Exhibit 99.1
Item 6. Selected Financial Data
- --------------------------------
The following table sets forth selected, historical consolidated financial data
for the Company and should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this annual report on Form 10-K.
The Company believes that the book value of its real estate assets, which
reflects the historical costs of such real estate assets less accumulated
depreciation, is not indicative of the current market value of its properties.
Historical operating results are not necessarily indicative of future operating
performance.
5
Year ended December 31, (2)
-----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(in thousands, except per share information)
Operating Data:
Revenues from
rental property (1) $ 475,541 $ 427,868 $ 425,575 $ 417,432 $ 395,365
Interest expense $ 102,597 $ 85,323 $ 87,005 $ 90,858 $ 83,479
Depreciation and
amortization $ 85,168 $ 69,944 $ 67,560 $ 65,455 $ 61,852
Gain on sale of
development properties $ 17,495 $ 15,880 $ 13,418 $ -- $ --
Gain on sale of
operating properties $ 3,177 $ -- $ 3,040 $ 3,962 $ 1,552
Provision for income taxes $ 8,514 $ 12,904 $ 19,376 $ -- $ --
Income from continuing
operations $ 233,412 $ 232,877 $ 204,460 $ 182,971 $ 157,479
Income per common share,
from continuing
operations:
Basic $ 2.10 $ 2.14 $ 1.98 $ 1.69 $ 1.44
Diluted $ 2.07 $ 2.13 $ 1.95 $ 1.67 $ 1.43
Weighted average number of
shares of common stock:
Basic 107,092 104,458 96,317 92,688 90,709
Diluted 108,770 105,969 101,163 93,653 91,466
Cash dividends declared
per common share $ 2.19 $ 2.10 $ 1.96 $ 1.81 $ 1.64
December 31,
-----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Real estate, before
accumulated depreciation $ 4,136,524 $ 3,398,971 $ 3,201,364 $ 3,114,503 $ 2,951,050
Total assets $ 4,603,925 $ 3,758,350 $ 3,387,342 $ 3,175,294 $ 3,011,297
Total debt $ 2,154,948 $ 1,576,982 $ 1,328,079 $ 1,325,663 $ 1,249,571
Total stockholders' equity $ 2,135,846 $ 1,908,800 $ 1,892,647 $ 1,708,285 $ 1,609,256
Cash flow provided
by operations $ 308,632 $ 278,931 $ 287,444 $ 250,546 $ 237,153
Cash flow used for
investing activities $ (642,365) $ (396,655) $ (157,193) $ (191,626) $ (205,219)
Cash flow (used for) provided
by financing activities $ 346,059 $ 59,839 $ (55,501) $ (67,899) $ (47,778)
(1) Does not include (i) revenues from rental property relating to
unconsolidated joint ventures, (ii) revenues relating to the investment in
retail stores leases and (iii) revenues from properties included in discontinued
operations.
(2) All years have been adjusted to reflect the impact of operating
properties sold during the nine months ended September 30, 2004 and the year
ended December 31, 2003 and properties classified as held for sale as of
December 31, 2003 which are reflected in discontinued operations in the
Consolidated Statements of Income.
6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in this annual report on Form
10-K. Historical results and percentage relationships set forth in the
Consolidated Statements of Income contained in the Consolidated Financial
Statements, including trends which might appear, should not be taken as
indicative of future operations.
Executive Summary
- -----------------
Kimco Realty Corporation is one of the nation's largest publicly-traded owners
and operators of neighborhood and community shopping centers. As of February 5,
2004, the Company's portfolio was comprised of 699 property interests, including
620 shopping center properties (including 26 property interests relating to the
Company's Preferred Equity program), 36 retail store leases, 33 ground-up
development projects and ten undeveloped parcels of land, totaling approximately
102.6 million square feet of leasable space (including 3.9 million square feet
related to the Company's Preferred Equity program and 4.9 million square feet
projected for the ground-up development projects) located in 41 states, Canada
and Mexico.
The Company is self-administered and self-managed through present management,
which has owned and managed neighborhood and community shopping centers for over
40 years. The executive officers are engaged in the day-to-day management and
operation of real estate exclusively with the Company, with nearly all-operating
functions, including leasing, asset management, maintenance, construction,
legal, finance and accounting administered by the Company.
Additionally, in connection with the Tax Relief Extension Act of 1999 (the
"RMA"), which became effective January 1, 2001, the Company is now 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 Code, subject to certain limitations. As such,
the Company, through its taxable REIT subsidiaries, is engaged in various retail
real estate related opportunities including (i) merchant building, through its
Kimco Developers, Inc. ("KDI") subsidiary, which is primarily engaged in the
ground-up development of neighborhood and community shopping centers and the
subsequent sale thereof upon completion (ii) retail real estate advisory and
disposition services which primarily focuses on leasing and disposition
strategies of retail real estate controlled by both healthy and distressed
and/or bankrupt retailers and (iii) acting as an agent or principal in
connection with tax deferred exchange transactions. The Company will consider
other investments through taxable REIT subsidiaries should suitable
opportunities arise.
The Company's strategy is to maintain a strong balance sheet while investing
opportunistically and selectively. The Company's intends to continue to execute
its plan of delivering solid growth in earnings and dividends. As a result of
the improved 2003 performance, the Board of Directors increased the quarterly
dividend to $0.57 from $0.54, effective for the first quarter of 2004.
Critical Accounting Policies
- ----------------------------
The Consolidated Financial Statements of the Company include the accounts of the
Company, its wholly-owned subsidiaries and all partnerships in which the Company
has a controlling interest. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying Consolidated Financial
Statements and related notes. In preparing these financial statements,
management has made its best estimates and assumptions that affect the reported
amounts of assets and liabilities. These estimates are based on, but not limited
to, historical results, industry standards and current economic conditions,
giving due consideration to materiality. The most significant assumptions and
estimates relate to revenue recognition and the recoverability of trade accounts
receivable, depreciable lives and valuation of real estate. Application of these
assumptions requires the exercise of judgment as to future uncertainties and, as
a result, actual results could differ from these estimates.
7
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 recorded once the required sales level is achieved. In
addition, leases typically provide for reimbursement to the Company of common
area maintenance, real estate taxes and other operating expenses. Operating
expense reimbursements are recognized as earned. Rental income may also include
payments received in connection with lease termination agreements.
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 income is directly affected
by management's estimate of the collectability of accounts receivable.
Real Estate
Upon acquisition of operating real estate properties, the Company estimates the
fair value of acquired tangible assets (consisting of land, building and
improvements) and identified intangible assets and liabilities (consisting of
above and below-market leases, in-place leases and tenant relationships) and
assumed debt in accordance with Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS No. 141"). Based on these estimates, the
Company allocates the purchase price to the applicable assets and liabilities.
The Company utilized methods similar to those used by independent appraisers in
estimating the fair value of acquired assets and liabilities. 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.
The Company's investments in real estate properties are carried at cost, less
accumulated depreciation and amortization. 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.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the assets, as follows:
Buildings 15 to 46 years
Fixtures, building and leasehold Terms of leases or useful lives,
improvements (including certain whichever is shorter
identified intangible assets)
The Company is required to make subjective assessments as to the useful lives of
its properties for purposes of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have a
direct impact on the Company's net income.
Real estate under development on the Company's Consolidated Balance Sheets
represent ground-up development projects which are held for sale upon
completion. These assets are carried at cost and no depreciation is recorded.
The cost of land and buildings under development include 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 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
estimated net sales price of these assets is less than the net carrying value,
an adjustment to the carrying value would be recorded to reflect the estimated
fair value of the property. A gain on the sale of these assets is generally
recognized using the full accrual method in accordance with the provisions of
Statement of Financial Accounting Standards No. 66, Accounting for Real Estate
Sales.
Long Lived Assets
On a periodic basis, management assesses whether there are any indicators 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 without interest charges) 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, trend 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 property.
8
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 of such
asset net of selling costs. If, in management's opinion, the net sales price of
the asset is less than the net book value of such asset, an adjustment to the
carrying value would be recorded to reflect the estimated fair value of the
property.
The Company is required to make subjective assessments as to whether there are
impairments in the value of its real estate properties, investments in joint
ventures and other investments. The Company's reported net income is directly
affected by management's estimate of impairments and/or valuation allowances.
Results of Operations
- ---------------------
Comparison 2003 to 2002
Revenues from rental property increased $47.7 million or 11.1% to $475.5 million
for the year ended December 31, 2003, as compared with $427.9 million for the
year ended December 31, 2002. This net increase resulted primarily from the
combined effect of (i) the acquisition of 55 operating properties during 2003,
including 41 operating properties acquired in the Mid-Atlantic Merger, providing
revenues of $34.2 million for the year ended December 31, 2003, (ii) the full
year impact related to the 13 operating properties acquired in 2002 providing
incremental revenues of $16.6 million, and (iii) an overall increase in shopping
center portfolio occupancy to 90.7% at December 31, 2003 as compared to 87.8% at
December 31, 2002 and the completion of certain development and redevelopment
projects, providing incremental revenues of approximately $18.1 million as
compared to the corresponding year ended December 31, 2002, offset by (iv) a
decrease in revenues of approximately $8.4 million resulting from the bankruptcy
filing of Kmart Corporation ("Kmart") and subsequent rejection of leases, and
(v) sales of certain shopping center properties and tenant buyouts resulting in
a decrease of revenues of approximately $12.8 million as compared to the
preceding year.
Rental property expenses including depreciation and amortization increased $25.6
million or 13.9% to $209.2 million for the year ended December 31, 2003 as
compared to $183.6 million for the preceding year. The rental property expense
components of operating and maintenance and depreciation and amortization
increased approximately $24.4 million or 21.5% for the year ended December 31,
2003 as compared with the year ended December 31, 2002. This increase is
primarily due to property acquisitions during 2003 and 2002 and increased snow
removal costs during 2003.
