ | 1,161.7 | $ | 1,017.8 |
| | | | | | |
| | December 31, |
| | 2009 | | 2008 | | 2007 |
Revenues from rental properties | $ | 175.6 | $ | 179.7 | $ | 170.6 |
| | | | | | |
Operating expenses | | (65.1) | | (64.4) | | (60.4) |
Interest expense | | (47.5) | | (47.3) | | (42.7) |
Depreciation and amortization | | (31.4) | | (28.5) | | (26.0) |
Other income, net | | - | | 0.6 | | 0.5 |
| | (144.0) | | (139.6) | | (128.6) |
Net income | $ | 31.6 | $ | 40.1 | $ | 42.0 |
Kimco / G.E. Joint Venture ("KROP")
During 2001, the Company formed Kimco Retail Opportunity Portfolio ("KROP") with GE Capital Real Estate ("GECRE"), in which the Company has a 20% noncontrolling interest and manages the portfolio. During August 2006, the Company and GECRE agreed to market for sale the properties within the KROP venture.
During 2009, KROP recognized an impairment charge relating to one property of approximately $2.2 million based on the estimated fair value. The Company’s share of this impairment charge was approximately $1.0 million which is included in Equity in income of joint ventures, net on the Company’s Consolidated Statements of Operations. This operating property was foreclosed on by the third party mortgage lender in exchange for forgiveness of the outstanding debt, this transaction resulted in no gain or loss.
KROP’s estimated fair value relating to the impairment assessment above was based upon a discounted cash flow model that include all estimated cash inflows and outflows over a specified holding period. Capitalization rates and discount rates utilized in this model were based upon rates that the Company believes to be within a reasonable range of current market rates for the respective property.
During 2008, KROP transferred an operating property to the Company for a sales price of approximately $65.5 million, including the assumption of approximately $44.0 million in non-recourse mortgage debt. This sale resulted in a gain of $15.0 million of which the Company’s share was approximately $3.0 million. As a result of this transaction, the Company has deferred its share of the gain related to its remaining ownership interest in the properties.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2007, KROP sold seven operating properties for an aggregate sales price of approximately $162.9 million. These sales resulted in an aggregate gain of $43.1 million of which the Company’s share was approximately $8.6 million.
During 2007, KROP transferred ten operating properties for an aggregate sales price of approximately $267.8 million, including approximately $111.6 million of non-recourse mortgage debt, to a new joint venture in which the Company holds a 15% noncontrolling ownership interest. As a result of this transaction, the Company has deferred its share of the gain related to its remaining ownership interest in the properties. The Company manages this joint venture and accounts for this investment under the equity method of accounting.
Additionally, during 2007, KROP sold four operating properties to the Company for an aggregate sales price of approximately $89.1 million, including the assumption of $41.9 million in non-recourse mortgage debt. The Company’s share of the gains related to these transactions has been deferred.
As of December 31, 2009, the KROP portfolio was comprised of two operating properties aggregating approximately 0.1 million square feet of GLA located in two states.
The Company’s equity in income from KROP for the year ended December 31, 2007, exceeded 10% of the Company’s income from continuing operations; as such the Company is providing summarized financial information for KROP as follows (in millions):
| | | | |
| | December 31, |
| | 2009 | | 2008 |
Assets: | | | | |
Real estate, net | $ | 67.4 | $ | 83.5 |
Other assets | | 7.6 | | 5.5 |
| $ | 75.0 | $ | 89.0 |
Liabilities and Members' Capital: | | | | |
Mortgages payable | $ | 56.4 | $ | 68.4 |
Other liabilities | | 0.7 | | 1.4 |
Noncontrolling interests | | 4.2 | | 3.9 |
Members' capital | | 13.7 | | 15.3 |
| $ | 75.0 | $ | 89.0 |
| | | | | | |
| | December 31, |
| | 2009 | | 2008 | | 2007 |
Revenues from rental properties | $ | 69.6 | $ | 73.6 | $ | 65.7 |
Operating expenses | | (18.8) | | (19.5) | | (17.5) |
Interest expense | | (24.8) | | (25.0) | | (24.4) |
Depreciation and amortization | | (23.2) | | (26.5) | | (18.2) |
Impairments of real estate | | (11.2) | | - | | - |
Other income, net | | 10.8 | | 0.1 | | 0.4 |
| | (67.2) | | (70.9) | | (59.7) |
Income from continuing operations | | 2.4 | | 2.7 | | 6.0 |
Discontinued operations: | | | | | | |
(Loss)/income from discontinued operations | | (7.0) | | 0.2 | | 0.3 |
Loss on disposition of properties | | (4.5) | | - | | - |
Net (loss)/income | $ | (9.1) | $ | 2.9 | $ | 6.3 |
PL Retail -
During December 2004, the Company acquired the Price Legacy Corporation through a newly formed joint venture, PL Retail LLC ("PL Retail"), in which the Company had a 15% noncontrolling interest and managed the portfolio. In connection with this transaction, PL Retail had acquired 33 operating properties aggregating approximately 7.6 million square feet of GLA located in ten states.
109
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During November 2009, the 85% owner in PL Retail sold its interest to the Company. At the time of the transaction, PL Retail indirectly owned through wholly-owned subsidiaries 21 shopping centers, comprising approximately 5.2 million square feet of GLA, in which the Company held a 15% noncontrolling interest just prior to this transaction. The Company paid a purchase price equal to approximately $175.0 million, after customary adjustments and closing prorations, which was equivalent to 85% of PL Retail LLC’s gross asset value, which equaled approximately $825 million, less the assumption of $564 million of non-recourse mortgage debt encumbering 20 properties and $50 million of perpetual preferred stock. This transfer resulted in an aggregate net gain of approximately $57.5 million of which the Company’s share was approximately $8.6 million. As a result of this transaction the Company now consolidates this entity.
During 2009, prior to the Company acquiring PL Retail, PL Retail refinanced an aggregate $118.6 million in mortgage debt, which bore interest at rates ranging from 8.18% to 10.18% and matured during 2009, with $131.5 million in mortgage debt which bears interest at rates ranging from LIBOR plus 400 basis points to 7.70% and maturity dates ranging from 2014 to 2016.
Additionally, during 2009, prior to the Company acquiring PL Retail, PL Retail recognized a non-cash impairment charge of approximately $2.6 million relating to a property held-for-sale based on its estimated sales price. The Company’s share of this impairment charge was approximately $0.4 million which is included in Equity in income of joint ventures, net on the Company’s Consolidated Statements of Operations. PL Retail, subsequently sold this property for a sales price of $104.0 million which resulted in a loss of approximately $1.1 million, of which the Company’s share was approximately $0.2 million. Proceeds from this sale were used to partially pay down the outstanding balance on PL Retail’s revolving credit facility described below.
During 2007, PL Retail sold one operating property for a sales price of $40.1 million which resulted in a gain of approximately $13.5 million, of which the Company’s share was approximately $2.0 million. Proceeds from this sale were used to partially pay down the outstanding balance on PL Retail’s revolving credit facility described below.
PL Retail had a $39.5 million unsecured revolving credit facility, which bore interest at LIBOR plus 400 basis points, with a LIBOR floor of 1.5%,and was scheduled to mature in February 2010. This facility was guaranteed by the Company and the joint venture partner had guaranteed reimbursement to the Company of 85% of any guaranty payment the Company was obligated to make. During 2009, the joint venture fully repaid the outstanding balance and terminated this credit facility utilizing proceeds from the property sale transactions described above.
The Company’s equity in income from PL Retail for the period from January 1, 2009 through the transaction date of November 4, 2009, exceeded 10% of the Company’s income from continuing operations; as such the Company is providing summarized financial information for PL Retail as follows (in millions):
| | | | |
| | December 31, |
| | 2009 | | 2008 |
Assets: | | | | |
Real estate, net | $ | - | $ | 861.8 |
Other Assets | | - | | 117.3 |
| $ | - | $ | 979.1 |
Liabilities and Members' Capital: | | | | |
Notes payable | $ | - | $ | 35.6 |
Mortgages payable | | - | | 649.0 |
Other liabilities | | - | | 10.6 |
Noncontrolling interests | | - | | 56.9 |
Members' capital | | - | | 227.0 |
| $ | - | $ | 979.1 |
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
| | | | | | |
| | December 31, |
| | 2009 | | 2008 | | 2007 |
Revenues from rental properties | $ | 58.6 | $ | 83.1 | $ | 87.2 |
| | | | | | |
Operating expenses | | (20.7) | | (23.9) | | (26.1) |
Interest expense | | (27.0) | | (30.2) | | (37.1) |
Depreciation and amortization | | (19.7) | | (23.4) | | (22.8) |
Impairments of real estate | | (2.6) | | - | | - |
Other (expense)/income, net | | (0.1) | | 1.2 | | 1.7 |
| | (70.1) | | (76.3) | | (84.3) |
(Loss)/income from continuing operations | | (11.5) | | 6.8 | | 2.9 |
Discontinued operations: | | | | | | |
Income from discontinued operations | | 18.9 | | 0.3 | | 1.1 |
Gain on disposition of properties | | 57.5 | | - | | 13.5 |
Net income | $ | 64.9 | $ | 7.1 | $ | 17.5 |
InTown Suites –
During June 2007, the Company entered into a joint venture, in which the Company has a noncontrolling ownership interest, and acquired all of the common stock of InTown Suites Management, Inc, which holds 138 extended stay residential properties (“InTown Suites”). This investment was funded with approximately $186.0 million of new cross-collateralized non-recourse mortgage debt with a fixed interest rate of 5.59%, encumbering 35 properties, a $153.0 million three-year unsecured credit facility, with two one-year extension options, which bears interest at LIBOR plus 0.375% and is guaranteed by the Company and the assumption of $278.6 million cross-collateralized non-recourse mortgage debt with fixed interest rates ranging from 5.19% to 5.89%, encumbering 86 properties. The joint venture partner has pledged its equity interest for any guaranty payment the Company is obligated to pay. The outstanding balance on the three-year unsecured credit facility was $147.5 million as of December 31, 2008.
For the year ended December 31, 2009, InTown Suites is considered a significant subsidiary of the Company based upon reaching certain income thresholds per the SEC Regulation S-X Rule 3-09. The Company’s equity in income from InTown Suites for the year ended December 31, 2009, exceeded 20% of the Company’s income from continuing operations, as such the Company has included audited financial statements of InTown Suites as Exhibit 99.1 to this annual report of Form 10-K.
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 noncontrolling 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.
During 2009, KUBS refinanced $7.4 million in mortgage debt encumbering one property, which bore interest at a rate of 4.74% and matured during 2009, with $6.0 million in mortgage debt which bears interest at a rate of 6.64% and is scheduled to mature in 2014.
As of December 31, 2009, the KUBS portfolio was comprised of 43 operating properties aggregating approximately 6.2 million square feet of GLA located in 12 states.
Other Real Estate Joint Ventures –
The Company and its subsidiaries have investments in and advances to various other real estate joint ventures. These joint ventures are engaged primarily in the operation and development of shopping centers which are either owned or held under long-term operating leases.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2009, the Company acquired a land parcel located in San Luis Potosi, Mexico, through a joint venture in which the Company has a noncontrolling interest, for an aggregate purchase price of approximately $0.8 million. The Company accounts for its investment in this joint venture under the equity method of accounting. The Company’s aggregate investment resulting from this transaction was approximately $0.4 million.
During 2009, a joint venture in which the Company held a 10% noncontrolling interest sold an operating property to the Company for a sales price of approximately $23.6 million, including the assumption of a $13.5 million non-recourse mortgage. This sale resulted in a gain of approximately $3.4 million at the joint venture level of which the Company’s share of the gain was approximately $0.3 million. As a result of this transaction, the Company recognized a gain of approximately $0.3 million related to a change in control and remeasuring the Company’s 10% noncontrolling equity interest to fair value, the Company now consolidates this entity.
During 2009, a joint venture in which the Company had a noncontrolling interest refinanced approximately $13.2 million in mortgage debt encumbering one property, which bore interest at a rate of 4.00% and matured during 2009, with $13.6 million in mortgage debt which bears interest at a rate of LIBOR plus 350 basis points and is scheduled to mature in 2012.
Also during 2009, a joint venture in which the Company has a 50% noncontrolling ownership interest obtained a new three-year $53.0 million loan which bears interest at a rate of 7.85%. Proceeds from this mortgage and an additional $15.0 million capital contribution from the partners were used to repay $68.0 million in mortgage debt, which was scheduled to mature in 2009 and bore interest at a rate of LIBOR plus 1.16%. This mortgage is jointly and severally guaranteed by the Company and the other 50% noncontrolling ownership interest holder. As of December 31, 2009, the outstanding balance on this loan was $52.8 million.
Additionally during 2009, a joint venture in which the Company has a 30% noncontrolling ownership interest obtained a new $59.0 million three-year mortgage loan, which bears interest at a rate of LIBOR plus 350 basis points. The Company and the holder of the remaining 70% ownership interest guarantee, jointly and severally, up to $10.0 million of this mortgage. As of December 31, 2009, the outstanding balance on this loan was $59.0 million.