Income from other real estate investments increased $6.8 million to $22.8
million as compared to $16.0 million for the preceding year. This increase is
primarily due to increased investment in the Company's preferred equity program
contributing $4.6 million during 2003 as compared to $1.0 million in 2002,
contribution of $12.1 million from the Kimsouth investment resulting from the
disposition of 14 investment properties during 2003, offset by a decrease in
income of $7.8 million from the Montgomery Ward Asset Designation rights
transaction.
Management and other fee income increased approximately $3.2 million to $15.3
million for the year ended December 31, 2003 as compared to $12.1 million for
the year ended December 31, 2002. This increase is primarily due to (i)
increased management and acquisition fees resulting from the growth of the KROP
portfolio, (ii) increased management fees from KIR resulting from the growth of
the KIR portfolio, and (iii) increased property management activity providing
incremental fee income of approximately $1.1 million for the year ended December
31, 2003 as compared to the preceding year.
Interest expense increased $17.3 million or 20.2% to $102.6 million for the year
ended December 31, 2003, as compared with $85.3 million for the year ended
December 31, 2002. This increase is primarily due to an overall increase in
borrowings during the year ended December 31, 2003 as compared to the preceding
year, including additional borrowings and assumption of mortgage debt totaling
approximately $616.0 million in connection with the Mid-Atlantic Merger.
9
General and administrative expenses increased approximately $7.0 million for the
year ended December 31, 2003, as compared to the preceding calendar year. This
increase is primarily due to (i) increased staff levels related to the growth of
the Company, and (ii) other personnel related costs, associated with a
realignment of our regional operations.
During 2003, the Company reached agreement with certain lenders in connection
with three individual non-recourse mortgages encumbering three former Kmart
sites. The Company paid approximately $14.2 million in full satisfaction of
these loans which aggregated approximately $24.0 million. As a result of these
transactions, the Company recognized a gain on early extinguishment of debt of
approximately $9.7 million during 2003.
During December 2002, the Company reached agreement with certain lenders in
connection with four individual non-recourse mortgages encumbering four former
Kmart sites. The Company paid approximately $24.2 million in full satisfaction
of these loans which aggregated approximately $46.5 million. The Company
recognized a gain on early extinguishment of debt of approximately $22.3 million
for the year ended December 31, 2002.
As part of the Company's periodic assessment of its real estate properties with
regard to both the extent to which such assets are consistent with the Company's
long-term real estate investment objectives and the performance and prospects of
each asset, the Company determined in 2002, that its investment in four
operating properties, comprised of an aggregate 0.4 million square feet of GLA
with an aggregate net book value of approximately $23.8 million, may not be
fully recoverable. Based upon management's assessment of current market
conditions and the lack of demand for the properties, the Company has reduced
its potential holding period of these investments. As a result of the reduction
in the anticipated holding period, together with a reassessment of the projected
future operating cash flows of the properties and the effects of current market
conditions, the Company has determined that its investment in these assets was
not fully recoverable and has recorded an adjustment of property carrying value
aggregating approximately $12.5 million for the year ended December 31, 2002.
Approximately $1.5 million relating to the adjustment of property carrying value
for one of these properties is included in the caption Income from discontinued
operations on the Company's Consolidated Statements of Income.
Provision for income taxes decreased $4.4 million to $8.5 million for the year
ended December 31, 2003, as compared with $12.9 million for the year ended
December 31, 2002. This decrease is primarily due to less taxable income
provided by the Montgomery Ward Asset Designation Rights transaction in 2003 as
compared to 2002.
Equity in income of real estate joint ventures, net increased $4.6 million to
$42.3 million for the year ended December 31, 2003, as compared to $37.7 million
for the year ended December 31, 2002. This increase is primarily attributable to
the equity in income from the Kimco Income REIT joint venture investment, the
RioCan joint venture investment, and the KROP joint venture investment as
described below.
During 1998, the Company formed KIR, a limited partnership established to invest
in high quality retail properties financed primarily through the use of
individual non-recourse mortgages. The Company has a 43.3% non-controlling
limited partnership interest in KIR, which the Company manages, and accounts for
its investment in KIR under the equity method of accounting. Equity in income of
KIR increased $1.6 million to $19.8 million for the year ended December 31,
2003, as compared to $18.2 million for the preceding year. This increase is
primarily due to the Company's increased capital investment in KIR totaling
$13.0 million during 2003 and $23.8 million during 2002. The additional capital
investments received by KIR from the Company and its other institutional
partners were used to purchase additional shopping center properties throughout
calendar year 2003 and 2002.
During October 2001, the Company formed a joint venture (the "RioCan Venture")
with RioCan Real Estate Investment Trust ("RioCan", Canada's largest publicly
traded REIT measured by gross leasable area ("GLA")), in which the Company has a
50% non-controlling interest, to acquire retail properties and development
projects in Canada. As of December 31, 2003, the RioCan Venture consisted of 31
shopping center properties and three development projects with approximately 7.2
million square feet of GLA. The Company's equity in income from the RioCan
Venture increased approximately $3.4 million to $12.5 million for the year ended
December 31, 2003, as compared to $9.1 million for the preceding year.
10
During October 2001, the Company formed the Kimco Retail Opportunity Portfolio
("KROP"), a joint venture with GE Capital Real Estate ("GECRE") which the
Company manages and has a 20% non-controlling interest. The purpose of this
venture is to acquire established, high-growth potential retail properties in
the United States. As of December 31, 2003, KROP consisted of 23 shopping center
properties with approximately 3.5 million square feet of GLA. The Company's
equity in income from the KROP Venture increased approximately $1.0 million to
$2.0 million for the year ended December 31, 2003, as compared to $1.0 million
for the preceding year.
Minority interests in income of partnerships, net increased $5.5 million to $7.8
million as compared to $2.3 million for the preceding year. This increase is
primarily due to the full year effect of the acquisition of a shopping center
property acquired during October 2002, through a newly formed partnership by
issuing approximately 2.4 million downREIT units valued at $80 million. The
downREIT units are convertible at a ratio of 1:1 into the Company's common stock
and are entitled to a distribution equal to the dividend rate on the Company's
common stock multiplied by 1.1057.
During 2003, the Company disposed of, in separate transactions, (i) 10 operating
shopping center properties, for an aggregate sales price of approximately $119.1
million, including the assignment of approximately $1.7 million of mortgage debt
encumbering one of the properties, (ii) two regional malls for an aggregate
sales price of approximately $135.6 million, (iii) one out-parcel for a sales
price of approximately $8.1 million, (iv) transferred three operating properties
to KROP for a price of approximately $144.2 million which approximated their net
book value, (v) transferred an operating property to a newly formed joint
venture in which the Company has a non-controlling 10% interest for a price of
approximately $21.9 million which approximated its net book value and (vi)
terminated four leasehold positions in locations which a tenant in bankruptcy
had rejected its lease. These transactions resulted in net gains of
approximately $50.8 million. Additionally, during the nine month period ended
September 30, 2004, the Company (i) disposed of, in separate transactions, 11
operating properties and one ground lease for an aggregate sales price of
approximately $64.4 million including the assignment of approximately $8.0
million of non-recourse mortgage debt encumbering one of the properties, (ii)
transferred 16 operating properties to KROP for a price of approximately $182.9
million, which approximated their net book values, and (iii) transferred 20
operating properties to various co-investment ventures in which the Company has
non-controlling interests ranging from 10% to 30% for an aggregate price of
approximately $471.8 million, which approximated their net book value. These
dispositions resulted in net gains of approximately $11.6 million which were
recognized during the nine months ended September 30, 2004.
For those property dispositions for which SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144") is applicable, the
current and prior comparative years operations of properties sold during 2003
and during the six months ended June 30, 2004 and net gain on disposition of
properties sold during 2003 have been included in the caption Discontinued
operations on the Company's Consolidated Statements of Income.
During 2003, the Company identified two operating properties, comprised of
approximately 0.2 million square feet of GLA, as held-for-sale in accordance
with SFAS No. 144. The book value of these properties, aggregating approximately
$19.5 million, net of accumulated depreciation of approximately $2.0 million,
exceeded their estimated fair value. The Company's determination of the fair
value of these properties, aggregating approximately $15.4 million, is based
upon contracts of sale with third parties less estimated selling costs. As a
result, the Company recorded an adjustment of property carrying values of $4.0
million. Additionally, during March 2004, the Company reclassified as
held-for-sale two shopping center properties comprising approximately 0.3
million square feet. The book value of these properties, aggregating
approximately $8.7 million, net of accumulated depreciation of approximately
$4.2 million, exceeded their estimated fair value. The Company's determination
of the fair value of these properties, aggregating approximately $4.5 million,
was based upon contracts of sale with third parties less estimated selling
costs. As a result, the Company recorded an adjustment of property carrying
values of $4.2 million that was recognized during the nine months ended
September 30, 2004. During March and June 2004, the Company, in separate
transactions, completed the sale of these two properties for an aggregate sales
price of approximately $5.0 million. The current and prior years comparative
operations of properties sold during the nine months ended September 30, 2004
and classified as held-for-sale as of December 31, 2003, along with the
adjustment of property carrying values during 2003, are included in the caption
Income from discontinued operations on the Company's Consolidated Statements of
Income.
11
During 2002, the Company identified two operating properties, comprised of
approximately 0.2 million square feet of GLA, as held-for-sale in accordance
with SFAS No. 144. The book value of these properties, aggregating approximately
$28.4 million, net of accumulated depreciation of approximately $2.9 million,
exceeded their estimated fair value. The Company's determination of the fair
value of these properties, aggregating approximately $7.9 million, is based upon
executed contracts of sale with third parties less estimated selling costs. As a
result, the Company recorded an adjustment of property carrying values of $20.5
million. This adjustment is included, along with the related property operations
for the current and comparative years, in the caption Income from discontinued
operations on the Company's Consolidated Statements of Income.