During June 2009, the Company recognized non-cash impairment charges of approximately $12.2 million, against the carrying value of its investments in six joint ventures, reflecting an other-than-temporary decline in the fair value of these investments resulting from a further decline in the real estate markets. Estimated fair values were based upon discounted cash flow models that include all estimated cash inflows and outflows over a specified holding period and where applicable, any estimated fair value debt premiums. Capitalization rates, discount rates and credit spreads utilized in these models were based upon rates that the Company believes to be within a reasonable range of current market rates for the respective properties.
During 2008, the Company acquired nine operating properties, one leasehold interest and two land parcels through joint ventures in which the Company has noncontrolling interests for an aggregate purchase price of approximately $62.2 million including the assumption of approximately $20.6 million of non-recourse mortgage debt encumbering two of the properties. The Company accounts for its investment in these joint ventures under the equity method of accounting. The Company’s aggregate investment resulting from these transactions was approximately $32.3 million. Details of these transactions are as follows (in thousands):
112
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
| | | | | | | | | | |
| | | | | | Purchase Price |
Property Name | | Location | | Month Acquired | | Cash | | Debt | | Total |
InTown Suites (2 extended stay residential properties, 299 units) | | Houston,TX | | Feb-08 | $ | 8,750 | $ | - | $ | 8,750 |
| | | | | | | | | | |
American Industries (land parcel) | | Chihuahua,Mexico | | Feb-08 | | 1,933 | | - | | 1,933 |
| | | | | | | | | | |
American Industries | | Monterrey,Mexico | | Apr-08 | | 8,700 | | - | | 8,700 |
| | | | | | | | | | |
Little Ferry(leasehold interest) | | LittleFerry,NJ | | June-08 | | 5,000 | | - | | 5,000 |
| | | | | | | | | | |
Tacoma Plaza | | Dartmouth,Canada | | Sept-08 | | 8,714 | | 9,026 | | 17,740 |
| | | | | | | | | | |
American Industries (land parcel) | | SanLuisPotosi,Mexico | | Sept-08 | | 224 | | - | | 224 |
| | | | | | | | | | |
River Point Shopping Center | | BritishColumbia,Canada | | Nov-08 | | 4,486 | | 11,606 | | 16,092 |
| | | | | | | | | | |
Patio-Portfolio II (4 properties) | | Santiago,Chile | | Nov-08 | | 3,810 | | - | | 3,810 |
| | Total Acquisitions | | | $ | 41,617 | $ | 20,632 | $ | 62,249 |
In addition, during 2008, two joint venture investments in which the Company holds a 50% interest in each obtained individual non-recourse mortgages totaling $77.0 million. These mortgages have interest rates ranging from 6.38% to 6.47% and maturities ranging from 2018 to 2019. Proceeds from these mortgages were used to retire $36.0 million of mortgage debt encumbering two properties held by the joint ventures.
The Company’s equity in income for the year ended December 31, 2009, from a joint venture that holds an operating property in Tustin, CA, in which the Company holds a noncontrolling interest (“Tustin”) exceeded 10% of the Company’s income from continuing operations), as such the Company is providing summarized financial information for this investment below (in millions):
| | | | |
| | Tustin |
| | December 31, |
| | 2009 | | 2008 |
Assets: | | | | |
Real estate, net | $ | 187.2 | $ | 195.8 |
Other assets | | 13.6 | | 13.9 |
| $ | 200.8 | $ | 209.7 |
Liabilities and Members’ Capital: | | | | |
Mortgages Payable | $ | 206.0 | $ | 206.0 |
Other liabilities | | 2.8 | | 3.3 |
Members’ (deficit)/capital | | (8.0) | | 0.4 |
| $ | 200.8 | $ | 209.7 |
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
| | | | | | |
| | Tustin |
| | December 31, |
| | 2009 | | 2008 | | 2007 |
Revenues from rental properties | $ | 22.6 | $ | 21.8 | $ | 3.7 |
| | | | | | |
Operating expenses | | (6.5) | | (8.0) | | (1.8) |
Interest expense | | (14.0) | | (15.3) | | (3.6) |
Depreciation and amortization | | (10.4) | | (10.6) | | (3.3) |
Other (expense)/income, net | | (0.1) | | 4.3 | | 4.4 |
| | (31.0) | | (29.6) | | (4.3) |
Net loss | $ | (8.4) | $ | (7.8) | $ | (0.6) |
Summarized financial information for real estate joint ventures (excluding the seven discussed above, which are presented separately) is as follows (in millions):
| | | | |
| | December 31, |
| | 2009 | | 2008 |
Assets: | | |
|
|
Real estate, net | $ | 4,725.2 | $ | 4,739.5 |
Other assets | | 333.9 | | 267.1 |
| $ | 5,059.1 | $ | 5,006.6 |
Liabilities and Partners’/Members’ Capital: | | | | |
Notes payable | $ | 88.3 | $ | 137.1 |
Mortgages payable | | 2,862.6 | | 2,842.2 |
Construction loans | | 109.0 | | 119.6 |
Other liabilities | | 146.2 | | 149.0 |
Noncontrolling interests | | 1.6 | | 1.0 |
Partners’/Members’ capital | | 1,851.4 | | 1,757.7 |
| $ | 5,059.1 | $ | 5,006.6 |
| | | | | | |
| | Year Ended December 31, |
| | 2009 | | 2008 | | 2007 |
Revenues from rental property | $ | 588.8 | $ | 586.4 | $ | 558.3 |
Operating expenses | | (191.9) | | (190.7) | | (184.5) |
Interest expense | | (166.8) | | (180.4) | | (174.9) |
Depreciation and amortization | | (164.5) | | (162.4) | | (144.4) |
Other expense, net | | (36.6) | | (27.0) | | (14.7) |
| | (559.8) | | (560.5) | | (518.5) |
Income from continuing operations | | 29.0 | | 25.9 | | 39.8 |
Discontinued Operations: | | | | | | |
Income from discontinued operations | | 2.1 | | - | | 0.1 |
Gain on dispositions of properties | | 7.8 | | 13.4 | | 104.9 |
Net income | $ | 38.9 | $ | 39.3 | $ | 144.8 |
Other liabilities included in the Company’s accompanying Consolidated Balance Sheets include accounts with certain real estate joint ventures totaling approximately $25.5 million and $9.7 million at December 31, 2009 and 2008, respectively. The Company and its subsidiaries have varying equity interests in these real estate joint ventures, which may differ from their proportionate share of net income or loss recognized in accordance with GAAP.
114
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company’s maximum exposure to losses associated with its unconsolidated joint ventures is primarily limited to its carrying value in these investments. Generally such investments contain operating properties and the Company has determined these entities do not contain the characteristics of a VIE. As of December 31, 2009 and 2008, the Company’s carrying value in these investments approximated $1.1 billion and $1.2 billion, respectively.
9. Other Real Estate Investments:
Preferred Equity Capital -
The Company maintains a Preferred Equity program, which provides capital to developers and owners of real estate properties. During 2009, the Company provided, in separate transactions, an aggregate of approximately $0.4 million in investment capital to developers and owners of two real estate properties. During 2008, the Company provided, in separate transactions, an aggregate of approximately $51.9 million in investment capital to developers and owners of 28 real estate properties. As of December 31, 2009, the Company’s net investment under the Preferred Equity program was approximately $520.8 million relating to 615 properties, including 402 net lease properties described below. For the years ended December 31, 2009, 2008 and 2007, the Company earned approximately $30.4 million, including $2.5 million of profit participation earned from five capital transactions, $66.8 million, including $24.6 million of profit participation earn ed from five capital transactions, and $67.1 million, including $30.5 million of profit participation earned from 18 capital transactions, respectively, from its preferred equity investments.
Included in the capital transactions described above for the year ended December 31, 2008, was the sale of the Company’s preferred equity investment in an operating property to its partner for approximately $29.5 million. The Company provided seller financing to the partner for approximately CAD $24.0 million (approximately USD $23.5 million), which bears interest at a rate of 8.5% per annum and has a maturity date of June 2013. The Company evaluated this transaction pursuant to the provisions of the FASB’s real estate sales guidance and accordingly, recognized profit participation of approximately $10.8 million.
Two of the capital transactions described above for the year ended December 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% noncontrolling 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.
Also, included in the capital transactions described above for the year ended December 31, 2007, was 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 acquisition of this property, the Company did not recognize any profit participation.
During 2007, the Company invested approximately $81.7 million of preferred equity capital in an entity which was comprised of 403 net leased properties which consist of 30 master leased pools with each pool leased to individual corporate operators (“USRA Venture”). Each master leased pool is accounted for as a direct financing lease. These properties consist of a diverse array of free-standing restaurants, fast food restaurants, convenience and auto parts stores. The Company determined that this entity was a VIE, based on the fact that certain non-equity holders have the right to receive expected residual returns from this entity. The Company also determined that it was not the primary beneficiary of this VIE based on the fact that the Company is in a preferred position and would not absorb a majority of expected losses, nor would receive a majority of the entities expected residual returns. As of December 31, 2009, these properties were encumbered by third party loans aggregating approximately $418.5 million with interest rates ranging from 5.08% to 10.47% with a weighted average interest rate of 9.3% and maturities ranging from two years to 13 years. The Company’s investment in this VIE as of December 31, 2009 was $102.4 million. The Company has not provided financial support to the VIE that it was not previously contractually required to provide.
115
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company’s equity in income from the USRA Venture for the year ended December 31, 2009, exceeded 10% of the Company’s income from continuing operations, as such the Company is providing summarized financial information for the investment as follows (in millions):
| | | | |
| | 2009 | | 2008 |
Assets: | | | | |
Investment in direct financing leases, net | $ | 701.1 | $ | 668.6 |
| | | | |
Liabilities and Members’ Capital: | | | | |
Mortgages payable, including fair market value of debt of $85 million | $ | 503.5 | $ | 521.4 |
Members’ capital | | 197.6 | | 147.2 |
| $ | 701.1 | $ | 668.6 |
| | | | | | |
| | Year Ended December 31, |
| | 2009 | | 2008 | | 2007 |
Interest income from direct financing leases | $ | 52.6 | $ | 52.6 | $ | 25.8 |
| | | | | | |
Interest expense | | (31.9) | | (32.9) | | (16.8) |
Impairment (a) | | (20.0) | | - | | - |
Other expense, net | | (0.1) | | (0.1) | | (0.1) |
| | (52.0) | | (33.0) | | (16.9) |
Net Income | $ | 0.6 | $ | 19.6 | $ | 8.9 |
(a) Represents impairments on two master lease pools due to decline in fair market value.
During 2009, the Company recognized non-cash impairment charges of $49.2 million, primarily against the carrying value of 16 preferred equity investments, which hold 29 properties, reflecting an other-than-temporary decline in the fair value of its investment resulting from a decline in the real estate markets.
The Company’s estimated fair values relating to the impairment assessments above were based upon discounted cash flow models that include all estimated cash inflows and outflows over a specified holding period and where applicable, any estimated debt premiums. Capitalization rates, discount rates and credit spreads utilized in these models were based upon rates that the Company believes to be within a reasonable range of current market rates for the respective properties.
The Company’s equity in income from three of its preferred equity investments for the year ended December 31, 2009, exceeded 10% of the Company’s income from continuing operations, as such the Company is providing summarized financial information for the investments as follows (in millions):
| | | | | | | | | | | | |
| | MBC(a) | | Foothills(b) | | Delray & JCC(c) |
| | | | | | December 31, | | | | |
| | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 |
Assets: | | | | | | | | | | | | |
Real estate, net | $ | - | $ | 55.6 | $ | 93.1 | $ | 95.9 | $ | 21.3 | $ | 31.2 |
Other assets | | - | | 3.7 | | 4.6 | | 5.5 | | 0.6 | | 0.7 |
| $ | - | $ | 59.3 | $ | 97.7 | $ | 101.4 | $ | 21.9 | | 31.9 |
| | | | | | | | | | | | |
Liabilities and Members’ Capital: | | | | | | | | | | | | |
Mortgages payable | $ | - | $ | 50.7 | $ | 81.0 | $ | 81.0 | $ | 25.0 | $ | 25.0 |
Other liabilities | | - | | 1.2 | | 2.3 | | 3.1 | | 0.9 | | 0.3 |
Members’ capital | | - | | 7.4 | | 14.4 | | 17.3 | | (4.0) | | 6.6 |
| $ | - | $ | 59.3 | $ | 97.7 | $ | 101.4 | $ | 21.9 | $ | 31.9 |
116
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
| | | | | | | | | | | | | | | | | | |
| | MBC (a) | | Foothills (b) | | Delray & JCC (c) |
| | Year Ended December 31, |
| | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 |
Revenues from Rental Property | $ | 6.9 | $ | 7.3 | $ | 7.8 | $ | 13.3 | $ | 14.0 | $ | 13.4 | $ | 1.4 | $ | 1.4 | $ | 0.6 |
Operating expenses | | (3.4) | | (3.0) | | (3.2) | | (6.0) | | (5.8) | | (6.0) | | (0.9) | | (1.1) | | (0.3) |
Interest expense | | (2.3) | | (2.7) | | (2.8) | | (5.0) | | (5.0) | | (5.0) | | (1.2) | | (1.4) | | (0.6) |
Depreciation and amortization | | (2.5) | | (2.3) | | (3.6) | | (4.6) | | (4.0) | | (4.4) | | (0.7) | | (0.8) | | (0.1) |
Other, net | | (0.2) | | 0.1 | | 0.3 | | - | | - | | 0.2 | | - | | - | | - |
| | (8.4) | | (7.9) | | (9.3) | | (15.6) | | (14.8) | | (15.2) | | (2.8) | | (3.3) | | (1.0) |
Net loss | $ | (1.5) | $ | (0.6) | $ | (1.5) | $ | (2.3) | $ | (0.8) | $ | (1.8) | $ | (1.4) | $ | (1.9) | $ | (0.4) |
(a)
Represents a preferred equity investment which holds three operating properties in Boston, MA. The Company sold its interest in this preferred equity joint venture during 2009, as such the result from operations are for the period the investment was held.