Effective January 1, 2001, the Company has elected taxable REIT subsidiary
status for its wholly-owned development subsidiary, KDI. KDI is primarily
engaged in the ground-up development of neighborhood and community shopping
centers and the subsequent sale thereof upon completion. During the year ended
December 31, 2003, KDI sold four projects and 26 out-parcels, in separate
transactions, for approximately $134.6 million. These sales resulted in pre-tax
gains of approximately $17.5 million.
During the year ended December 31, 2002, KDI sold four of its recently completed
projects and eight out-parcels, in separate transactions, for approximately
$128.7 million, including the assignment of approximately $17.7 million of
mortgage debt encumbering one of the properties which resulted in pre-tax
profits of $15.9 million.
Net income for the year ended December 31, 2003 was $307.9 million as compared
to $245.7 million for the year ended December 31, 2002. On a diluted per share
basis, net income increased $0.46 to $2.62 for the year ended December 31, 2003
as compared to $2.16 for the preceding year. This improved performance is
primarily attributable to (i) the acquisition of operating properties, including
the Mid-Atlantic Merger, during 2003 and 2002, (ii) significant leasing within
the portfolio which improved operating profitability, (iii) increased
contributions from KIR, the RioCan Venture and KROP, (iv) increased gains on
development sales from KDI, and (v) increased gains from operating property
sales of $50.8 million in 2003 as compared to $12.8 million in 2002. The 2003
improvement also includes the impact from gains on early extinguishment of debt
of $9.7 million in 2003 as compared to $22.3 million in 2002 and adjustments to
property carrying values of $4.0 million in 2003 and $33.0 million in 2002. The
2003 diluted per share results were decreased by a reduction in net income
available to common shareholders of $0.07 resulting from the deduction of
original issuance costs associated with the redemption of the Company's 7 3/4%
Class A, 8 1/2% Class B and 8?% Class C Cumulative Redeemable Preferred Stocks
during the second quarter of 2003.
Comparison 2002 to 2001
Revenues from rental property increased $2.3 million or 0.5% to $427.9 million
for the year ended December 31, 2002, as compared with $425.6 million for the
year ended December 31, 2001. This net increase resulted primarily from the
combined effect of (i) the acquisition of 13 operating properties during 2002,
providing revenues of $5.1 million for the year ended December 31, 2002, (ii)
the full year impact related to the three operating properties acquired in 2001
providing incremental revenues of $2.3 million, and (iii) the completion of
certain development and redevelopment projects, tenant buyouts and new leasing
within the portfolio providing incremental revenues of approximately $20.5
million as compared to the corresponding year ended December 31, 2001, offset by
(iv) an overall decrease in shopping center portfolio occupancy to 87.8% at
December 31, 2002 as compared to 90.4% at December 31, 2001 due primarily to the
bankruptcy filing of Kmart Corporation ("Kmart") and Ames Department Stores,
Inc. ("Ames") and subsequent rejection of leases resulting in a decrease of
revenues of approximately $24.2 million as compared to the preceding year, and
(v) sales of certain shopping center properties throughout 2001 and 2002,
resulting in a decrease of revenues of approximately $1.4 million as compared to
the preceding year.
Rental property expenses, including depreciation and amortization, increased
$9.8 million or 5.6% to $183.6 million for the year ended December 31, 2002 as
compared to $173.8 million for the preceding year. The rental property expense
component of real estate taxes increased approximately $6.0 million or 11.4% for
the year ended December 31, 2002 as compared with the year ended December 31,
2001. This increase relates primarily to the payment of real estate taxes by the
Company on certain Kmart anchored locations where Kmart previously paid the real
estate taxes directly to the taxing authorities. The rental property expense
component of operating and maintenance increased approximately $1.6 million or
3.8% for the year ended December 31, 2002 as compared with the year ended
December 31, 2001. This increase is primarily due to property acquisitions
during 2002 and 2001, renovations within the portfolio and higher professional
fees relating to tenant bankruptcies.
12
Income from other real estate investments decreased $22.1 million to $16.0
million as compared to $38.1 million for the preceding year. This decrease is
primarily due to the decrease in income from the Montgomery Ward asset
designation rights transactions described below.
During March 2001, the Company, through a taxable REIT subsidiary, formed a real
estate joint venture (the "Ward Venture") in which the Company has a 50%
interest, for purposes of acquiring asset designation rights for substantially
all of the real estate property interests of the bankrupt estate of Montgomery
Ward LLC and its affiliates. These asset designation rights have provided the
Ward Venture the ability to direct the ultimate disposition of the 315 fee and
leasehold interests held by the bankrupt estate, of which 303 transactions were
completed as of December 31, 2002. During the year ended December 31, 2002, the
Ward Venture completed transactions for 32 properties. The pre-tax profits from
the Ward Venture decreased approximately $23.3 million to $11.3 million for the
year ended December 31, 2002 as compared to $34.6 million for the preceding
year.
Mortgage financing income increased $16.8 million to $19.4 million for the year
ended December 31, 2002 as compared to $2.6 million for the year ended December
31, 2001. This increase is primarily due to increased interest income earned
related to certain real estate lending activities during the year ended December
31, 2002.
Management and other fee income increased approximately $5.7 million to $12.1
million for the year ended December 31, 2002 as compared to $6.4 million for the
year ended December 31, 2001. This increase is primarily due to (i) a $0.6
million increase in management fees from KIR resulting from the growth of the
KIR portfolio, (ii) $2.1 million of management and acquisition fees relating to
the KROP joint venture activities during the year ended December 31, 2002 and
(iii) increased property management activity providing incremental fee income of
approximately $3.0 million.
Other income/(expense), net increased approximately $4.7 million to $2.5 million
for the year ended December 31, 2002 as compared to the preceding calendar year.
This increase is primarily due to pre-tax profits earned from the Company's
participation in ventures established to provide inventory liquidation services
to regional retailers in bankruptcy.
Interest expense decreased $1.7 million or 1.9% to $85.3 million for the year
ended December 31, 2002, as compared with $87.0 million for the year ended
December 31, 2001. This decrease is primarily due to reduced interest costs on
the Company's floating-rate revolving credit facilities and remarketed reset
notes which was partially offset by an increase in borrowings during the year
ended December 31, 2002, as compared to the preceding year.
General and administrative expenses increased approximately $3.3 million for the
year ended December 31, 2002, as compared to the preceding calendar year. This
increase is primarily due to higher costs related to the growth of the Company
including (i) increased senior management and staff levels, (ii) increased
system related costs and (iii) other personnel related costs.
The Company had previously encumbered certain Kmart sites with individual
non-recourse mortgages as part of its strategy to reduce its exposure to Kmart
Corporation. As a result of the Kmart bankruptcy filing in January 2002 and the
subsequent rejection of leases including leases at these encumbered sites, the
Company, during July 2002, had suspended debt services payments on these loans
and was actively negotiating with the respective lenders. During December 2002,
the Company reached agreement with certain lenders in connection with four of
these locations. The Company paid approximately $24.2 million in full
satisfaction of these loans which aggregated approximately $46.5 million. The
Company recognized a gain on early extinguishment of debt of approximately $22.3
million.
As part of the Company's periodic assessment of its real estate properties with
regard to both the extent to which such assets are consistent with the Company's
long-term real estate investment objectives and the performance and prospects of
each asset, the Company determined in 2002, that its investment in four
operating properties, comprised of an aggregate 0.4 million square feet of GLA
with an aggregate net book value of approximately $23.8 million, may not be
fully recoverable. Based upon management's assessment of current market
conditions and the lack of demand for the properties, the Company has reduced
its potential holding period of these investments. As a result of the reduction
in the anticipated holding period, together with a reassessment of the projected
future operating cash flows of the properties and the effects of current market
conditions, the Company has determined that its investment in these assets was
not fully recoverable and has recorded an adjustment of property carrying value
aggregating approximately $12.5 million, of which approximately $1.5 million is
included in the caption Income from discontinued operations on the Company's
Consolidated Statements of Income.
13
Equity in income of real estate joint ventures, net increased $16.0 million to
$37.7 million for the year ended December 31, 2002, as compared to $21.7 million
for the year ended December 31, 2001. This increase is primarily attributable to
the equity in income from the Kimco Income REIT joint venture investment, the
RioCan joint venture investment, and the KROP joint venture investment as
described below.
During 1998, the Company formed KIR, a limited partnership established to invest
in high quality retail properties financed primarily through the use of
individual non-recourse mortgages. The Company has a 43.3% non-controlling
limited partnership interest in KIR, which the Company manages, and accounts for
its investment in KIR under the equity method of accounting. Equity in income of
KIR increased $3.5 million to $18.2 million for the year ended December 31,
2002, as compared to $14.7 million for the preceding year. This increase is
primarily due to the Company's increased capital investment in KIR totaling
$23.8 million during 2002 and $30.8 million during 2001. The additional capital
investments received by KIR from the Company and its other institutional
partners were used to purchase additional shopping center properties throughout
calendar year 2002 and 2001.
During October 2001, the Company formed a joint venture (the "RioCan Venture")
with RioCan Real Estate Investment Trust ("RioCan", Canada's largest publicly
traded REIT measured by gross leasable area ("GLA")), in which the Company has a
50% non-controlling interest, to acquire retail properties and development
projects in Canada. As of December 31, 2002, the RioCan Venture consisted of 28
shopping center properties and four development projects with approximately 6.7
million square feet of GLA. The Company's equity in income from the RioCan
Venture increased approximately $8.7 million to $9.1 million for the year ended
December 31, 2002, as compared to $0.4 million for the preceding year.