(b)
Represents a preferred equity investment which holds an operating property in Tucson, AZ.
(c)
Represents a preferred equity investment which holds two properties in Delray Beach, FL.
Summarized financial information relating to the Company’s preferred equity investments (excluding the investments presented separately above) is as follows (in millions):
| | | | |
| | December 31, |
| | 2009 | | 2008 |
Assets: | | | | |
Real estate, net | $ | 1,886.5 | $ | 1,829.6 |
Other assets | | 155.0 | | 112.8 |
| $ | 2,041.5 | $ | 1,942.4 |
Liabilities and Partners’/Members’ Capital: | | | | |
Notes and mortgages payable | $ | 1,511.8 | $ | 1,411.2 |
Other liabilities | | 64.8 | | 60.6 |
Partners’/Members’ capital | | 464.9 | | 470.6 |
| $ | 2,041.5 | $ | 1,942.4 |
| | | | | | |
| | Year Ended December 31, |
| | 2009 | | 2008 | | 2007 |
Revenues from rental property | $ | 237.7 | $ | 238.0 | $ | 218.7 |
Operating expenses | | (86.4) | | (90.1) | | (77.9) |
Interest expense | | (72.1) | | (78.1) | | (82.2) |
Depreciation and amortization | | (59.9) | | (56.6) | | (52.1) |
Other expense, net | | (9.3) | | (1.7) | | (1.6) |
| | (227.7) | | (226.5) | | (213.8) |
Gain on disposition of properties | | 1.6 | | 8.5 | | 90.5 |
Net income | $ | 11.6 | $ | 20.0 | $ | 95.4 |
In addition to the net leased portfolio VIE discussed above, the Company’s preferred equity investments include two additional investments that are VIEs for which the Company is not the primary beneficiary. These joint ventures were primarily established to develop real estate property for long-term investment. These entities were deemed VIEs primarily based on the fact that the equity investment at risk was not sufficient to permit the entity to finance its activities without additional financial support. The initial equity contributed to these entities was not sufficient to fully finance the real estate construction as development costs are funded by the partners throughout the construction period. The Company determined that it was not the primary beneficiary of these VIEs based on the fact that the Company is in a preferred position and would not absorb a majority of expected losses, nor would it receive a majorit y of the entity's expected residual returns.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company’s aggregate investment in these VIEs was approximately $3.0 million as of December 31, 2009, which is included in Other real estate investments in the Company’s Consolidated Balance Sheets. The Company’s maximum exposure to loss as a result of its involvement with these VIEs is estimated to be $5.5 million, which primarily represents the Company’s current investment and estimated future funding commitments. One of these entities is encumbered by third party debt aggregating $0.9 million. The Company has not provided financial support to these VIEs that it was not previously contractually required to provide. All future costs of development will be funded with capital contributions from the Company and the outside partners in accordance with their respective ownership percentages.
The Company’s maximum exposure to losses associated with its preferred equity investments is primarily limited to its invested capital. As of December 31, 2009 and 2008, the Company’s invested capital in its preferred equity investments approximated $520.8 million and $534.0 million, respectively.
Other -
During 2008, the Company sold its 18.7% interest in a real estate company located in Mexico for approximately $23.2 million resulting in a gain of approximately $7.2 million.
Investment in Retail Store Leases -
The Company has interests in various retail store leases relating to the anchor store premises in neighborhood and community shopping centers. These premises have been sublet to retailers who lease the stores pursuant to net lease agreements. Income from the investment in these retail store leases during the years ended December 31, 2009, 2008 and 2007, was approximately $0.8 million, $2.7 million and $1.2 million, respectively. These amounts represent sublease revenues during the years ended December 31, 2009, 2008 and 2007, of approximately $5.2 million, $7.1 million and $7.7 million, respectively, less related expenses of $4.4 million, $4.4 million and $5.1 million, respectively. The Company's future minimum revenues under the terms of all non-cancelable tenant subleases and future minimum obligations through the remaining terms of its retail store leases, assuming no new or renegotiated leases are executed for such premises, for future yea rs are as follows (in millions): 2010, $6.0 and $3.7; 2011, $4.9 and $3.7; 2012, $3.8 and $2.9; 2013, $3.0 and $2.1; 2014, $1.8 and $1.2 and thereafter, $2.6 and $1.4, respectively.
Leveraged Lease -
During June 2002, the Company acquired a 90% equity participation interest in an existing leveraged lease of 30 properties. The properties are leased under a long-term bond-type net lease whose primary term expires in 2016, with the lessee having certain renewal option rights. The Company’s cash equity investment was approximately $4.0 million. This equity investment is reported as a net investment in leveraged lease in accordance with the FASB’s Lease guidance.
From 2002 to 2008, 18 of these properties were sold, whereby the proceeds from the sales were used to pay down the mortgage debt by approximately $31.2 million.
As of December 31, 2009, the remaining 12 properties were encumbered by third-party non-recourse debt of approximately $38.4 million that is scheduled to fully amortize during the primary term of the lease from a portion of the periodic net rents receivable under the net lease.
As an equity participant in the leveraged lease, the Company has no recourse obligation for principal or interest payments on the debt, which is collateralized by a first mortgage lien on the properties and collateral assignment of the lease. Accordingly, this obligation has been offset against the related net rental receivable under the lease.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
At December 31, 2009 and 2008, the Company’s net investment in the leveraged lease consisted of the following (in millions):
| | | | |
| | 2009 | | 2008 |
Remaining net rentals | $ | 44.1 | $ | 53.8 |
Estimated unguaranteed residual value | | 31.7 | | 31.7 |
Non-recourse mortgage debt | | (34.5) | | (38.5) |
Unearned and deferred income | | (37.0) | | (43.0) |
Net investment in leveraged lease | $ | 4.3 | $ | 4.0 |
10. Mortgages and Other Financing Receivables:
The Company has various mortgages and other financing receivables which consist of loans acquired and loans originated by the Company. For a complete listing of the Company’s mortgages and other financing receivables at December 31, 2009, see Financial Statement Schedule IV included in this annual report on Form 10-K.
The following table reconciles mortgage loans and other financing receivables from January 1, 2007 to December 31, 2009 (in thousands):
| | | | | | |
| | 2009 | | 2008 | | 2007 |
Balance at January 1 | $ | 181,992 | $ | 153,847 | $ | 162,669 |
| | | | | | |
Additions: | | | | | | |
New mortgage loans | | 8,316 | | 86,247 | | 62,362 |
Additions under existing mortgage loans | | 707 | | 8,268 | | 38,122 |
Foreign currency translation | | 6,324 | | - | | - |
Capitalized loan costs | | 60 | | 605 | | 675 |
Amortization of loan discounts | | 247 | | 247 | | 271 |
| | | | | | |
Deductions: | | | | | | |
Collections of principal | | (43,578) | | (48,633) | | (105,277) |
Loan foreclosures | | (17,312) | | - | | - |
Loan impairments | | (3,800) | | - | | - |
Charge off/foreign currency translation | | - | | (15,630) | | (1,837) |
Amortization of loan premiums | | (1,024) | | (2,279) | | (2,298) |
Amortization of loan costs | | (600) | | (680) | | (840) |
Balance at December 31 | $ | 131,332 | $ | 181,992 | $ | 153,847 |
As noted in the table above, during 2009, the Company recognized non-cash impairment charges of approximately $3.8 million, against the carrying value of two mortgage loans. Approximately $3.5 million of the $3.8 million of impairment charges was related to a mortgage receivable that was in default. The Company began foreclosure proceedings on the underlying property during June 2009 and the process was completed in the fourth quarter 2009. This impairment charge reflects the decrease in the estimated fair values of the real estate collateral.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
11. Marketable Securities:
The amortized cost and estimated fair values of securities available-for-sale and held-to-maturity at December 31, 2009 and 2008, are as follows (in thousands):
| | | | | | | | |
| | December 31, 2009 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available-for-sale: | | | | | | | | |
Equity and debt securities | $ | 182,826 | $ | 4,896 | $ | $(21,629) | $ | 166,093 |
Held-to-maturity: | | | | | | | | |
Other debt securities | | 43,500 | | 1,454 | | (7,042) | | 37,912 |
Total marketable securities | $ | 226,326 | $ | 6,350 | $ | (28,671) | $ | 204,005 |
| | | | | | | | |
| | December 31, 2008 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available-for-sale: | | | | | | | | |
Equity and debt securities | $ | 220,560 | $ | 122 | $ | (60,518) | $ | 160,164 |
Held-to-maturity: | | | | | | | | |
Other debt securities | | 98,010 | | 2,177 | | (41,565) | | 58,622 |
Total marketable securities | $ | $ 318,570 | $ | 2,299 | $ | (102,083) | $ | 218,786 |
During February 2008, the Company acquired an aggregate $190 million Australian denominated (“AUD”) (approximately $170.1 million USD) convertible notes issued by a subsidiary of Valad Property Group (“Valad”), a publicly traded Australian company listed on the Australian stock exchange that is a diversified, property fund manager, investor, developer and property investment banker with property investments in Australia, Europe and Asia. The notes are guaranteed by Valad and bear interest at 9.5% payable semi-annually in arrears. The notes are repayable after five years with an option for Valad to extend up to 18 months, subject to certain interest rate and conversion price resets. The notes are convertible any time into publicly traded Valad securities at a price of AUD$1.33.
In accordance with the FASB’s Derivative and Hedging guidance, the Company has bifurcated the conversion option within the Valad convertible notes and has separately accounted for this option as an embedded derivative. The original host instrument is classified as an available-for-sale security at fair value and is included in Marketable securities on the Company’s Consolidated Balance Sheets with changes in the fair value recorded through Stockholders’ equity as a component of other comprehensive income. At December 31, 2009 and 2008, the Company had an unrealized loss associated with these notes of approximately $21.6 million and $46.0 million, respectively. Interest payments on the notes are current and all amounts due in accordance with contractual terms are considered probable by the Company. The Company has the intent and ability to hold the notes to recover its investment, which may be to its mat urity and therefore, does not believe that the decline in value at December 31, 2009, is other-than-temporary. The embedded derivative is recorded at fair value and is included in Other assets on the Company’s Consolidated Balance Sheets with changes in fair value recognized in the Company’s Consolidated Statements of Operations. The value attributed to the embedded convertible option was approximately AUD $14.3 million, (approximately USD $13.8 million). As a result of the fair value remeasurement of this derivative instrument during 2009 and 2008, there was an AUD $1.4 million (approximately USD $1.6 million) and an AUD $5.5 million (approximately USD $5.9 million), respectively, unrealized increase in the fair value of the convertible option. This unrealized increase is included in Other expense, net on the Company’s Consolidated Statements of Operations.
120
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
For marketable debt securities, the Company assesses current interest payments and the probability of the issuer’s ability to pay all amounts due under contractual terms. Additionally, in accordance with the FASB’s Investments-Debt and Equity Securities guidance, the Company assesses whether it has the intent to sell the debt security, whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery (for example, if its cash or working capital requirements or contractual or regulatory obligations indicate that the debt security will be required to be sold before the Company forecasted recovery occurs) and whether it does not expect to recover the security’s entire amortized cost basis even if the entity does not intend to sell.
During 2009, 2008 and 2007, the Company recorded non-cash impairment charges of approximately $26.1 million, $118.4 million and $5.3 million, respectively, before income tax benefits of approximately $0 million, $25.7 million and $2.1 million, respectively, due to the decline in value of certain marketable equity and other investments that were deemed to be other-than-temporary. These impairments were a result of the deterioration of the equity markets for these securities during 2009, 2008 and 2007 and the uncertainty of their future recoverability. Market value for these equity securities represents the closing price of each security as it appears on their respective stock exchange at the end of the period. Details of these impairment charges are as follows (in millions):
| | | | | | |
| | For the year ended December 31, |
| | 2009 | | 2008 | | 2007 |
Valad | $ | - | $ | 45.5 | $ | - |
Six Flags, including bonds | | 7.7 | | - | | - |
Innvest | | - | | 24.2 | | - |
Plazacorp | | 5.3 | | - | | - |
Cost method investments | | 3.0 | | 17.7 | | - |
Sears | | - | | 8.8 | | - |
Lexington | | - | | 7.5 | | - |
Winthrop | | - | | 5.4 | | - |
Capital & Regional | | 3.7 | | - | | - |
Other | | 6.4 | | 9.3 | | 5.3 |
| $ | 26.1 | $ | 118.4 | $ | 5.3 |
At December 31, 2009, the Company’s investment in marketable securities was approximately $209.6 million which includes an aggregate unrealized loss of approximately $21.6 million relating to the Valad marketable debt securities. At December 31, 2009 there were no unrealized losses relating to marketable equity securities. The Company does not believe that the declines in value of any of its remaining securities with unrealized losses are other-than-temporary at December 31, 2009.
For each of the equity securities in the Company’s portfolio with unrealized losses, the Company reviews the underlying cause of the decline in value and the estimated recovery period, as well as the severity and duration of the decline. In the Company’s evaluation, the Company considers its ability and intent to hold these investments for a reasonable period of time sufficient for the Company to recover its cost basis.
During 2009, the Company received approximately $79.8 million in proceeds from the sale of certain marketable securities. The Company recognized gross realizable gains of approximately $8.5 million and gross realizable losses of approximately $2.6 million from sales of marketable securities during 2009.
During 2008, the Company received approximately $50.3 million in proceeds from the sale of certain marketable securities. The Company recognized gross realizable gains of approximately $15.9 million and gross realizable losses of approximately $1.9 million from its marketable securities during 2008.
During 2007, the Company received approximately $32.7 million in proceeds from the sale of certain marketable securities. The Company recognized gross realizable gains of approximately $11.5 million from sales of marketable securities during 2007.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2009, the contractual maturities of Other debt securities classified as held-to-maturity are as follows: within one year, $ 1.1 million; after one year through five years, $16.2 million; after five years through 10 years, $ 11.3 million; and after 10 years, $ 14.9 million. Actual maturities may differ from contractual maturities as issuers may have the right to prepay debt obligations with or without prepayment penalties.
12. Notes Payable:
Medium Term Notes –
The Company has implemented a medium-term notes ("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 the year ended December 31, 2009, the Company repaid (i) its $20.0 million 7.56% Medium Term Note, which matured in May 2009 and (ii) its $25.0 million 7.06% Medium Term Note, which matured in July 2009.
During the year ended December 31, 2008, the Company repaid its $100.0 million 3.95% Medium Term Notes, which matured on August 5, 2008 and its $25.0 million 7.2% Senior Notes, which matured on September 15, 2008.
Additionally during 2009, the Company repurchased in aggregate approximately $36.1 million in face value of its Medium Term Notes and Fixed Rate Bonds for an aggregate discounted purchase price of approximately $33.7 million. These transactions resulted in an aggregate gain of approximately $2.4 million.
As of December 31, 2009, a total principal amount of approximately $1.1 billion in senior fixed-rate MTNs was outstanding. These fixed-rate notes had maturities ranging from five months to six years as of December 31, 2009, and bear interest at rates ranging from 4.62% to 5.98%. Interest on these fixed-rate senior unsecured notes is payable semi-annually in arrears. Proceeds from these issuances were primarily used for the acquisition of neighborhood and community shopping centers, the expansion and improvement of properties in the Company’s portfolio and the repayment of certain debt obligations of the Company.
As of December 31, 2008, a total principal amount of approximately $1.2 billion in senior fixed-rate MTNs was outstanding. These fixed-rate notes had maturities ranging from five months to seven years as of December 31, 2009, and bear interest at rates ranging from 4.62% to 7.56%. Interest on these fixed-rate senior unsecured notes is payable semi-annually in arrears. Proceeds from these issuances were primarily used for the acquisition of neighborhood and community shopping centers, the expansion and improvement of properties in the Company’s portfolio and the repayment of certain debt obligations of the Company.
Senior Unsecured Notes –
During September 2009, the Company issued $300.0 million of 10-year Senior Unsecured Notes at an interest rate of 6.875% payable semi-annually in arrears. These notes were sold at 99.84% of par value. Net proceeds from the issuance were approximately $297.3 million, after related transaction costs of approximately $0.3 million. The proceeds from this issuance were primarily used to repay the Company’s $220.0 million unsecured term loan described below. The remaining proceeds were used to repay certain construction loans that were scheduled to mature in 2010.
During 2009, the Company repaid its $130.0 million 6.875% senior notes, which matured on February 10, 2009.
As of December 31, 2009, the Company had a total principal amount of approximately $1.3 billion in fixed-rate unsecured senior notes. These fixed-rate notes had maturities ranging from nine months to nine years as of December 31, 2009, and bear interest at rates ranging from 4.70% to 7.95%. Interest on these fixed-rate senior unsecured notes is payable semi-annually in arrears.
As of December 31, 2008, the Company had a total principal amount of approximately $1.2 billion in fixed-rate unsecured senior notes. These fixed-rate notes had maturities ranging from one month to eight years as of December 31, 2008, and bear interest at rates ranging from 4.70% to 7.95%. Interest on these fixed-rate senior unsecured notes is payable semi-annually in arrears.
122
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The scheduled maturities of all unsecured notes payable as of December 31, 2009, were approximately as follows (in millions): 2010, $223.7; 2011, $481.7; 2012, $215.9; 2013, $542.8; 2014, $295.3; and thereafter, $1,240.9.
During September 2009, the Company entered into a fifth supplemental indenture, under the indenture governing its Medium Term Notes and Senior Notes, which included the financial covenants for future offerings under this indenture that were removed by the fourth supplemental indenture.
In accordance with the terms of the Indenture, as amended, pursuant to which the Company's Senior Unsecured Notes, except for the $300.0 million issued during April 2007 under the fourth supplemental indenture, have been issued, the Company is subject to maintaining (a) certain maximum leverage ratios on both unsecured senior corporate and secured debt, minimum debt service coverage ratios and minimum equity levels, (b) certain debt service ratios, (c) certain asset to debt ratios and (d) restricted from paying dividends in amounts that exceed by more than $26.0 million the funds from operations, as defined, generated through the end of the calendar quarter most recently completed prior to the declaration of such dividend; however, this dividend limitation does not apply to any distributions necessary to maintain the Company's qualification as a REIT providing the Company is in compliance with its total leverage limitations.
During April 2009, the Company obtained a two-year $220.0 million unsecured term loan with a consortium of banks, which accrued interest at a spread of 4.65% to LIBOR (subject to a 2% LIBOR floor) or at the Company’s option, at a spread of 3.65% to the “ABR,” as defined in the Credit Agreement. The term loan was scheduled to mature in April 2011. The Company utilized proceeds from this term loan to partially repay the outstanding balance under the Company’s U.S. revolving credit facility and for general corporate purposes. During September 2009, the Company fully repaid the $220.0 million outstanding balance and terminated this loan.
Credit Facilities –
During October 2007, the Company established a new $1.5 billion unsecured U.S. revolving credit facility (the "U.S. Credit Facility") with a group of banks, which is scheduled to expire in October 2011. The Company has a one-year extension option related to this facility. This credit facility has made available funds to finance general corporate purposes, including (i) property acquisitions, (ii) investments in the Company’s institutional management programs, (iii) development and redevelopment costs, and (iv) any short-term working capital requirements. Interest on borrowings under the U.S. Credit Facility accrues at LIBOR plus 0.425% and fluctuates in accordance with changes in the Company’s senior debt ratings. As part of this U.S. Credit Facility, the Company has a competitive bid option whereby the Company may auction up to $750.0 million of its requested borrowings to the bank group. This compe titive bid option provides the Company the opportunity to obtain pricing below the currently stated spread. A facility fee of 0.15% per annum is payable quarterly in arrears. As part of the U.S. Credit Facility, the Company has a $200.0 million sub-limit which provides it the opportunity to borrow in alternative currencies such as Pounds Sterling, Japanese Yen or Euros. Pursuant to the terms of the U.S. Credit Facility, the Company, among other things, is subject to covenants requiring the maintenance of (i) maximum leverage ratios on both unsecured and secured debt, and (ii) minimum interest and fixed coverage ratios. As of December 31, 2009, there was $139.5 million outstanding and $22.5 million appropriated letters of credit under this credit facility.
The Company also has a three-year CAD $250.0 million unsecured credit facility with a group of banks. This facility bears interest at a rate of CDOR plus 0.425%, subject to change in accordance with the Company’s senior debt ratings and is scheduled to mature March 2011 with an additional one year extension option. A facility fee of 0.15% per annum is payable quarterly in arrears. This facility also permits U.S. dollar denominated borrowings. Proceeds from this facility are used for general corporate purposes, including the funding of Canadian denominated investments. As of December 31, 2009, there was no outstanding balance under this credit facility. There are approximately CAD $67.4 million (approximately USD $64.0 million) appropriated for letters of credit under this credit facility at December 31, 2009 (see Note 21, Commitments and Contingencies). The Canadian facility covenants are the same as th e U.S. Credit Facility covenants described above.
123
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During March 2008, the Company obtained a MXP 1.0 billion term loan, which bears interest at a rate of 8.58%, subject to change in accordance with the Company’s senior debt ratings, and is scheduled to mature in March 2013. The Company utilized proceeds from this term loan to fully repay the outstanding balance of a MXP 500.0 million unsecured revolving credit facility, which had been terminated by the Company. Remaining proceeds from this term loan were used for funding MXP denominated investments. As of December 31, 2009, the outstanding balance on this term loan was MXP 1.0 billion (approximately USD $76.6 million).
13. Mortgages Payable:
During 2009, the Company (i) obtained 21 new non-recourse mortgages aggregating approximately $400.2 million, which bear interest at rates ranging from 5.95% to 8.00% and have maturities ranging from five months to six years (ii) assumed approximately $579.2 million of individual non-recourse mortgage debt relating to the acquisition of 22 operating properties, including approximately $1.6 million of fair value debt adjustments and (iii) paid off approximately $437.7 million of individual non-recourse mortgage debt that encumbered 24 operating properties.
During 2008, the Company (i) obtained an aggregate of approximately $16.7 million of non-recourse mortgage debt on three operating properties, (ii) assumed approximately $101.1 million of individual non-recourse mortgage debt relating to the acquisition of five operating properties, including approximately $0.8 million of fair value debt adjustments and (iii) paid off approximately $73.4 million of individual non-recourse mortgage debt that encumbered 11 operating properties.
Mortgages payable, collateralized by certain shopping center properties and related tenants' leases, are generally due in monthly installments of principal and/or interest which mature at various dates through 2031. Interest rates range from LIBOR plus 1.40% (1.65% at December 31, 2009) to 10.50% (weighted-average interest rate of 5.99% as of December 31, 2009). The scheduled principal payments of all mortgages payable, excluding unamortized fair value debt adjustments of approximately $3.0 million, as of December 31, 2009, were approximately as follows (in millions): 2010, $152.7; 2011, $77.6; 2012, $241.0; 2013, $192.8; 2014, $249.4; and thereafter, $471.8.
14. Construction Loans Payable:
During 2009, the Company fully repaid nine construction loans aggregating approximately $212.2 million. As of December 31, 2009, total loan commitments on the Company’s four remaining construction loans aggregated approximately $69.7 million of which approximately $45.8 million has been funded. These loans have scheduled maturities ranging from 11 months to 56 months (excluding any extension options which may be available to the Company) and bear interest at rates ranging from 2.13% to 4.50% at December 31, 2009. These construction loans are collateralized by the respective projects and associated tenants’ leases. The scheduled maturities of all construction loans payable as of December 31, 2009, were approximately as follows (in millions): 2010, $3.4; 2011, $26.8; 2012, $13.6; 2013, $0 and 2014, $2.0.
During 2008, the Company obtained construction financing on three merchant building projects with total loan commitment amounts up to $35.4 million, of which $8.7 million was outstanding as of December 31, 2008. As of December 31, 2008, total loan commitments on the Company’s 16 outstanding construction loans aggregated approximately $364.2 million of which approximately $268.3 million has been funded. These loans have scheduled maturities ranging from two months to 42 months (excluding any extension options which may be available to the Company) and bear interest at rates ranging from 1.81% to 3.19% at December 31, 2008. These construction loans are collateralized by the respective projects and associated tenants’ leases.
15. Noncontrolling Interests:
Noncontrolling interests represent the portion of equity that the Company does not own in those entities it consolidates as a result of having a controlling interest or determined that the Company was the primary beneficiary of a VIE in accordance with the provisions of the FASB’s Consolidation guidance.
124
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company accounts and reports for noncontrolling interests in accordance with the Consolidation guidance issued by the FASB. The Company identifies its noncontrolling interests separately within the equity section on the Company’s Consolidated Balance Sheets. Redeemable units are classified as Redeemable noncontrolling interests and presented between Total liabilities and Stockholder’s equity on the Company’s Consolidated Balance Sheets. The amounts of consolidated net income attributable to the Company and to the noncontrolling interests are presented on the Company’s Consolidated Statements of Operations.
During 2006, the Company acquired seven shopping center properties located throughout Puerto Rico. The properties were acquired through the issuance of approximately $158.6 million of non-convertible units, approximately $45.8 million of convertible units, the assumption of approximately $131.2 million of non-recourse debt and $116.3 million in cash. Noncontrolling interests related to these acquisitions was approximately $233.0 million of units, including premiums of approximately $13.5 million and a fair market value adjustment of approximately $15.1 million (the "Units"). The Company is restricted from disposing of these assets, other than through a tax free transaction until November 2015.