During October 2001, the Company formed the Kimco Retail Opportunity Portfolio
("KROP"), a joint venture with GE Capital Real Estate ("GECRE") which the
Company manages and has a 20% non-controlling interest. The purpose of this
venture is to acquire established, high-growth potential retail properties in
the United States. As of December 31, 2002, KROP consisted of 15 shopping center
properties with approximately 1.5 million square feet of GLA. During the year
ended December 31, 2002, the Company's equity in income from KROP was
approximately $1.0 million.
Minority interests in income of partnerships, net increased $0.7 million to $2.3
million as compared to $1.6 million for the preceding year. This increase is
primarily due to the acquisition of a shopping center property acquired through
a newly formed partnership by issuing approximately 2.4 million downREIT units
valued at $80 million. The downREIT units are convertible at a ratio of 1:1 into
the Company's common stock and are entitled to a distribution equal to the
dividend rate on the Company's common stock multiplied by 1.1057.
During 2002, the Company identified two operating properties, comprised of
approximately 0.2 million square feet of GLA, as "Held for Sale" in accordance
with SFAS No. 144. The book value of these properties, aggregating approximately
$28.4 million, net of accumulated depreciation of approximately $2.9 million,
exceeded their estimated fair value. The Company's determination of the fair
value of these properties, aggregating approximately $7.9 million, is based upon
executed contracts of sale with third parties less estimated selling costs. As a
result, the Company recorded an adjustment of property carrying values of $20.5
million. This adjustment is included, along with the related property operations
for the current and comparative years, in the caption Income from discontinued
operations on the Company's Consolidated Statements of Income.
During 2002, the Company, (i) disposed of, in separate transactions, 12
operating properties for an aggregate sales price of approximately $74.5
million, including the assignment/repayment of approximately $22.6 million of
mortgage debt encumbering three of the properties and, (ii) terminated five
leasehold positions in locations where a tenant in bankruptcy had rejected its
lease. These dispositions resulted in net gains of approximately $12.8 million
for the year ended December 31, 2002. In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"),
the operations and net gain on disposition of these properties have been
included in the caption Discontinued operations on the Company's Consolidated
Statements of Income.
14
During 2001, the Company, in separate transactions, disposed of three operating
properties, including the sale of a property to KIR, and a portion of another
operating property comprising in the aggregate approximately 0.6 million square
feet of GLA. Cash proceeds from these dispositions aggregated approximately
$46.7 million, which resulted in a net gain of approximately $3.0 million. Cash
proceeds from the sale of the operating property in Elyria, OH totaling $5.8
million, together with an additional $7.1 million cash investment, were used to
acquire an exchange shopping center property located in Lakeland, FL during
August 2001.
Effective January 1, 2001, the Company has elected taxable REIT subsidiary
status for its wholly-owned development subsidiary ("KDI"). KDI is primarily
engaged in the ground-up development of neighborhood and community shopping
centers and the subsequent sale thereof upon completion. During the year ended
December 31, 2002, KDI sold four projects and eight out-parcels, in separate
transactions, for approximately $128.7 million, including the assignment of
approximately $17.7 million of mortgage debt encumbering one of the properties.
These sales resulted in pre-tax gains of approximately $15.9 million.
During the year ended December 31, 2001, KDI sold two of its recently completed
projects and five out-parcels, in separate transactions, for approximately $61.3
million, which resulted in pre-tax profits of $13.4 million.
Net income for the year ended December 31, 2002 was $245.7 million as compared
to $236.5 million for the year ended December 31, 2001, representing an increase
of $9.2 million. This increase reflects the combined effect of increased
contributions from the investments in KIR, KROP, the RioCan Venture and other
financing investments, reduced by lower income resulting from tenant
bankruptcies and subsequent rejection of leases and a decrease in profits from
the Ward Venture.
Tenant Concentrations
- ---------------------
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, 2003, the Company's five largest tenants were The Home Depot, Kmart
Corporation, Kohl's, Royal Ahold, and TJX Companies, which represented
approximately 3.0%, 2.9%, 2.8%, 2.6% and 2.5%, 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.
On January 14, 2003, Kmart announced it would be closing 326 locations relating
to its January 22, 2002 filing of protection under Chapter 11 of the U.S.
Bankruptcy Code. Nine of these locations (excluding the KIR portfolio which
includes three additional locations and Kimsouth which includes two additional
locations) are leased from the Company. The annualized base rental revenues from
these nine locations are approximately $4.3 million. As of December 31, 2003,
Kmart rejected its lease at eight of these locations representing approximately
$3.8 million of annualized base rental revenues. The Company has signed a lease
at three of these sites, terminated its ground lease at another site, sold two
properties and continues to negotiate leases with prospective tenants at the two
remaining sites.
Liquidity and Capital Resources
- -------------------------------
It is management's intention that the Company continually have access to the
capital resources necessary to expand and develop its business. As such, the
Company intends to operate with and maintain a conservative capital structure
with a level of debt to total market capitalization of 50% or less. As of
December 31, 2003 the Company's level of debt to total market capitalization was
30%. In addition, the Company intends to maintain strong debt service coverage
and fixed charge coverage ratios as part of its commitment to maintaining its
investment-grade debt ratings. The Company may, from time to time, seek to
obtain funds through additional equity offerings, unsecured debt financings
and/or mortgage/construction loan financings and other debt and equity
alternatives in a manner consistent with its intention to operate with a
conservative debt structure.
Since the completion of the Company's IPO in 1991, the Company has utilized the
public debt and equity markets as its principal source of capital for its
expansion needs. Since the IPO, the Company has completed additional offerings
of its public unsecured debt and equity, raising in the aggregate over $3.3
billion for the purposes of, among other things, repaying indebtedness,
acquiring interests in neighborhood and community shopping centers, funding
ground-up development projects, expanding and improving properties in the
portfolio and other investments.
15
The Company has a $500.0 million unsecured revolving credit facility, which is
scheduled to expire in August 2006. This credit facility has made available
funds to both finance the purchase of properties and other investments and meet
any short-term working capital requirements. As of December 31, 2003 there was
$45.0 million outstanding under this credit facility.
The Company also has a $400.0 million unsecured bridge facility, which is
scheduled to expire in September 2004, with an option to extend up to $150.0
million for an additional year. Proceeds from this facility were used to
partially fund the Mid-Atlantic Realty Trust transaction. (See Recent
Developments - Mid-Atlantic Realty Trust Merger and Notes 3 and 13 of the Notes
to Consolidated Financial Statements included in this annual report on Form
10-K.) As of December 31, 2003, there was $329.0 million outstanding on this
unsecured bridge facility.
The Company has a $300.0 million 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. (See Note 13 of the Notes to
Consolidated Financial Statements included in this annual report on Form 10-K.)
In addition to the public equity and debt markets as capital sources, the
Company may, from time to time, obtain mortgage financing on selected properties
and construction loans to partially fund the capital needs of KDI, the Company's
merchant building subsidiary. As of December 31, 2003, the Company had over 400
unencumbered property interests in its portfolio.
During May 2003, the Company filed a shelf registration statement on Form S-3
for up to $1.0 billion of debt securities, preferred stock, depositary shares,
common stock and common stock warrants. As of December 31, 2003, the Company had
$609.7 million available for issuance under this shelf registration statement.
In connection with its intention to continue to qualify as a REIT for federal
income tax purposes, the Company expects to continue paying regular dividends to
its stockholders. These dividends will be paid from operating cash flows which
are expected to increase due to property acquisitions, growth in operating
income in the existing portfolio and from other investments. Since cash used to
pay dividends reduces amounts available for capital investment, the Company
generally intends to maintain a conservative dividend payout ratio, reserving
such amounts as it considers necessary for the expansion and renovation of
shopping centers in its portfolio, debt reduction, the acquisition of interests
in new properties and other investments as suitable opportunities arise, and
such other factors as the Board of Directors considers appropriate. Cash
dividends paid increased to $246.3 million in 2003, compared to $235.6 million
in 2002 and $209.8 million in 2001.
Although the Company receives substantially all of its rental payments on a
monthly basis, it generally intends to continue paying dividends quarterly.
Amounts accumulated in advance of each quarterly distribution will be invested
by the Company in short-term money market or other suitable instruments.
The Company anticipates its capital commitment toward redevelopment projects
during 2004 will be approximately $50.0 million to $75.0 million. Additionally,
the Company anticipates its capital commitment toward ground-up development
during 2004 will be approximately $160.0 million to $200.0 million. The proceeds
from the sales of development properties and proceeds from construction loans in
2004 should be sufficient to fund the ground-up development capital
requirements.
16
The Company anticipates that cash flows from operations will continue to provide
adequate capital to fund its operating and administrative expenses, regular debt
service obligations and all dividend payments in accordance with REIT
requirements in both the short-term and long-term. In addition, the Company
anticipates that cash on hand, borrowings under its revolving credit facility,
issuance of equity and public debt, as well as other debt and equity
alternatives, will provide the necessary capital required by the Company. Cash
flows from operations as reported in the Consolidated Statements of Cash Flows
was $308.6 million for 2003, $278.9 million for 2002 and $287.4 million for
2001.