The Units consisted of (i) approximately 81.8 million Preferred A Units par value $1.00 per unit, which pay the holder a return of 7.0% per annum on the Preferred A Par Value and are redeemable for cash by the holder at any time after one year or callable by the Company any time after six months and contain a promote feature based upon an increase in net operating income of the properties capped at a 10.0% increase, (ii) 2,000 Class A Preferred Units, par value $10,000 per unit, which pay the holder a return equal to LIBOR plus 2.0% per annum on the Class A Preferred Par Value and are redeemable for cash by the holder at any time after November 30, 2010, (iii) 2,627 Class B-1 Preferred Units, par value $10,000 per unit, which pay the holder a return equal to 7.0% per annum on the Class B-1 Preferred Par Value and are redeemable by the holder at any time after November 30, 2010, for cash or at the Company’s option, shares of the Company’s c ommon stock, equal to the Cash Redemption Amount, as defined, (iv) 5,673 Class B-2 Preferred Units, par value $10,000 per unit, which pay the holder a return equal to 7.0% per annum on the Class B-2 Preferred par value and are redeemable for cash by the holder at any time after November 30, 2010, and (v) 640,001 Class C DownReit Units, valued at an issuance price of $30.52 per unit which pay the holder a return at a rate equal to the Company’s common stock dividend and are redeemable by the holder at any time after November 30, 2010, for cash or at the Company’s option, shares of the Company’s common stock equal to the Class C Cash Amount, as defined.
The following units have been redeemed as of December 31, 2009:
| | | | | | |
Type | | Units Redeemed | | Par Value Redeemed (in millions) | | Redemption Type |
Preferred A Units | | 2.2 million | | $2.2 | | Cash |
Class A Preferred Units | | 2,000 | | $20.0 | | Cash |
Class B-1 Preferred Units | | 2,438 | | $24.4 | | Cash |
Class B-2 Preferred Units | | 5,057 | | $50.6 | | Cash/Charitable Contribution |
Class C DownReit Units | | 61,804 | | $1.9 | | Cash |
Noncontrolling interest relating to these units was $113.1 million and $129.8 million as of December 31, 2009 and 2008, respectively.
During 2006, the Company acquired two shopping center properties located in Bay Shore and Centereach, NY. Included in Noncontrolling interests was approximately $41.6 million, including a discount of $0.3 million and a fair market value adjustment of $3.8 million, in redeemable units (the "Redeemable Units"), issued by the Company in connection with these transactions. The properties were acquired through the issuance of $24.2 million of Redeemable Units, which are redeemable at the option of the holder; approximately $14.0 million of fixed rate Redeemable Units and the assumption of approximately $23.4 million of non-recourse debt. The Redeemable Units consist of (i) 13,963 Class A Units, par value $1,000 per unit, which pay the holder a return of 5% per annum of the Class A par value and are redeemable for cash by the holder at any time after April 3, 2011, or callable by the Company any time after April 3, 2016, and (ii) 647,758 C lass B Units, valued at an issuance price of $37.24 per unit, which pay the holder a return at a rate equal to the Company’s common stock dividend and are redeemable by the holder at any time after April 3, 2007, for cash or at the
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option of the Company for Common Stock at a ratio of 1:1, or callable by the Company any time after April 3, 2026. The Company is restricted from disposing of these assets, other than through a tax free transaction, until April 2016 and April 2026 for the Centereach, NY, and Bay Shore, NY, assets, respectively.
During 2007, 30,000 units, or $1.1 million par value, of the Class B Units were redeemed by the holder in cash at the option of the Company. Noncontrolling interest relating to the units was $40.3 million and $40.5 million as of December 31, 2009 and 2008, respectively.
Noncontrolling interests also includes 138,015 convertible units issued during 2006, by the Company, which are valued at approximately $5.3 million, including a fair market value adjustment of $0.3 million, related to an interest acquired in an office building located in Albany, NY. These units are redeemable at the option of the holder after one year for cash or at the option of the Company for the Company’s common stock at a ratio of 1:1. The holder is entitled to a distribution equal to the dividend rate of the Company’s common stock. The Company is restricted from disposing of these assets, other than through a tax free transaction, until January 2017.
The following table presents the change in the redemption value of the Redeemable noncontrolling interests for the year ended December 31, 2009 and December 31, 2008 (amounts in thousands):
| | | | |
| | 2009 | | 2008 |
Balance at January 1, | $ | 115,853 | $ | 173,592 |
Unit redemptions | | (14,889) | | (55,110) |
Fair market value amortization | | (571) | | (2,524) |
Other | | (89) | | (105) |
Balance at December 31, | $ | 100,304 | $ | 115,853 |
16. Fair Value Disclosure of Financial Instruments:
All financial instruments of the Company are reflected in the accompanying Consolidated Balance Sheets at amounts which, in management’s estimation based upon an interpretation of available market information and valuation methodologies, reasonably approximate their fair values except those listed below, for which fair values are reflected. The valuation method used to estimate fair value for fixed-rate and variable-rate debt and noncontrolling interests relating to mandatorily redeemable noncontrolling interests associated with finite-lived subsidiaries of the Company is based on discounted cash flow analyses, with assumptions that include credit spreads, loan amounts and debt maturities. The fair values for marketable securities are based on published or securities dealers’ estimated market values. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition. The following are financial instruments for which the Company’s estimate of fair value differs from the carrying amounts (in thousands):
| | | | | | | | |
| | December 31, |
| | 2009 | | 2008 |
| | Carrying Amounts | | Estimated Fair Value | | Carrying Amounts | | Estimated Fair Value |
| | | | | | | | |
Marketable Securities | $ | 209,593 | $ | 204,006 | $ | 258,174 | $ | 218,786 |
Notes Payable | $ | 3,000,303 | $ | 3,099,139 | $ | 3,440,819 | $ | 2,766,187 |
Mortgages Payable | $ | 1,388,259 | $ | 1,377,224 | $ | 847,491 | $ | 838,503 |
Construction Payable | $ | 45,821 | $ | 44,725 | $ | 268,337 | $ | 262,485 |
Mandatorily Redeemable Noncontrolling Interests (termination dates ranging from 2019 – 2027) | $ | 2,768 | $ | 5,256 | $ | 2,895 | $ | 5,444 |
The Company has certain financial instruments that must be measured under the FASB’s Fair Value Measurements and Disclosures guidance, including: available for sale securities, convertible notes and derivatives. The Company currently does not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis.
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As a basis for considering market participant assumptions in fair value measurements, the FASB’s Fair Value Measurements and Disclosures guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Available for sale securities are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.
The Company has an investment in convertible notes for which it separately accounts for the conversion option as an embedded derivative. The convertible notes and conversion option are measured at fair value using widely accepted valuation techniques including pricing models. These models reflect the contractual terms of the convertible notes, including the term to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, stock price, dividend yields and foreign exchange rates. Based on these inputs the Company has determined that its convertible notes and conversion option valuations are classified within Level 2 of the fair value hierarchy.
The Company uses interest rate swaps to manage its interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Based on these inputs the Company has determined that its interest rate swap valuations are classified within Level 2 of the fair value hierarchy.
To comply with the FASB’s Fair Value Measurements and Disclosures guidance, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. The credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2009, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.
The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.
Assets and liabilities measured at fair value on a recurring basis at December 31, 2009 and 2008 (in thousands):
| | | | | | | | |
| | Balance at December 31,2009 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Marketable equity securities | $ | 25,812 | $ | 25,812 | $ | - | $ | - |
Convertible notes | $ | 140,281 | $ | - | $ | 140,281 | $ | - |
Conversion option | $ | 9,095 | $ | - | $ | 9,095 | $ | - |
Liabilities: | | | | | | | | |
Interest rate swaps | $ | 150 | $ | - | $ | 150 | $ | - |
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| | | | | | | | |
| | Balance at December 31,2008 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Marketable equity securities | $ | 46,452 | $ | 46,452 | $ | - | $ | - |
Convertible notes | $ | 113,713 | $ | - | $ | 113,713 | $ | - |
Conversion option | $ | 6,063 | $ | - | $ | 6,063 | $ | - |
Liabilities: | | | | | | | | |
Interest rate swaps | $ | 734 | $ | - | $ | 734 | $ | - |
Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2009 are as follows (in thousands):
| | | | | | | | |
| | Balance at December 31, 2009 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Investments and advances in real estate joint ventures | $ | 177,037 | $ | - | $ | - | $ | 177,037 |
Real estate under development/ redevelopment | $ | 89,939 | $ | - | $ | - | $ | 89,939 |
Other real estate investments | $ | 43,383 | $ | - | $ | - | $ | 43,383 |
During 2009, the Company recognized non-cash impairment charges of approximately $145.0 million relating to investments in real estate joint ventures, real estate under development, and other real estate investments.
During 2008, the Company recognized non-recurring non-cash impairment charges of $15.5 million against the carrying value of its investment in its unconsolidated joint ventures with PREI, KimPru, reflecting an other-than-temporary decline in the fair value of its investment resulting from further significant declines in the real estate markets during 2008.
The Company’s estimated fair values relating to these impairment assessments were based upon discounted cash flow models that included all estimated cash inflows and outflows over a specified holding period and where applicable, any estimated debt premiums. These cash flows are comprised of unobservable inputs which include contractual rental revenues and forecasted rental revenues and expenses based upon market conditions and expectations for growth. Capitalization rates and discount rates utilized in these models were based upon observable rates that the Company believes to be within a reasonable range of current market rates for the respective properties. Based on these inputs the Company determined that its valuation in these investments were classified within Level 3 of the fair value hierarchy.
17. Financial Instruments - Derivatives and Hedging:
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risk through management of its core business activities. The company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may use derivatives to manage exposures that arise from changes in interest rates, foreign currency exchange rate fluctuations and market value fluctuations of equity securities. The Company limits these risks by following established risk management policies and procedures including the use of derivatives.
Cash Flow Hedges of Interest Rate Risk -
The Company, from time to time, hedges the future cash flows of its floating-rate debt instruments to reduce exposure to interest rate risk principally through interest rate swaps and interest rate caps with major financial institutions. The effective portion of the changes in fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the year ended December 31, 2009, the Company had no hedge ineffectiveness.
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Amounts reported in accumulated other comprehensive income related to cash flow hedges will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During 2010, the Company estimates that an additional $0.4 million will be reclassified as an increase to interest expense.
As of December 31, 2009, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
| | |
Interest Rate Derivates | Number of Instruments | Notional |
Interest Rate Caps | 2 | $ 83.1 million |
Interest Rate Swaps | 2 | $ 23.6 million |
The fair value of these derivative financial instruments classified as asset derivatives was $0.4 million and $0 for December 31, 2009 and 2008, respectively. The fair value of these derivative financial instruments classified as liability derivatives was $(0.5) million and $(0.8) million for December 31, 2009 and 2008, respectively.
Credit-risk-related Contingent Features –
The Company has agreements with one of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company has an agreement with a derivative counterparty that incorporates the loan covenant provisions of the Company's indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.
18.
Preferred Stock, Common Stock and Convertible Unit Transactions –
During December 2009, the Company completed a primary public stock offering of 28,750,000 shares of the Company’s common stock. The net proceeds from this sale of common stock, totaling approximately $345.1 million (after related transaction costs of $0.75 million) were used to partially repay the outstanding balance under the Company’s U.S. revolving credit facility.
During April 2009, the Company completed a primary public stock offering of 105,225,000 shares of the Company’s common stock. The net proceeds from this sale of common stock, totaling approximately $717.3 million (after related transaction costs of $0.7 million) were used to partially repay the outstanding balance under the Company’s U.S. revolving credit facility and for general corporate purposes.
During September 2008, the Company completed a primary public stock offering of 11,500,000 shares of the Company’s common stock. The net proceeds from this sale of common stock, totaling approximately $409.4 million (after related transaction costs of $0.6 million) were used to partially repay the outstanding balance under the Company’s U.S. revolving credit facility.
During October 2007, the Company issued 18,400,000 Depositary Shares (the "Class G Depositary Shares"), after the exercise of an over-allotment option, each representing a one-hundredth fractional interest in a share of the Company’s 7.75% Class G Cumulative Redeemable Preferred Stock, par value $1.00 per share (the "Class G Preferred Stock"). Dividends on the Class G Depositary Shares are cumulative and payable quarterly in arrears at the rate of 7.75% per annum based on the $25.00 per share initial offering price, or $1.9375 per annum. The Class G Depositary Shares are redeemable, in whole or part, for cash on or after October 10, 2012, at the option of the Company, at a redemption price of $25.00 per depositary share, plus any accrued and unpaid dividends thereon. The Class G Depositary Shares are not convertible or exchangeable for any other property or securities of the Company. The Class G Prefe rred Stock (represented by the Class G Depositary Shares outstanding) ranks pari passu with the Company’s Class F Preferred Stock as to voting rights, priority for receiving dividends and liquidation preference as set forth below.
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During June 2003, the Company issued 7,000,000 Depositary Shares (the "Class F Depositary Shares"), each such Class F Depositary Share representing a one-tenth fractional interest of a share of the Company’s 6.65% Class F Cumulative Redeemable Preferred Stock, par value $1.00 per share (the "Class F Preferred Stock"). Dividends on the Class F Depositary Shares are cumulative and payable quarterly in arrears at the rate of 6.65% per annum based on the $25.00 per share initial offering price, or $1.6625 per annum. The Class F Depositary Shares are redeemable, in whole or part, for cash on or after June 5, 2008, at the option of the Company, at a redemption price of $25.00 per Depositary Share, plus any accrued and unpaid dividends thereon. The Class F Depositary Shares are not convertible or exchangeable for any other property or securities of the Company. The Class F Preferred Stock (represented by the Class F Depositary Shares outstanding) ranks pari passu with the Company’s Class F Preferred Stock as to voting rights, priority for receiving dividends and liquidation preference as set forth below.
Voting Rights - As to any matter on which the Class F Preferred Stock may vote, including any action by written consent, each share of Class F Preferred Stock shall be entitled to 10 votes, each of which 10 votes may be directed separately by the holder thereof. With respect to each share of Preferred Stock, the holder thereof may designate up to 10 proxies, with each such proxy having the right to vote a whole number of votes (totaling 10 votes per share of Class F Preferred Stock). As a result, each Class F Depositary Share is entitled to one vote.
As to any matter on which the Class G Preferred Stock may vote, including any actions by written consent, each share of the Class G Preferred Stock shall be entitled to 100 votes, each of which 100 votes may be directed separately by the holder thereof. With respect to each share of Class G Preferred Stock, the holder thereof may designate up to 100 proxies, with each such proxy having the right to vote a whole number of votes (totaling 100 votes per share of Class G Preferred Stock). As a result, each Class G Depositary Share is entitled to one vote.
Liquidation Rights - In the event of any liquidation, dissolution or winding up of the affairs of the Company, the Preferred Stock holders are entitled to be paid, out of the assets of the Company legally available for distribution to its stockholders, a liquidation preference of $250.00 Class F Preferred per share and $2,500.00 Class G Preferred per share ($25.00 per Class F and Class G Depositary Share), plus an amount equal to any accrued and unpaid dividends to the date of payment, before any distribution of assets is made to holders of the Company’s common stock or any other capital stock that ranks junior to the Preferred Stock as to liquidation rights.
During October 2002, the Company acquired an interest in a shopping center property located in Daly City, CA, valued at $80.0 million, through the issuance of approximately 4.8 million Convertible Units which are convertible at a ratio of 1:1 into the Company’s common stock. The unit holder has the right to convert the Convertible Units at any time after one year. In addition, the Company has the right to mandatorily require a conversion after ten years. If at the time of conversion the common stock price for the 20 previous trading days is less than $16.785 per share, the unit holder would be entitled to additional shares; however, the maximum number of additional shares is limited to 503,932 based upon a floor Common Stock price of $15.180. The Company has the option to settle the conversion in cash. Dividends on the Convertible Units are paid quarterly at the rate of the Company’s common stock dividend mult iplied by 1.1057. During 2008, all of these Convertible Units were redeemed. The Company elected to redeem these Convertible Units, at a ratio of 1:1, for 4.8 million shares of Common Stock, of which 1.0 million shares were valued at $17.26 per share and 3.8 million shares were valued at $15.02 per share.
During March 2006, the shareholders of Atlantic Realty Trust ("Atlantic Realty") approved the proposed merger with the Company and the closing occurred on March 31, 2006. As consideration for this transaction, the Company issued Atlantic Realty shareholders 1,274,420 shares of Common Stock, excluding 201,930 shares of Common Stock that were to be received by the Company and 546,580 shares of Common Stock that were to be received by the Company’s wholly owned TRS, at a price of $40.41 per share. During December 2008, the Company purchased the 546,580 shares from its TRS for a purchase price of $17.69 per share. The 546,580 shares had a carry-over basis from the Atlantic Realty share price of $17.10 per share. These shares are no longer considered issued.
During 2006, the Company acquired interests in seven shopping center properties located throughout Puerto Rico. The properties were acquired through the issuance of approximately $158.6 million of non-convertible units, approximately $45.8 million of convertible units, approximately $131.2 million of non-recourse debt and $116.3 million in cash.
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The convertible units consist of (i) 2,627 Class B-1 Preferred Units, par value $10,000 per unit and 640,001 Class C DownREIT Units, valued at an issuance price of $30.52 per unit. Both the Class B-1 Units and the Class C DownREIT Units are redeemable by the holder at any time after November 30, 2010, for cash, or at the Company’s option, shares of the Company’s common stock. During 2007 - 2009, 2,438 units, or $24.4 million, of the Class B-1 Preferred Units were redeemed and 61,804 units, or $1.9 million, of the Class C DownREIT Units were redeemed under the Loan provision of the Agreement. The Company opted to settle these units in cash.
The number of shares of Common Stock issued upon conversion of the Class B-1 Preferred Units would be equal to the Class B-1 Cash Redemption Amount, as defined, which ranges from $6,000 to $14,000 per Class B-1 Preferred Unit depending on the Common Stock’s Adjusted Current Trading Price, as defined, divided by the average daily market price for the 20 consecutive trading days immediately preceding the redemption date.
Prior to January 1, 2009, the number of shares of Common Stock issued upon conversion of the Class C DownREIT Units would be equal to the Class C Cash Amount which equals the number of Class C DownREIT Units being redeemed, multiplied by the Adjusted Current Trading Price, as defined. After January 1, 2009, if the Adjusted Current Trading Price is greater than $36.62 then the Class C Cash Amount shall be an amount equal to the Adjusted Current Trading Price per Class C DownREIT Unit. If the Adjusted Current Trading Price is greater than $24.41 but less than $36.62, then the Class C Cash Amount shall be an amount equal to $30.51 per Class C DownREIT Unit, or is less than $24.41, then the Class C Cash Amount shall be an amount per Class C DownREIT Unit equal to the Adjusted Current Trading Price multiplied by 1.25.
During April 2006, the Company acquired interests in two shopping center properties, located in Bay Shore and Centereach, NY, valued at an aggregate $61.6 million. The properties were acquired through the issuance of units from a consolidated subsidiary and consist of approximately $24.2 million of Redeemable Units, which are redeemable at the option of the holder, approximately $14.0 million of fixed rate Redeemable Units and the assumption of approximately $23.4 million of non-recourse mortgage debt. The Company has the option to settle the redemption of the $24.2 million redeemable units with Common Stock, at a ratio of 1:1 or in cash. From 2007 - 2009, 30,000 units, or $1.1 million par value, of the Redeemable Units were redeemed by the holder. The Company opted to settle these units in cash.
During June 2006, the Company acquired an interest in an office property, located in Albany, NY, valued at approximately $39.9 million. The property was acquired through the issuance of approximately $5.0 million of redeemable units from a consolidated subsidiary, which are redeemable at the option of the holder after one year, and the assumption of approximately $34.9 million of non-recourse mortgage debt. The Company has the option to settle the redemption with Common Stock, at a ratio of 1:1 or in cash.
The amount of consideration that would be paid to unaffiliated holders of units issued from the Company’s consolidated subsidiaries which are not mandatorily redeemable, as if the termination of these consolidated subsidiaries occurred on December 31, 2009, is approximately $21.3 million. The Company has the option to settle such redemption in cash or shares of the Company’s common stock. If the Company exercised its right to settle in Common Stock, the unit holders would receive approximately 1.6 million shares of Common Stock.
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19. Supplemental Schedule of Non-Cash Investing/Financing Activities:
The following schedule summarizes the non-cash investing and financing activities of the Company for the years ended December 31, 2009, 2008 and 2007 (in thousands):
| | | | | | |
| | 2009 | | 2008 | | 2007 |
Acquisition of real estate interests by assumption of debt | $ | 577,604 | $ | 96,226 | $ | 82,614 |
Exchange of DownREIT units for Common Stock | $ | - | $ | 80,000 | $ | - |
Disposition/transfer of real estate interest by origination of mortgage debt | $ | - | $ | 27,175 | $ | - |
Acquisition of real estate interests through proceeds held in escrow | $ | - | $ | - | $ | 68,031 |
Issuance of Restricted Common Stock | $ | 3,415 | $ | 1,405 | $ | - |
Proceeds held in escrow through sale of real estate interest | $ | - | $ | 11,195 | $ | - |
Disposition of real estate through the issuance of an unsecured obligation | $ | 1,366 | $ | 6,265 | $ | - |
Investment in real estate joint venture by contribution of property | $ | - | $ | - | $ | 740 |
| | | | | | |
Deconsolidation of Joint Venture: | | | | | | |
Decrease in real estate and other assets | $ | - | $ | 55,453 | $ | 113,074 |
Decrease in noncontrolling interest, construction loan and other liabilities | $ | - | $ | 55,453 | $ | 113,074 |
| | | | | | |
Declaration of dividends paid in succeeding period | $ | 76,707 | $ | 131,097 | $ | 112,052 |
| | | | | | |
Consolidation of Joint Ventures: | | | | | | |
Increase in real estate and other assets | $ | 47,368 | $ | 68,360 | $ | - |
Increase in mortgage payable | $ | 35,104 | $ | - | $ | - |
20. Transactions with Related Parties:
The Company provides management services for shopping centers owned principally by affiliated entities and various real estate joint ventures in which certain stockholders of the Company have economic interests. Such services are performed pursuant to management agreements which provide for fees based upon a percentage of gross revenues from the properties and other direct costs incurred in connection with management of the centers.
Ripco Real Estate Corp. was formed in 1991 and employs approximately 40 professionals and serves numerous retailers, REITS and developers. Ripco’s business activities include serving as a leasing agent and representative for national and regional retailers including Target, Best Buy, Kohls and many others, providing real estate brokerage services and principal real estate investing. Mr. Todd Cooper, an officer and 50% shareholder of Ripco, is a son of Mr. Milton Cooper, Executive Chairman of the Board of Directors of the Company. During 2009 and 2008, the Company paid brokerage commissions of $0.7 million and $0.5 million, respectively, to Ripco for services rendered primarily as leasing agent for various national tenants in shopping center properties owned by the Company. The Company believes that the brokerage commissions paid were at or below the customary rates for such leasing services.
Additionally, the Company has the following joint venture investments with Ripco. During 2005, the Company acquired three operating properties and one land parcel, through joint ventures, in which the Company and Ripco each hold 50% noncontrolling interests. The Company accounts for its investment in these joint ventures under the equity method of accounting. As of December 31, 2009, these joint ventures hold three individual one-year loans aggregating $17.3 million which are scheduled to mature in 2010 and bear interest at rates of LIBOR plus 2.75%. These loans are jointly and severally guaranteed by the Company and the joint venture partner.
Reference is made to Note 8 for additional information regarding transactions with related parties.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
21. Commitments and Contingencies:
Operations -
The Company and its subsidiaries are primarily engaged in the operation of shopping centers which are either owned or held under long-term leases which expire at various dates through 2095. The Company and its subsidiaries, in turn, lease premises in these centers to tenants pursuant to lease agreements which provide for terms ranging generally from 5 to 25 years and for annual minimum rentals plus incremental rents based on operating expense levels and tenants' sales volumes. Annual minimum rentals plus incremental rents based on operating expense levels comprised approximately 99% of total revenues from rental property for each of the three years ended December 31, 2009, 2008 and 2007.
The future minimum revenues from rental property under the terms of all non-cancelable tenant leases, assuming no new or renegotiated leases are executed for such premises, for future years are approximately as follows (in millions): 2010, $609.4; 2011, $583.3; 2012, $535.5; 2013, $474.2; 2014, $402.4 and thereafter; $1,845.2.
Minimum rental payments under the terms of all non-cancelable operating leases pertaining to the Company’s shopping center portfolio for future years are approximately as follows (in millions): 2010, $13.2; 2011, $10.5; 2012, $9.3; 2013, $8.7; 2014, $8.1 and thereafter, $169.2.
Uncertain Tax Positions -
In June 2006, the FASB issued further guidance relating to income taxes which clarified the accounting for uncertainty in income taxes recognized in a company’s financial statements. 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 de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company does not have any material unrecognized tax benefits as of December 31, 2009.
Captive Insurance -
In October 2007, the Company formed a wholly-owned captive insurance company, Kimco Insurance Company, Inc., ("KIC"), which provides general liability insurance coverage for all losses below the deductible under our third-party policy. The Company entered into the Insurance Captive as part of its overall risk management program and to stabilize its insurance costs, manage exposure and recoup expenses through the functions of the captive program. The Company capitalized KIC in accordance with the applicable regulatory requirements. KIC established annual premiums based on projections derived from the past loss experience of the Company’s properties. KIC has engaged an independent third party to perform an actuarial estimate of future projected claims, related deductibles and projected expenses necessary to fund associated risk management programs. Premiums paid to KIC may be adjusted based on this estimate, like premiums paid to third-party insurance companies, premiums paid to KIC may be reimbursed by tenants pursuant to specific lease terms.
Guarantees -
During June 2007, the Company entered into a joint venture, in which the Company has a noncontrolling ownership interest, and acquired all of the common stock of InTown Suites Management, Inc. This investment was funded with approximately $186.0 million of new cross-collateralized non-recourse mortgage debt with a fixed interest rate of 5.59%, encumbering 35 properties, a $153.0 million three-year unsecured credit facility, with two one-year extension options, which bears interest at LIBOR plus 0.375% and is guaranteed by the Company and the assumption of $278.6 million cross-collateralized non-recourse mortgage debt with fixed interest rates ranging from 5.19% to 5.89%, encumbering 86 properties. The joint venture partner has pledged its equity interest for any guaranty payment the Company is obligated to pay. The outstanding balance on the three-year unsecured credit facility was $147.5 million as of December 31, 2009. The joint venture obtained an interest rate swap at 5.37% on $128.0 million of this debt. The swap is designated as a cash flow hedge and is deemed highly effective; as such adjustments to the swaps fair value are recorded in other comprehensive income at the joint venture level.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During November 2007, the Company entered into a joint venture, in which the Company has a noncontrolling ownership interest, to acquire a property in Houston, Texas. This investment was funded with a $24.5 million unsecured credit facility scheduled to mature in November 2009, with a six-month extension option which was exercised during 2009 and thus the maturity date is now April 2010, which bears interest at LIBOR plus 0.375% and is guaranteed by the Company. The outstanding balance on this credit facility as of December 31, 2009 was $24.5 million.