Contractual Obligations and Other Commitments
- ---------------------------------------------
The Company has debt obligations relating to its revolving credit facility,
bridge facility, MTNs, senior notes, mortgages and construction loans with
maturities ranging from less than one year to 20 years. As of December 31, 2003,
the Company's total debt had a weighted average term to maturity of
approximately 4.3 years. In addition, the Company has non-cancelable operating
leases pertaining to its shopping center portfolio. As of December 31, 2003, the
Company has certain shopping center properties that are subject to long-term
ground leases where a third party owns and has leased the underlying land to the
Company to construct and/or operate a shopping center. In addition, the Company
has non-cancelable operating leases pertaining to its retail store lease
portfolio. The following table summarizes the Company's debt maturities and
obligations under non-cancelable operating leases as of December 31, 2003 (in
millions):
2004 2005 2006 2007 2008 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Long-Term Debt $570.4 $244.6 $198.1 $207.6 $143.1 $791.2 $2,155.0
Operating Leases
Ground Leases $ 11.3 $ 10.9 $ 10.2 $ 9.9 $ 8.9 $153.5 $ 204.7
Retail Store Leases $ 7.9 $ 7.7 $ 6.3 $ 4.4 $ 2.7 $ 2.8 $ 31.8
The Company has $50.0 million of unsecured senior notes, $135.0 million of
medium term notes and $47.7 million of construction loans maturing in 2004. In
addition, the Company's unsecured bridge facility, which is scheduled to expire
in September 2004, with an option to extend up to $150.0 million for an
additional year, had $329.0 million outstanding as of December 31, 2003. The
Company anticipates satisfying these maturities with a combination of operating
cash flows, its unsecured revolving credit facility and new debt financings.
The Company has issued letters of credit in connection with the
collateralization of tax-exempt mortgage bonds, completion guarantees for
certain construction projects, and guaranty of payment related to the Company's
insurance program. These letters of credit aggregate approximately $15.3
million.
Additionally, the RioCan Venture, an entity in which the Company holds a 50%
non-controlling interest, has a CAD $5.0 million (approximately USD $3.9
million) letter of credit facility. This facility is jointly guaranteed by
RioCan and the Company and has approximately CAD $3.1 million (approximately USD
$2.4 million) outstanding as of December 31, 2003 relating to various
development projects.
During 2003, the Company obtained construction financing on seven ground-up
development projects for an aggregate loan commitment amount of up to $152.2
million. As of December 31, 2003, the Company had 13 construction loans with
total commitments of up to $238.9 million of which $92.8 million had been funded
to the Company. These loans have maturities ranging from 18 to 36 months and
interest rates ranging from 2.87% to 5.00% at December 31, 2003.
Off-Balance Sheet Arrangements
- ------------------------------
Unconsolidated Real Estate Joint Ventures
The Company has investments in various unconsolidated real estate joint ventures
with varying structures. These investments include the Company's 43.3%
non-controlling interest in KIR, the Company's 50% non-controlling interest in
the RioCan Venture, the Company's 20% non-controlling interest in KROP, and
varying interests in other real estate joint ventures. These joint ventures
operate either shopping center properties or are established for development
projects. Such arrangements are generally with third party institutional
investors, local developers and individuals. The properties owned by the joint
ventures are primarily financed with individual non-recourse mortgage loans.
Non-recourse mortgage debt is generally defined as debt whereby the lenders'
sole recourse with respect to borrower defaults is limited to the value of the
property collateralized by the mortgage. The lender generally does not have
recourse against any other assets owned by the borrower or any of the
constituent members of the borrower, except for certain specified exceptions
listed in the particular loan documents.
17
The KIR joint venture was established for the purpose of investing in high
quality real estate properties financed primarily with individual non-recourse
mortgages. The Company believes that these properties are appropriate for
financing with greater leverage than the Company traditionally uses. As of
December 31, 2003, KIR had interests in 70 properties comprising 14.6 million
square feet of GLA. As of December 31, 2003, KIR had obtained individual
non-recourse mortgage loans on 68 of these properties. These non-recourse
mortgage loans have maturities ranging from 2 to 15 years and rates ranging from
3.23% to 8.52%. As of December 31, 2003, the Company's pro-rata share of
non-recourse mortgages relating to the KIR joint venture was approximately
$506.8 million. The Company also has unfunded capital commitments to KIR in the
amount of approximately $42.9 million as of December 31, 2003. (See Note 8 of
the Notes to Consolidated Financial Statements included in this annual report on
Form 10-K.)
The RioCan Venture was established with RioCan Real Estate Investment Trust to
acquire properties and development projects in Canada. As of December 31, 2003,
the RioCan Venture consisted of 31 shopping center properties and three
development projects with approximately 7.2 million square feet of GLA. As of
December 31, 2003, the RioCan Venture had obtained individual, non-recourse
mortgage loans on 27 of these properties aggregating approximately CAD $590.6
million (USD $453.3 million). These non-recourse mortgage loans have maturities
ranging from five months to 11 years and rates ranging from 5.12% to 8.70%. As
of December 31, 2003 the Company's pro-rata share of non-recourse mortgage loans
relating to the RioCan Venture was approximately CAD $295.3 million (USD $226.7
million). (See Note 8 of the Notes to Consolidated Financial Statements included
in this annual report on Form 10-K.)
The Kimco Retail Opportunity Portfolio ("KROP"), a joint venture with GE Capital
Real Estate ("GECRE") was established to acquire high-growth potential retail
properties in the United States. As of December 31, 2003, KROP consisted of 23
shopping center properties with approximately 3.5 million square feet of GLA. As
of December 31, 2003, KROP had non-recourse mortgage loans totaling $295.1
million with fixed rates ranging from 4.25% to 8.64% and variable rates ranging
from LIBOR plus 1.8% to LIBOR plus 2.5%. KROP has entered into a series of
interest rate cap agreements to mitigate the impact of changes in interest rates
on its variable rate mortgage agreements. Such mortgage debt is collateralized
by the individual shopping center property and is payable in monthly
installments of principal and interest. At December 31, 2003 the weighted
average interest rate for all mortgage debt outstanding was 5.04% per annum. As
of December 31, 2003, the Company's pro-rata share of non-recourse mortgage
loans relating to the KROP joint venture was approximately $59.0 million.
Additionally, the Company along with its joint venture partner have provided
interim financing ("Short-term Notes") for all acquisitions without a mortgage
in place at the time of closing. As of December 31, 2003 KROP has outstanding
Short-term Notes of $16.8 million due each the Company and GECRE. These
short-term notes all have maturities of less than one year with rates ranging
from LIBOR plus 4.0% to LIBOR plus 5.25%. (See Note 8 of the Notes to
Consolidated Financial Statements included in this annual report on Form 10-K.)
The Company has various other unconsolidated real estate joint ventures with
ownership interests ranging from 4% to 50%. As of December 31, 2003, these
unconsolidated joint ventures had individual non-recourse mortgage loans
aggregating approximately $425.0 million. The Company's pro-rata share of these
non-recourse mortgages was approximately $187.0 million. (See Note 8 of the
Notes to Consolidated Financial Statements included in this annual report on
Form 10-K.)
Other Real Estate Investments
During November 2002, the Company, through its taxable REIT subsidiary, together
with Prometheus Southeast Retail Trust, completed the merger and privatization
of Konover Property Trust, which has been renamed Kimsouth Realty, Inc.,
("Kimsouth"). The Company acquired 44.5% of the common stock of Kimsouth, which
consisted primarily of 38 retail shopping center properties comprising
approximately 4.6 million square feet of GLA. Total acquisition value was
approximately $280.9 million including approximately $216.2 million in mortgage
debt. The Company's investment strategy with respect to Kimsouth includes
re-tenanting, repositioning and disposition of the properties. As a result of
this strategy, Kimsouth has sold 16 properties as of December 31, 2003. The
Kimsouth portfolio is comprised of 22 properties totaling 3.2 million square
feet of GLA as of December 31, 2003 with non-recourse mortgage debt of
approximately $137.0 million encumbering the properties. All mortgages payable
are collateralized by certain properties and are due in monthly installments. As
of December 31, 2003, interest rates range from 2.88% to 9.22% and the weighted
average interest rate for all mortgage debt outstanding was 5.71% per annum. As
of December 31, 2003, the Company's pro-rata share of non-recourse mortgage
loans relating to the Kimsouth portfolio was approximately $61.0 million.
18
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 SFAS No. 13, Accounting
for Leases (as amended). The net investment in leveraged lease reflects the
original cash investment adjusted by remaining net rentals, estimated
unguaranteed residual value, unearned and deferred income, and deferred taxes
relating to the investment.
As of December 31, 2003, eight of these properties were sold whereby the
proceeds from the sales were used to paydown the mortgage debt by approximately
$18.7 million. As of December 31, 2003, the remaining 22 properties were
encumbered by third-party non-recourse debt of approximately $73.6 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 debt has been offset against the related net rental receivable
under the lease.
Effects of Inflation
- --------------------
Many of the Company's leases contain provisions designed to mitigate the adverse
impact of inflation. Such provisions include clauses enabling the Company to
receive payment of additional rent calculated as a percentage of tenants' gross
sales above pre-determined thresholds, which generally increase as prices rise,
and/or escalation clauses, which generally increase rental rates during the
terms of the leases. Such escalation clauses often include increases based upon
changes in the consumer price index or similar inflation indices. In addition,
many of the Company's leases are for terms of less than 10 years, which permits
the Company to seek to increase rents to market rates upon renewal. Most of the
Company's leases require the tenant to pay an allocable share of operating
expenses, including common area maintenance costs, real estate taxes and
insurance, thereby reducing the Company's exposure to increases in costs and
operating expenses resulting from inflation. The Company periodically evaluates
its exposure to short-term interest rates and foreign currency exchange rates
and will, from time to time, enter into interest rate protection agreements
and/or foreign currency hedge agreements which mitigate, but do not eliminate,
the effect of changes in interest rates on its floating-rate debt and
fluctuations in foreign currency exchange rates.