During April 2007, the Company entered into a joint venture, in which the Company has a 50% noncontrolling ownership interest to acquire a property in Visalia, CA. Subsequent to this acquisition the joint venture obtained a $6.0 million three-year promissory note which bears interest at LIBOR plus 0.75% and has an extension option of two-years. This loan is jointly and severally guaranteed by the Company and the joint venture partner. As of December 31, 2009, the outstanding balance on this loan was $6.0 million.
During August 2008, KimPru entered into a $650.0 million credit facility, which bears interest at a rate of LIBOR plus 1.25% and was initially scheduled to mature in August 2009. This facility included an option to extend the maturity date for one year, subject to certain requirements including a reduction of the outstanding balance to $485.0 million. During August 2009, KimPru exercised the one-year extension option and made an additional payment to reduce the balance to $485.0 million; as such the credit facility is scheduled to mature in August 2010. Proceeds from this credit facility were used to repay the outstanding balance of $658.7 million under the $1.2 billion credit facility, which was scheduled to mature in October 2008 and bore interest at a rate of LIBOR plus 0.45%. This facility is guaranteed by the Company with a guarantee from PREI to the Company for 85% of any guaranty payment the Company is obligated to make. As of December 31, 2009, the outstanding balance on the credit facility was $331.0 million.
During 2006, an entity in which the Company has a preferred equity investment, located in Montreal, Canada, obtained a construction loan, which is collateralized by the respective land and project improvements. Additionally, the Company has provided a partial guaranty to the lender of up to CAD $45 million (approximately USD $42.7 million) and the developer partner has provided an indemnity to the Company for 25% of all payments the Company is obligated to pay. As of December 31, 2009, there was CAD $99.8 million (approximately USD $94.8 million) outstanding on this construction loan.
Additionally, the RioCan Ventures have a CAD $7.0 million (approximately USD $6.6 million) letter of credit facility. This facility is jointly guaranteed by RioCan and the Company and had approximately CAD $4.9 million (approximately USD $4.6 million) outstanding as of December 31, 2009, relating to various development projects.
Additionally, during 2005, the Company acquired three operating properties and one land parcel, through joint ventures, in which the Company holds 50% noncontrolling interests. Subsequent to these acquisitions, the joint ventures obtained four individual loans aggregating $20.4 million with interest rates ranging from LIBOR plus 1.00% to LIBOR plus 3.50%. During 2007, one of these properties was sold for a sales price of approximately $10.5 million, including the pay down of $5.0 million of debt. During 2008, one of the loans was increased by $2.0 million. During 2009 these loans were extended to mature in 2010 at an interest rate of LIBOR plus 2.75%. As of December 31, 2009, there was an aggregate of $17.3 million outstanding on these loans. These loans are jointly and severally guaranteed by the Company and the joint venture partner.
During 2009, a joint venture in which the Company has a 50% noncontrolling ownership interest obtained a new three-year $53.0 million loan which bears interest at a rate of 7.85%. Proceeds from this mortgage and an additional $15.0 million capital contribution from the partners were used to repay $68.0 million in mortgage debt, which was scheduled to mature in 2009 and bore interest at a rate of LIBOR plus 1.16%. This mortgage is jointly and severally guaranteed by the Company and the joint venture partner. As of December 31, 2009, the outstanding balance on this loan was $52.8 million.
Additionally during 2009, a joint venture in which the Company has a 30% noncontrolling ownership interest obtained a new $59.0 million three-year mortgage loan, which bears interest at a rate of LIBOR plus 350 basis points. The Company and the holder of the remaining 70% ownership interest guarantee, jointly and severally, up to $10.0 million of this mortgage. As of December 31, 2009, the outstanding balance on this loan was $59.0 million.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company evaluated these guarantees in connection with the provisions of the FASB’s Guarantees guidance and determined that the impact did not have a material effect on the Company’s financial position or results of operations.
Letters of Credit -
The Company has issued letters of credit in connection with the completion and repayment guarantees for construction loans encumbering certain of the Company’s ground-up development projects and guaranty of payment related to the Company’s insurance program. These letters of credit aggregate approximately $23.9 million.
During August 2009, the Company became obligated to issue a letter of credit for approximately CAD $66.0 million (approximately USD $62.7 million) relating to a tax assessment dispute with the Canada Revenue Agency (“CRA”). The letter of credit has been issued under the Company’s CAD $250 million credit facility. The dispute is in regards to three of the Company’s wholly-owned subsidiaries which hold a 50% co-ownership interest in Canadian real estate. However, applicable Canadian law requires that a non-resident corporation post sufficient collateral to cover a claim for taxes assessed. As such, the Company issued its letter of credit as required by the governing law. The Company strongly believes that it has a justifiable defense against the dispute which will release the Company from any and all liability.
Other -
In connection with the construction of its development projects and related infrastructure, certain public agencies require performance and surety bonds be posted to guarantee that the Company’s obligations are satisfied. These bonds expire upon the completion of the improvements and infrastructure. As of December 31, 2009, there were approximately $52.8 million bonds outstanding.
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or liquidity of the Company.
22. Incentive Plans:
The Company maintains a stock option plan (the "Plan") pursuant to which a maximum of 47,000,000 shares of the Company’s common stock may be issued for qualified and non-qualified options. Options granted under the Plan generally vest ratably over a three to five-year term, expire ten years from the date of grant and are exercisable at the market price on the date of grant, unless otherwise determined by the Board at its sole discretion. 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.
The Company accounts for stock options in accordance with FASB’s Compensation – Stock Compensation guidance which requires that all share based payments to employees, including grants of employee stock options, be recognized in the statement of operations over the service period based on their fair values.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing formula. The assumption for expected volatility has a significant affect on the grant date fair value. Volatility is determined based on the historical equity of common stock for the most recent historical period equal to the expected term of the options plus an implied volatility measure. The more significant assumptions underlying the determination of fair values for options granted during 2009, 2008 and 2007 were as follows:
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
| | | | | | |
| | Year Ended December 31, |
| | 2009 | | 2008 | | 2007 |
Weighted average fair value of options granted | $ | 3.16 | $ | 5.73 | $ | 7.41 |
Weighted average risk-free interest rates | | 2.54% | | 3.13% | | 4.50% |
Weighted average expected option lives (in years) | | 6.25 | | 6.38 | | 6.50 |
Weighted average expected volatility | | 45.81% | | 26.16% | | 19.01% |
Weighted average expected dividend yield | | 5.48% | | 4.33% | | 3.77% |
Information with respect to stock options under the Plan for the years ended December 31, 2009, 2008, and 2007 are as follows:
| | | | | |
| Shares | | Weighted-Average Exercise Price Per Share | | Aggregate Intrinsic value (in millions) |
Options outstanding, January 1, 2007 | 14,793,593 | $ | 25.93 | $ | 281.4 |
Exercised | (1,884,421) | $ | 20.22 | | |
Granted | 2,971,900 | $ | 41.41 | | |
Forfeited | (257,618) | $ | 35.87 | | |
Options outstanding, December 31, 2007 | 15,623,454 | $ | 29.39 | $ | 133.7 |
Exercised | (1,862,209) | $ | 20.59 | | |
Granted | 2,903,475 | $ | 37.29 | | |
Forfeited | (400,898) | $ | 38.64 | | |
Options outstanding, December 31, 2008 | 16,263,822 | $ | 31.58 | $ | 7.6 |
Exercised | (116,418) | $ | 12.79 | | |
Granted | 1,746,000 | $ | 11.58 | | |
Forfeited | (332,483) | $ | 33.57 | | |
Options outstanding, December 31, 2009 | 17,560,921 | $ | 29.69 | $ | 3.4 |
Options exercisable (fully vested)- | | $ | | | |
December 31, 2007 | 9,307,184 | $ | 23.10 | $ | 123.8 |
December 31, 2008 | 9,011,677 | $ | 26.00 | $ | 7.6 |
December 31, 2009 | 10,869,336 | $ | 28.36 | $ | 0.0 |
The exercise prices for options outstanding as of December 31, 2009, range from $7.22 to $53.14 per share. The Company estimates forfeitures based on historical data. The weighted-average remaining contractual life for options outstanding as of December 31, 2009, was approximately 6.3 years. The weighted-average remaining contractual term of options currently exercisable as of December 31, 2009, was approximately 5.8 years. Options to purchase 2,989,805, 5,031,718, and 2,996,321, shares of the Company’s common stock were available for issuance under the Plan at December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, the Company had 6,691,585 options expected to vest, with a weighted-average exercise price per share of $31.87 and an aggregate intrinsic value of $3.4 million.
Cash received from options exercised under the Plan was approximately $1.5 million, $38.3 million, and $38.1 million, for the years ended December 31, 2009, 2008 and 2007, respectively. The total intrinsic value of options exercised during 2009, 2008 and 2007 was approximately $0.2 million, $35.0 million, and $54.4 million, respectively.
The Company recognized stock options expense of $11.3 million, $12.3 million, and $12.2 million for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, the Company had $21.5 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 2.3 years.
136
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company maintains a 401(k) retirement plan covering substantially all officers and employees, which permits participants to defer up to the maximum allowable amount determined by the Internal Revenue Service of their eligible compensation. This deferred compensation, together with Company matching contributions, which generally equal employee deferrals up to a maximum of 5% of their eligible compensation (capped at $170,000), is fully vested and funded as of December 31, 2009. The Company contributions to the plan were approximately $1.8 million, $1.5 million and $1.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Due to declining economic conditions resulting in the lack of transactional activity within the real estate industry as a whole, the Company had accrued approximately $3.6 million at December 31, 2008, relating to severance costs associated with employees that had been terminated during January 2009. Also, as a result of continued economic decline, the Company recorded an additional accrual of approximately $3.6 million for severance costs associated with employee terminations during 2009.
23. Income Taxes:
The Company elected to qualify as a REIT in accordance with the Code commencing with its taxable year which began January 1, 1992. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted REIT taxable income to its stockholders. It is management’s intention to adhere to these requirements and maintain the Company’s REIT status. As a REIT, the Company generally will not be subject to corporate federal income tax, provided that distributions to its stockholders equal at least the amount of its REIT taxable income as defined under the Code. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company is subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.
Reconciliation between GAAP Net Income and Federal Taxable Income:
The following table reconciles GAAP net (loss)/income to taxable income for the years ended December 31, 2009, 2008 and 2007 (in thousands):
| | | | | | |
| | 2009 (Estimated) | | 2008 (Actual) | | 2007 (Actual) |
GAAP net(loss)/income | $ | (3,942) | $ | 249,902 | $ | 442,830 |
Less: GAAP net loss/(income) of taxable REIT subsidiaries | | 67,843 | | (9,002) | | (98,542) |
GAAP net income from REIT operations (a) | | 63,901 | | 240,900 | | 344,288 |
Net book depreciation in excess of tax depreciation | | 24,261 | | 19,249 | | 31,963 |
Deferred/prepaid/above and below market rents, net | | (18,967) | | (17,521) | | (12,879) |
Book/tax differences from non-qualified stock options | | 12,107 | | (15,994) | | (26,210) |
Book/tax differences from investments in real estate joint ventures | | 55,101 | | 55,047 | | 5,740 |
Book/tax difference on sale of property | | (13,478) | | 5,617 | | (8,788) |
Valuation adjustment of foreign currency contracts | | - | | (35) | | 308 |
Book adjustment to property carrying values and marketable equity securities | | 122,903 | | 71,638 | | - |
Other book/tax differences, net | | 1,312 | | 10,769 | | 23,911 |
Adjusted taxable income subject to 90% dividend requirements | $ | 247,140 | $ | 369,670 | $ | 358,333 |
Certain amounts in the prior periods have been reclassified to conform to the current year presentation.
(a) All adjustments to "GAAP net (loss)/income from REIT operations" are net of amounts attributable to noncontrolling interest and taxable REIT subsidiaries.
137
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Reconciliation between Cash Dividends Paid and Dividends Paid Deductions (in thousands):
For the years ended December 31, 2009, 2008 and 2007 cash dividends paid exceeded the dividends paid deduction and amounted to $ 331,025, $469,024, and $384,502, respectively.
Characterization of Distributions:
The following characterizes distributions paid for the years ended December 31, 2009, 2008 and 2007, (in thousands):
| | | | | | | | | | | | |
| | 2009 | | | | 2008 | | | | 2007 | | |
Preferred F Dividends | | | | | | | | | | | | |
Ordinary income | $ | 11,638 | | 100% | $ | 9,079 | | 78% | $ | 7,123 | | 61% |
Capital gain | | - | | -% | | 2,559 | | 22% | | 4,515 | | 39% |
| $ | 11,638 | | 100% | $ | 11,638 | | 100% | $ | 11,638 | | 100% |
Preferred G Dividends | | | | | | | | | | | | |
Ordinary income | $ | 35,650 | | 100% | $ | 28,197 | | 78% | $ | - | | - |
Capital gain | | - | | -% | | 7,948 | | 22% | | - | | - |
| $ | 35,650 | | 100% | $ | 36,145 | | 100% | $ | - | | - |
Common Dividends | | | | | | | | | | | | |
Ordinary income | $ | 204,291 | | 72% | $ | 290,656 | | 69% | $ | 207,587 | | 56% |
Capital gain | | - | | -% | | 80,036 | | 19% | | 131,558 | | 35% |
Return of capital | | 79,446 | | 28% | | 50,549 | | 12% | | 33,719 | | 9% |
| $ | 283,737 | | 100% | $ | 421,241 | | 100% | $ | 372,864 | | 100% |
| | | | | | | | | | | | |
Total dividends distributed | $ | 331,025 | | | $ | 469,024 | | | $ | 384,502 | | |
Taxable REIT Subsidiaries ("TRS"):
The Company is subject to federal, state and local income taxes on the income from its TRS activities, which include Kimco Realty Services ("KRS"), a wholly owned subsidiary of the Company and the consolidated entities of FNC, and Blue Ridge Real Estate Company/Big Boulder Corporation.
Income taxes have been provided for on the asset and liability method as required by the FASB’s Income Tax guidance. Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and the tax basis of the TRS assets and liabilities.
The Company’s taxable income for book purposes and provision for income taxes relating to the Company’s TRS and taxable entities which have been consolidated for accounting reporting purposes, for the years ended December 31, 2009, 2008, and 2007, are summarized as follows (in thousands):
| | | | | | |
| | 2009 | | 2008 | | 2007 |
(Loss)/income before income taxes | $ | (104,231) | $ | (3,972) | $ | 109,057 |
Benefit/(provision) for income taxes: | | | | | | |
Federal | | 35,254 | | 11,026 | | (6,565) |
State and local | | 1,133 | | 1,948 | | (3,950) |
Total tax benefit/(provision) | | 36,387 | | 12,974 | | (10,515) |
GAAP net (loss)/income from taxable REIT subsidiaries | $ | (67,844) | $ | 9,002 | $ | 98,542 |
138
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company’s deferred tax assets and liabilities at December 31, 2009 and 2008, were as follows (in thousands):
| | | | |
| | 2009 | | 2008 |
Deferred tax assets: | | | | |
Operating losses | $ | 55,613 | $ | 48,863 |
Tax/GAAP basis differences | | 72,023 | | 71,747 |
Tax credit carryforwards | | 6,319 | | - |
Valuation allowance | | (33,783) | | (33,783) |
Total deferred tax assets | | 100,172 | | 86,827 |
Deferred tax liabilities | | (13,833) | | (2,656) |
Net deferred tax assets | $ | 86,339 | $ | 84,171 |
As of December 31, 2009, the Company had net deferred tax assets of approximately $86.3 million. This net deferred tax asset includes approximately $12.0 million for the tax effect of net operating losses, (“NOL”) after the impact of a valuation allowance of $33.8 million, relating to FNC, a consolidated entity in which the Company has a 53% ownership interest. The partial valuation allowance on the FNC deferred tax asset primarily results from current projected taxable income, being more likely than not, insufficient to utilize the full amount of the deferred tax asset. The Company’s remaining net deferred tax asset of approximately $74.3 million primarily relates to KRS and consists of (i) $13.8 million in deferred tax liabilities, (ii) $9.8 million in NOL carry forwards that expire in 2029, (iii) $6.3 million in tax credit carry forwards, $4.0 million of which expire in 2029 and $2.3 million that do not expire and (iv) $72.0 million primarily relating to differences in GAAP book basis and tax basis of accounting for (i) real estate assets (ii) real estate joint ventures, (iii) other real estate investments, and (iv) asset impairments charges that have been recorded for book purposes but not yet recognized for tax purposes and (v) other miscellaneous deductible temporary differences.
As of December 31, 2009, the Company determined that no valuation allowance was needed against the $74.3 million net deferred tax asset within KRS. This determination was based upon the Company’s analysis of both positive evidence, which includes future projected income for KRSand negative evidence, which consists of a three year cumulative pre-tax book loss of approximately $23.0 million for KRS. The cumulative loss was primarily the result of significant impairment charges taken by KRS during 2009 and 2008 of approximately $91.7 million and approximately $82.2 million, respectively. KRS has a strong earnings history exclusive of the impairment charges. Since 2001, KRS has produced substantial taxable income in each year through 2008. Over the prior three years (2006 through 2008) KRS generated approximately $69.3 million of taxable income, before net operating loss carryovers.
KRS activities primarily consisted of a merchant building business for the ground-up development of shopping center properties and subsequent sale upon completion and investments which include redevelopment properties and joint venture investments including KRS’s investment in the Albertson’s joint venture. During 2009, the Company changed its merchant building strategy from a sale upon completion strategy to a long-term hold strategy for its remaining merchant building projects.
To determine future projected income the Company scheduled KRS’s pre-tax book income and taxable income over a twenty year period taking into account its continuing operations (“core earnings”). Core earnings consist of estimated net operating income for properties currently in service and generating rental income from existing tenants. Major lease turnover is not expected in these properties as these properties were generally constructed and leased within the past two years. To allow the forecast to remain objective and verifiable, no income growth was forecasted for any other aspect of KRS’s continuing business activities including its investment in the Albertson’s joint venture. The Company also included future known events in its projected income forecast such as the maturity of certain mortgages and construction loans which will significantly reduce the amount of interest expense incurred in future years. Additionally, the Company h as also committed to certain actions which will result in reducing leverage at KRS. With the Company’s change in its merchant building strategy, future business operations at KRS will not support its current capital structure which consists of approximately $564 million of intercompany loans the Company has made to KRS to fund its merchant building operation. KRS incurred approximately $32.1 million of interest expense related to the intercompany financing during 2009. The Company will recapitalize a significant portion of the debt to reflect KRS’s ongoing business activities. The twenty year taxable income estimate reduces intercompany interest in accordance with this plan.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company’s projection of KRS’s future taxable income, utilizing the assumptions above with respect to core earnings and reductions in interest expense due to debt maturities and the Company’s recapitalization plans generates approximately $205.2 million in future taxable income, which is sufficient to fully utilize KRS’s $74.3 million net deferred tax asset. As a result of this analysis the Company has determined it is more likely than not that KRS’s net deferred tax asset of $74.3 million will be realized and therefore, no valuation allowance is needed at December 31, 2009. If future income projections do not occur as forecasted or the Company incurs additional impairment losses, the Company will reevaluate the need for a valuation allowance.
Deferred tax assets and deferred tax liabilities are included in the caption Other assets and Other liabilities on the accompanying Consolidated Balance Sheets at December 31, 2009 and 2008. Operating losses and the valuation allowance are primarily due to the Company’s consolidation of FNC for accounting and reporting purposes. At December 31, 2009, FNC had approximately $117.5 million of NOL carryforwards that expire from 2022 through 2025, with a tax value of approximately $45.8 million. At December 31, 2008, FNC had approximately $125.3 million of NOL carry forwards, with a tax value of approximately $48.9 million. A valuation allowance of $33.8 million has been established for a portion of these deferred tax assets.
(Benefit)/provision differ from the amount computed by applying the statutory federal income tax rate to taxable income before income taxes were as follows (in thousands):
| | | | | | |
| | 2009 | | 2008 | | 2007 |
Federal (benefit)/provision at statutory tax rate (35%) | $ | (36,481) | $ | (1,390) | $ | 38,170 |
State and local taxes, net of federal (benefit)/provision | | (6,775) | | (258) | | 7,089 |
Other | | 6,869 | | (8,283) | | (3,552) |
Valuation allowance decrease | | - | | (3,043) | | (31,192) |
| $ | (36,387) | $ | (12,974) | $ | 10,515 |
24. Supplemental Financial Information:
The following represents the results of operations, expressed in thousands except per share amounts, for each quarter during the years 2009 and 2008:
| | | | | | | | |
| | 2009 (Unaudited) |
| | Mar. 31 | | June 30 | | Sept. 30 | | Dec. 31 |
Revenues from rental property(1) | $ | 193,895 | $ | 189,285 | $ | 191,885 | $ | 211,822 |
| | | | | | | | |
Net income/(loss) attributable to the Company | $ | 38,424 | $ | (134,651) | $ | 40,108 | $ | 52,177 |
| | | | | | | | |
Net income/(loss) per common share: | | | | | | | | |
Basic | $ | 0.10 | $ | (0.40) | $ | 0.07 | $ | 0.11 |
Diluted | $ | 0.10 | $ | (0.40) | $ | 0.07 | $ | 0.11 |
| | | | | | | | |
| | 2008 (Unaudited) |
| | Mar. 31 | | June 30 | | Sept. 30 | | Dec. 31 |
Revenues from rental property(1) | $ | 188,794 | $ | 182,970 | $ | 189,951 | $ | 196,989 |
| | | | | | | | |
Net income/(loss) attributable to the Company | $ | 98,467 | $ | 94,374 | $ | 108,584(a) | $ | (51,523)(a) |
| | | | | | | | |
Net income/(loss) per common share: | | | | | | | | |
Basic | $ | 0.34 | $ | 0.33 | $ | 0.38 | $ | (0.24) |
Diluted | $ | 0.34 | $ | 0.32 | $ | 0.37 | $ | (0.24) |
(1) All periods have been adjusted to reflect the impact of operating properties sold during 2009 and 2008 and properties classified as held for sale as of December 31, 2009, which are reflected in the caption Discontinued operations on the accompanying Consolidated Statements of Operations.
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KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(a) Out-of-Period Adjustment - During the fourth quarter of 2008, the Company identified an out-of-period adjustment in its consolidated financial statements for the year ended December 31, 2008. This adjustment related to the accounting for cash distributions received in excess of the Company’s carrying value of its investment in an unconsolidated joint venture. During the third quarter of 2008, the Company recorded as income approximately $8.5 million from cash distributions received in excess of the Company’s carrying value of its investment resulting from mortgage refinancing proceeds from one of its unconsolidated joint ventures. The Company recorded the $8.5 million as income as the Company had no guaranteed obligations or was otherwise committed to provide further financial support to the joint venture. It was determined in the fourth quarter of 2008, that although the Company in substanc e does not have any further obligations, in form, the Company is the general partner in this joint venture and does have a legal obligation relating to the partnership. As such, the Company should not have recognized the $8.5 million as income in the third quarter. The Company has reversed this amount from income in the fourth quarter of 2008. As a result of this out-of-period adjustment, net income was overstated by $8.5 million in the third quarter of 2008 and understated by $8.5 million in the fourth quarter of 2008, but correctly stated for the year ended December 31, 2008. The Company concluded that the $8.5 million adjustment was not material to the quarter ended September 30, 2008 or the quarter ended December 31, 2008. As such, this adjustment was recorded in the Company’s Consolidated Statements of Income for the three months ended December 31, 2008, rather than restating the third quarter 2008 period.
Accounts and notes receivable in the accompanying Consolidated Balance Sheets are net of estimated unrecoverable amounts of approximately $12.2 million and $9.0 million of billed accounts receivable and $10.1 million and $13.3 million for accrued unbilled common area maintenance and real estate recoveries at December 31, 2009 and 2008, respectively.
25. Pro Forma Financial Information (Unaudited):
As discussed in Notes 5, 6 and 7, the Company and certain of its subsidiaries acquired and disposed of interests in certain operating properties during 2009. The pro forma financial information set forth below is based upon the Company's historical Consolidated Statements of Operations for the years ended December 31, 2009 and 2008, 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 operations for future periods. (Amounts presented in millions, except per share figures.)
| | | | |
| | Year ended December 31, |
| | 2009 | | 2008 |
Revenues from rental property | $ | 864.0 | $ | 853.5 |
Net income | $ | 22.4 | $ | 274.1 |
Net (loss)/income attributable to the Company’s common shareholders | $ | (34.9) | $ | 201.6 |
| | | | |
Net (loss)/income attributable to the Company’s common shareholders per common share: | | | | |
Basic | $ | (0.10) | $ | 0.78 |
Diluted | $ | (0.10) | $ | 0.78 |
141
KIMCO REALTY CORPORATION AND SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
For Years Ended December 31, 2009, 2008 and 2007
(in thousands)
| | | | | | | | | | |
| | Balance at beginning of period | | Charged to expenses | | Adjustments to valuation accounts | | Deductions | | Balance at end of period |
Year Ended December 31, 2009 | | | | | | | | | | |
Allowance for uncollectable accounts | $ | 9,000 | $ | 4,579 | $ | - | $ | (1,379) | $ | 12,200 |
| | | | | | | | | | |
Allowance for deferred tax asset | $ | 33,783 | $ | 34,800 | $ | (34,800) | $ | - | $ | 33,783 |
| | | | | | | | | | |
Year Ended December 31, 2008 | | | | | | | | | | |
Allowance for uncollectable accounts | $ | 9,000 | $ | 3,066 | $ | - | $ | (3,066) | $ | 9,000 |
| | | | | | | | | | |
Allowance for deferred tax asset | $ | 36,826 | $ | - | $ | (3,043) | $ | - | $ | 33,783 |
| | | | | | | | | | |
Year Ended December 31, 2007 | | | | | | | | | | |
Allowance for uncollectable accounts | $ | 8,500 | $ | 614 | $ | - | $ | (114) | $ | 9,000 |
| | | | | | | | | | |
Allowance for deferred tax asset | $ | 68,018 | $ | - | $ | (31,192) | $ | - | $ | 36,826 |
142