New Accounting Pronouncements
- -----------------------------
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"),
the primary objective of which is to provide guidance on the identification of
entities for which control is achieved through means other than voting rights
("variable interest entities" or "VIEs") and to determine when and which
business enterprise should consolidate the VIE (the "primary beneficiary"). This
new model applies when either (i) the equity investors (if any) do not have a
controlling financial interest or (ii) the equity investment at risk is
insufficient to finance that entity's activities without additional financial
support. In addition, effective upon issuance, FIN 46 requires additional
disclosures by the primary beneficiary and other significant variable interest
holders. The provisions of FIN 46 apply immediately to VIE's created after
January 31, 2003. In October 2003, the FASB issued FASB Staff Position 46-6,
which deferred the effective date to December 31, 2003 for applying the
provisions of FIN 46 for interests held by public companies in all VIEs created
prior to February 1, 2003. Additionally, in December 2003, the FASB issued
Interpretation No. 46(R), Consolidation of Variable Interest Entities (revised
December 2003) ("FIN 46(R)"). The provisions of FIN 46(R) are effective as of
March 31, 2004 for all non-special purpose entity ("non-SPE") interests held by
public companies in all variable interest entities created prior to February 1,
2003. These deferral provisions did not defer the disclosure provisions of FIN
46(R).
The Company has evaluated its joint venture investments established after
January 31, 2003 and based upon its interpretation of FIN 46 and applied
judgment, the Company has determined that these joint venture investments are
not VIEs and are not required to be consolidated.
19
The Company continues to evaluate all of its investments in joint ventures
created prior to February 1, 2003 to determine whether any of these entities are
VIEs and whether the Company is considered to be the primary beneficiary or a
holder of a significant variable interest in the VIE. If it is determined that
certain of these entities are VIEs the Company will be required to consolidate
those entities in which the Company is the primary beneficiary or make
additional disclosures for entities in which the Company is determined to hold a
significant variable interest in the VIE as of March 31, 2004.
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 losses 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 their risk. The Company's exposure to losses associated with
its unconsolidated joint ventures is limited to its carrying value in these
investments. (See Notes 8 and 9 of the Notes to Consolidated Financial
Statements included in this annual report on Form 10-K.)
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities ("SFAS No. 149"). This statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The provisions of this statement are effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of SFAS No. 149 did not have a material
adverse impact on the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS No.
150"). This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
provisions of this statement are effective for financial instruments entered
into or modified after May 31, 2003, and otherwise are effective at the
beginning of the first interim period beginning after June 15, 2003. On November
7, 2003, the FASB deferred the classification and measurement provisions of SFAS
No. 150 as they apply to certain mandatorily redeemable non-controlling
interests. This deferral is expected to remain in effect while these provisions
are further evaluated by the SFAS. As a result of this deferral, the adoption of
SFAS No. 150 did not have a material adverse impact on the Company's financial
position or results of operations.
At December 31, 2003, the estimated fair value of minority interests relating to
mandatorily redeemable non-controlling interests associated with finite-lived
subsidiaries of the Company is approximately $3.9 million. These finite-lived
subsidiaries have termination dates ranging from 2019 to 2027.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
As of December 31, 2003, the Company had approximately $558.2 million of
floating-rate debt outstanding including $45.0 million on its unsecured
revolving credit facility, $85 million of unsecured MTN's due August 2004 and
$329.0 million on its bridge facility due September 2004. The Company believes
the interest rate risk on its floating-rate debt is not material to the Company
or its overall capitalization.
As of December 31, 2003, the Company has Canadian investments totaling CAD
$189.2 million (approximately USD $145.2 million) comprised of a real estate
joint venture and marketable securities. In addition, the Company has Mexican
real estate investments of MXN $330.3 million (approximately USD $29.4 million).
The foreign currency exchange risk has been mitigated through the use of foreign
currency forward contracts (the "Forward Contracts") and a cross currency swap
(the "CC Swap") with major financial institutions. The Company is exposed to
credit risk in the event of non-performance by the counter-party to the Forward
Contracts and the CC Swap. The Company believes it mitigates its credit risk by
entering into the Forward Contracts and the CC Swap with major financial
institutions.
The Company has not, and does not plan to, enter into any derivative financial
instruments for trading or speculative purposes. As of December 31, 2003, the
Company had no other material exposure to market risk.
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Kimco Realty Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Kimco Realty Corporation and Subsidiaries (collectively, the "Company") at
December 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which requires that the results of operations, including any
gain or loss on sale, relating to real estate that has been disposed of or is
classified as held for sale after initial adoption be reported in discontinued
operations for all periods presented.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 2, 2004, except as to Note 7,
which is dated as of November 16, 2004
21
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
December 31, December 31,
2003 2002
----------- -----------
Assets:
Real Estate
Rental property
Land $ 664,069 $ 518,268
Building and improvements 3,166,857 2,666,626
----------- -----------
3,830,926 3,184,894
Less, accumulated depreciation and amortization 568,015 516,558
----------- -----------
3,262,911 2,668,336
Real estate under development 304,286 234,953
Undeveloped land parcels 1,312 1,312
----------- -----------
Real estate, net 3,568,509 2,904,601
Investment and advances in real estate joint ventures 487,394 390,484
Other real estate investments 113,085 99,542
Mortgages and other financing receivables 95,019 94,024
Cash and cash equivalents 48,288 35,962
Marketable securities 45,677 66,992
Accounts and notes receivable 57,080 56,484
Deferred charges and prepaid expenses 66,095 50,149
Other assets 122,778 60,112
----------- -----------
$ 4,603,925 $ 3,758,350
=========== ===========
Liabilities & Stockholders' Equity:
Notes payable $ 1,686,250 $ 1,302,250
Mortgages payable 375,914 230,760
Construction loans payable 92,784 43,972
Accounts payable and accrued expenses 92,239 94,784
Dividends payable 65,969 59,646
Other liabilities 55,006 24,198
----------- -----------
2,368,162 1,755,610
----------- -----------
Minority interests in partnerships 99,917 93,940
----------- -----------
Commitments and contingencies
Stockholders' Equity
Preferred stock, $1.00 par value, authorized 3,600,000 shares
Class A Preferred Stock, $1.00 par value, authorized 345,000 shares
Issued and outstanding 0 and 300,000 shares, respectively -- 300
Aggregate liquidation preference $0 and $75,000, respectively
Class B Preferred Stock, $1.00 par value, authorized 230,000 shares
Issued and outstanding 0 and 200,000 shares, respectively -- 200
Aggregate liquidation preference $0 and $50,000, respectively
Class C Preferred Stock, $1.00 par value, authorized 460,000 shares
Issued and outstanding 0 and 400,000 shares, respectively -- 400
Aggregate liquidation preference $0 and $100,000, respectively
Class F Preferred Stock, $1.00 par value, authorized 700,000 shares
Issued and outstanding 700,000 and 0 shares, respectively 700 --
Aggregate liquidation preference $175,000 and $0, respectively
Common stock, $.01 par value, authorized 200,000,000 shares
Issued and outstanding 110,623,967 and 104,601,828 shares, respectively 1,106 1,046
Paid-in capital 2,147,286 1,984,820
Cumulative distributions in excess of net income (30,112) (85,367)
----------- -----------
2,118,980 1,901,399
Accumulated other comprehensive income 16,866 7,401
----------- -----------
2,135,846 1,908,800
----------- -----------
$ 4,603,925 $ 3,758,350
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
22
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share information)
Year Ended December 31,
-----------------------------------------
2003 2002 2001
--------- --------- ---------
REAL ESTATE OPERATIONS:
Revenues from rental property $ 475,541 $ 427,868 $ 425,575
--------- --------- ---------
Rental property expenses:
Rent 10,843 10,903 11,171
Real estate taxes 60,078 58,876 52,840
Operating and maintenance 53,079 43,886 42,273
--------- --------- ---------
124,000 113,665 106,284
--------- --------- ---------
351,541 314,203 319,291
Income from other real estate investments 22,828 16,038 38,113
Mortgage financing income 18,587 19,412 2,594
Management and other fee income 15,315 12,069 6,350
Depreciation and amortization (85,168) (69,944) (67,560)
--------- --------- ---------
323,103 291,778 298,788
--------- --------- ---------
Interest, dividends and other investment income 19,464 18,565 17,001
Other income/(expense), net (3,899) 2,533 (2,176)
--------- --------- ---------
15,565 21,098 14,825
--------- --------- ---------
Interest expense (102,597) (85,323) (87,005)
General and administrative expenses (38,559) (31,540) (28,251)
Gain on early extinguishment of debt 2,921 19,033 --
Adjustment of property carrying values -- (11,000) --
--------- --------- ---------
200,433 204,046 198,357
Provision for income taxes (1,516) (6,552) (14,009)
Equity in income of real estate joint ventures, net 42,276 37,693 21,664
Minority interests in income of partnerships, net (7,781) (2,310) (1,552)
INCOME FROM CONTINUING OPERATIONS 233,412 232,877 204,460
--------- --------- ---------
DISCONTINUED OPERATIONS:
Income from discontinued operating properties 10,392 9,293 20,987
Gain on early extinguishment of debt 6,760 3,222 --
Adjustment of property carrying values (4,016) (22,030) --
Gain on disposition of operating properties 47,657 12,778 --
--------- --------- ---------
INCOME FROM DISCONTINUED OPERATIONS 60,793 3,263 20,987
--------- --------- ---------
Gain on sale of operating properties 3,177 -- 3,040
Gain on sale of development properties
net of tax of $6,998, $6,352 and $5,367, respectively 10,497 9,528 8,051
--------- --------- ---------
NET INCOME 307,879 245,668 236,538
Original issuance costs associated with the redemption
of preferred stock (7,788) -- --
Preferred stock dividends (14,669) (18,437) (24,553)
--------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 285,422 $ 227,231 $ 211,985
--------- --------- ---------
Per common share:
Income from continuing operations:
-Basic $ 2.10 $ 2.14 $ 1.98
========= ========= =========
-Diluted $ 2.07 $ 2.13 $ 1.95
========= ========= =========
Net income:
-Basic $ 2.67 $ 2.18 $ 2.20
========= ========= =========
-Diluted $ 2.62 $ 2.16 $ 2.16
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
23
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
--------- --------- ---------
Net income $ 307,879 $ 245,668 $ 236,538
--------- --------- ---------
Other comprehensive income:
Change in unrealized gain/(loss) on marketable securities 3,798 (4,456) 8,784
Change in unrealized gain on interest rate swaps 620 3,264 (3,884)
Change in unrealized gain on warrants 4,319 1,524 2,410
Change in unrealized gain/(loss) on foreign currency hedge agreements (15,465) 195 --
Foreign currency translation adjustment 16,193 (436) --
--------- --------- ---------
Other comprehensive income 9,465 91 7,310
--------- --------- ---------
Comprehensive income $ 317,344 $ 245,759 $ 243,848
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
24
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except per share information)
Cumulative
Distributions Accumulated
Preferred Stock Common Stock in Excess Other Total
----------------- ----------------- Paid-in of Net Comprehensive Stockholders'
Issued Amount Issued Amount Capital Income Income Equity
------ ------- -------- ------- ----------- ----------- ----------- -----------
Balance, January 1, 2001 1,318 $ 1,318 94,717 $ 947 $ 1,819,130 $(113,110) $ -- $ 1,708,285
Net income 236,538 236,538
Dividends ($1.96 per common
share; $1.9375, $2.125,
$2.0938, and $1.8409 per
Class A, Class B, Class C,
and Class D Depositary Share,
respectively) (216,559) (216,559)
Issuance of common stock 3,906 40 122,103 122,143
Exercise of common
stock options 1,694 17 34,919 34,936
Conversion of Class D
Preferred Stock to
common stock (326) (326) 3,036 30 290 (6)
Other comprehensive income 7,310 7,310
------ ------- -------- ------- ----------- --------- --------- -----------
Balance, December 31, 2001 992 992 103,353 1,034 1,976,442 (93,131) 7,310 1,892,647
Net income 245,668 245,668
Dividends ($2.10 per common share;
$1.9375, $2.125 and $2.0938 per
Class A, Class B, and Class C
Depositary Share, respectively) (237,904) (237,904)
Issuance of common stock 80 1 2,523 2,524
Exercise of common stock options 308 3 5,771 5,774
Conversion of Class D Preferred
Stock to common stock (92) (92) 861 8 84 --
Other comprehensive income 91 91
------ ------- -------- ------- ----------- --------- --------- -----------
Balance, December 31, 2002 900 900 104,602 1,046 1,984,820 (85,367) 7,401 1,908,800
Net income 307,879 307,879
Dividends ($2.19 per common share;
$1.0979, $1.3399, $1.3610, and
$1.016 per Class A, Class B,
Class C and Class F Depositary
Share, respectively) (252,624) (252,624)
Issuance of common stock 4,944 49 192,703 192,752
Exercise of common stock options 1,078 11 25,777 25,788
Redemption of Class A, B
and C preferred stock (900) (900) (224,100) (225,000)
Issuance of Class F
Preferred Stock 700 700 168,086 168,786
Other comprehensive income 9,465 9,465
------ ------- -------- ------- ----------- --------- --------- -----------
Balance, December 31, 2003 700 $ 700 110,624 $ 1,106 $ 2,147,286 $ (30,112) $ 16,866 $ 2,135,846
====== ======= ======== ======= =========== ========= ========= ===========
The accompanying notes are an integral part of these consolidated
financial statements.
25
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-----------------------------------------
2003 2002 2001
--------- --------- ---------
Cash flow from operating activities:
Net income $ 307,879 $ 245,668 $ 236,538
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 89,068 76,674 74,209
Adjustment of property carrying values 4,016 33,031 --
Gain on sale of development properties (17,495) (15,879) (13,418)
Gain on sale of operating properties (50,834) (12,778) (3,040)
Gain on early extinguishment of debt (9,681) (22,255) --
Minority interests in income of partnerships, net 7,868 2,430 1,682
Equity in income of real estate joint ventures, net (42,276) (37,693) (21,664)
Income from other real estate investments (19,976) (13,222) (33,518)
Distributions of unconsolidated investments 67,712 40,275 36,377
Change in accounts and notes receivable (596) (6,938) (1,956)
Change in accounts payable and accrued expenses (2,545) 12,612 3,607
Change in other operating assets and liabilities (24,508) (22,994) 8,627
--------- --------- ---------
Net cash flow provided by operating activities 308,632 278,931 287,444
--------- --------- ---------
Cash flow from investing activities:
Acquisition of and improvements to operating real estate (917,403) (244,750) (63,809)
Acquisition of and improvements to real estate under development (187,877) (113,450) (107,364)
Investment in marketable securities (23,680) (39,183) (29,070)
Proceeds from sale of marketable securities 62,744 49,396 36,427
Investments and advances to real estate joint ventures (152,997) (157,427) (63,302)
Reimbursements of advances to real estate joint ventures 93,729 16,665 --
Redemption of minority interests in real estate partnerships (4,729) -- (7,133)
Other real estate investments (52,818) (69,288) (24,824)
Reimbursements of advances to other real estate investments 13,264 1,179 24,824
Investment in mortgage loans receivable (64,652) (123,242) (36,099)
Collection of mortgage loans receivable 41,529 89,053 5,952
Proceeds from sale of mortgage loan receivable 36,723 -- --
Proceeds from sale of operating properties 423,237 84,139 46,766
Proceeds from sale of development properties 90,565 108,209 61,921
Other -- 2,044 (1,482)
--------- --------- ---------
Net cash flow used for investing activities (642,365) (396,655) (157,193)
--------- --------- ---------
Cash flow from financing activities:
Principal payments on debt, excluding
normal amortization of rental property debt (18,326) (30,689) (4,587)
Principal payments on rental property debt (5,813) (5,931) (5,126)
Principal payments on construction loan financings (40,644) (801) --
Proceeds from mortgage/construction loan financings 110,816 67,773 51,230
Borrowings under revolving credit facilities 195,000 269,000 10,000
Repayment of borrowings under revolving credit facilities (190,000) (229,000) (55,000)
Proceeds from issuance of unsecured senior notes 250,000 337,000 --
Repayment of unsecured senior notes (200,000) (110,000) --
Proceeds from senior term loan 400,000 -- --
Repayment of senior term loan (71,000) -- --
Payment of unsecured obligation -- (11,300) --
Dividends paid (246,301) (235,602) (209,785)
Proceeds from issuance of stock 387,327 9,389 157,767
Redemption of preferred stock (225,000) -- --
--------- --------- ---------
Net cash flow provided by (used for) financing activities 346,059 59,839 (55,501)
--------- --------- ---------
Change in cash and cash equivalents 12,326 (57,885) 74,750
Cash and cash equivalents, beginning of year 35,962 93,847 19,097
--------- --------- ---------
Cash and cash equivalents, end of year $ 48,288 $ 35,962 $ 93,847
========= ========= =========
Interest paid during the year (net of capitalized interest
of $8,887, $9,089 and $7,924, respectively) $ 97,215 $ 83,977 $ 81,092
========= ========= =========
Income taxes paid during the year $ 15,901 $ 12,035 $ 24,888
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
26
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
now 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, subject to certain
limitations. As such, the Company, through its taxable REIT
subsidiaries, is engaged in various retail real estate related
opportunities including (i) merchant building, through its Kimco
Developers, Inc. ("KDI") subsidiary, which is primarily engaged in
the ground-up development of neighborhood and community shopping
centers and the subsequent sale thereof upon completion, (ii)
retail real estate advisory and disposition services which
primarily focuses on leasing and disposition strategies of retail
real estate controlled by both healthy and distressed and/or
bankrupt retailers, and (iii) acting as an agent or principal in
connection with tax deferred exchange transactions.
The Company 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, 2003, the Company's single largest
neighborhood and community shopping center accounted for only 1.0%
of the Company's annualized base rental revenues and only 0.6% of
the Company's total shopping center gross leasable area ("GLA"). At
December 31, 2003, the Company's five largest tenants were The Home
Depot, Kmart Corporation, Kohl's, Royal Ahold and TJX Companies,
which represented approximately 3.0%, 2.9%, 2.8%, 2.6% and 2.5%,
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 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.
Principles of Consolidation and Estimates
-----------------------------------------
The accompanying Consolidated Financial Statements include the accounts
of the Company, its subsidiaries, all of which are wholly-owned,
and all partnerships in which the Company has a controlling
interest. All intercompany balances and transactions have been
eliminated in consolidation.
Accounting principles generally accepted in the United States of
America ("GAAP") require 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, depreciable lives, revenue
recognition and the collectability of trade accounts receivable.
Application of these assumptions requires the exercise of judgment
as to future uncertainties and, as a result, actual results could
differ from these estimates.
27
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Real Estate
-----------
Real estate assets are stated at cost, less accumulated depreciation
and amortization. If there is an event or a change in
circumstances that indicates that the basis of a property
(including any related amortizable intangible assets or
liabilities) may not be recoverable, then management will assess
any impairment in value by making a comparison of (i) the current
and projected operating cash flows (undiscounted and without
interest charges) of the property over its remaining useful life
and (ii) the net carrying amount of the property. If the current
and projected operating cash flows (undiscounted and without
interest charges) are less than the carrying value of the
property, the carrying value would be adjusted to an amount to
reflect the estimated fair value of the property.
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 and improvements) and identified intangible
assets and liabilities (consisting of above and below-market
leases, in-place leases and tenant relationships) and assumed debt
in accordance with Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations ("SFAS No. 141"). Based on
these estimates, the Company allocates the purchase price to the
applicable assets and liabilities.
The Company utilized methods similar to those used by independent
appraisers in estimating the fair value of acquired assets and
liabilities. The fair value of the tangible assets of an acquired
property considers the value of the property "as-if-vacant". The
fair value reflects the depreciated replacement cost of the
permanent assets, with no trade fixtures included.
In allocating the purchase price to identified intangible assets and
liabilities of an acquired property, the value of above-market and
below-market leases are 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.
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 and 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 are 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.
Depreciation and amortization are provided on the straight-line method
over the estimated useful lives of the assets, as follows:
Buildings 15 to 46 years
Fixtures, building and leasehold Terms of leases or useful
improvements (including certain lives, whichever is shorter
identified intangible assets)
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.
28
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Real Estate Under Development
-----------------------------
Real estate under development represents the ground-up development of
neighborhood and community shopping centers which are held for
sale upon completion. These properties are carried at cost and no
depreciation is recorded on these assets. The cost of land and
buildings under development include 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 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 these assets is less than the net
carrying value, the carrying value would be written down 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 equity in earnings and cash
contributions and distributions.
On a periodic basis, management assesses whether there are any
indicators 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. 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.
Marketable Securities
---------------------
The Company classifies its existing marketable equity securities as
available-for-sale in accordance with the provisions of SFAS No.
115, Accounting for Certain Investments in Debt and Equity
Securities. 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.
All debt securities are classified as held-to-maturity because the
Company has the positive intent and ability to hold the securities
to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion
discounts to maturity.
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.
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
recorded 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.
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 and 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
income is directly affected by management's estimate of the
collectability of accounts receivable.
29
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Income Taxes
------------
The Company and its subsidiaries file a consolidated federal income tax
return. 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 Internal Revenue Code, as
amended (the "Code").
In connection with the RMA, which became effective January 1, 2001,
the Company is now 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 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.
Foreign Currency Translation and Transactions
---------------------------------------------
Assets and liabilities of our 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 transaction's gain or loss
is included in the caption Other income/(expense), net in the
Consolidated Statements of Income.
Derivative / Financial Instruments
----------------------------------
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"), as amended by SFAS No. 149
in April 2003 to clarify accounting and reporting for derivative
instruments. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments. This accounting standard
requires the Company to measure derivative instruments at fair
value and to record them in the Consolidated Balance Sheet as an
asset or liability, depending on the Company's rights or
obligations under the applicable derivative contract. In addition,
the fair value adjustments will be recorded in either stockholders'
equity or earnings in the current period based on the designation
of the derivative. The effective portions of changes in fair value
of cash flow hedges are reported in OCI and are subsequently
reclassified into earnings when the hedged item affects earnings.
Changes in the fair value of foreign currency hedges that are
designated and effective as net investment hedges are included in
the cumulative translation component of OCI in accordance with SFAS
No. 52 to the extent they are economically effective and are
subsequently reclassified to earnings when the hedged investments
are sold or otherwise disposed of. The changes in fair value of
derivative instruments which are not designated as hedging
instruments and the ineffective portions of hedges are recorded in
earnings for the current period.
The Company utilizes derivative financial instruments to reduce
exposure to fluctuations in interest rates, foreign currency
exchange rates and market fluctuation on equity securities. The
Company has established policies and procedures for risk assessment
and the approval, reporting and monitoring of derivative financial
instrument activities. The Company has not, and does not plan to
enter into financial instruments for trading or speculative
purposes. Additionally, the Company has a policy of only entering
into derivative contracts with major financial institutions. The
principal financial instruments used by the Company are interest
rate swaps, foreign currency exchange forward contracts, cross
currency swaps and warrant contracts. In accordance with the
provisions of SFAS No. 133, these derivative instruments were
designated and qualified as cash flow, fair value or foreign
currency hedges (see Note 17).
30
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Earnings Per Share
------------------
On October 24, 2001, the Company's Board of Directors declared a
three-for-two split (the "Stock Split") of the Company's common
stock which was effected in the form of a stock dividend paid on
December 21, 2001 to stockholders of record on December 10, 2001.
All share and per share data included in the accompanying
Consolidated Financial Statements and Notes thereto have been
adjusted to reflect this Stock Split.
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):
2003 2002 2001
--------- --------- ---------
Computation of Basic Earnings Per Share:
Income from continuing operations $ 233,412 $ 232,877 $ 204,460
Gain on sale of operating properties 3,177 -- 3,040
Gain on sale of development properties, net of provision
for income tax 10,497 9,528 8,051
Original issuance costs associated with the redemption of
preferred stock (7,788) -- --
Preferred Stock Dividends (14,669) (18,437) (24,553)
--------- --------- ---------
Income from continuing operations applicable to common
shares 224,629 223,968 190,998
Income from discontinued operations 60,793 3,263 20,987
--------- --------- ---------
Net income applicable to common shares $ 285,422 $ 227,231 $ 211,985
========= ========= =========
Weighted average common shares outstanding
107,092 104,458 96,317
========= ========= =========
Basic Earnings Per Share:
Income from continuing operations $ 2.10 $ 2.14 $ 1.98
Income from discontinued operations 0.57 0.04 0.22
--------- --------- ---------
Net income $ 2.67 $ 2.18 $ 2.20
========= ========= =========
Computation of Diluted Earnings Per Share:
Income from continuing operations applicable to common
shares $ 224,629 $ 223,968 $ 190,998
Dividends on Class D Convertible Preferred Stock -- -- 6,115
Dividends on convertible downREIT units (a) 1,423 --
--------- --------- ---------
Income from continuing operations for diluted earnings
per share 224,629 225,391 197,113
Income from discontinued operations 60,793 3,263 20,987
--------- --------- ---------
Net income for diluted earnings per share $ 285,422 $ 228,654 $ 218,100
========= ========= =========
Weighted average common shares outstanding - Basic 107,092 104,458 96,317
Effect of dilutive securities:
Stock options 1,678 999 1,139
Assumed conversion of Class D Preferred stock to common
stock -- 4 3,707
Assumed conversion of downREIT units -- 508 --
--------- --------- ---------
Shares for diluted earnings per share 108,770 105,969 101,163
========= ========= =========
31
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
2003 2002 2001
--------- --------- ---------
Diluted Earnings Per Share:
Income from continuing operations $ 2.07 $ 2.13 $ 1.95
Income from discontinued operations 0.55 0.03 0.21
--------- --------- ---------
Net income $ 2.62 $ 2.16 $ 2.16
========= ========= =========
(a) In 2003, the effect of the assumed conversion of downREIT units had
an anti-dilutive effect upon the calculation of Income from
continuing operations per share. Accordingly, the impact of such
conversion has not been included in the determination of diluted
earnings per share calculations.
The Company maintains a stock option plan (the "Plan") for which prior
to January 1, 2003, the Company accounted for under the intrinsic
value-based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation (an interpretation of APB Opinion No.
25). Effective January 1, 2003, the Company adopted the prospective
method provisions of SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure an Amendment of FASB
Statement No. 123 ("SFAS No. 148"), which will apply the
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123") to all employee awards
granted, modified or settled after January 1, 2003. Awards under
the Company's Plan generally vest ratably over a three-year term
and expire ten years from the date of grant. Therefore, the cost
related to stock-based employee compensation included in the
determination of net income is less than that which would have been
recognized if the fair value based method had been applied to all
awards since the original effective date of SFAS No. 123. The
following table illustrates the effect on net income and earnings
per share if the fair value based method had been applied to all
outstanding stock awards in each period (amounts presented in
thousands, expect per share data):
Year Ended December 31,
2003 2002 2001
--------- --------- ---------
Net income, as reported $ 307,879 $ 245,668 $ 236,538
Add: Stock based employee compensation
expense included in reported net
income 148 -- --
Deduct: Total stock based employee
Compensation expense determined
under fair value based method
For all awards (3,095) (3,153) (2,702)
--------- --------- ---------
Pro Forma Net Income - Basic $ 304,932 $ 242,515 $ 233,836
========= ========= =========
Earnings Per Share
Basic - as reported $ 2.67 $ 2.18 $ 2.20
========= ========= =========
Basic - pro forma $ 2.64 $ 2.15 $ 2.17
========= ========= =========
Net income for diluted earnings per share
$ 285,422 $ 228,654 $ 218,100
Add: Stock based employee compensation
expense included in reported net
income 148 -- --
Deduct: Total stock based employee
Compensation expense determined
under fair value based method
For all awards (3,095) (3,153) (2,702)
--------- --------- ---------
Pro Forma Net Income - Diluted $ 282,475 $ 225,501 $ 215,398
========= ========= =========
Earnings Per Share
Diluted - as reported $ 2.62 $ 2.16 $ 2.16
========= ========= =========
Diluted - pro forma $ 2.60 $ 2.13 $ 2.13
========= ========= =========
32
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
These pro forma adjustments to net income and net income per diluted
common share assume fair values of each option grant estimated
using the Black-Scholes option pricing formula. The more
significant assumptions underlying the determination of such fair
values for options granted during 2003, 2002 and 2001 include: (i)
weighted average risk-free interest rates of 2.84%, 3.06% and
4.85%, respectively; (ii) weighted average expected option lives of
3.8 years, 4.1 years and 5.5 years, respectively; (iii) weighted
average expected volatility of 15.26%, 16.12% and 15.76%,
respectively, and (iv) weighted average expected dividend yield of
6.25%, 6.87% and 6.74%, respectively. The per share weighted
average fair value at the dates of grant for options awarded during
2003, 2002 and 2001 was $2.35, $1.50 and $1.98, respectively.
New Accounting Pronouncements
-----------------------------
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, Consolidation of Variable Interest
Entities ("FIN 46"), the primary objective of which is to provide
guidance on the identification of entities for which control is
achieved through means other than voting rights ("variable interest
entities" or "VIEs") and to determine when and which business
enterprise should consolidate the VIE (the "primary beneficiary").
This new model applies when either (i) the equity investors (if
any) do not have a controlling financial interest or (ii) the
equity investment at risk is insufficient to finance that entity's
activities without additional financial support. In addition,
effective upon issuance, FIN 46 requires additional disclosures by
the primary beneficiary and other significant variable interest
holders. The provisions of FIN 46 apply immediately to VIE's
created after January 31, 2003. In October 2003, the FASB issued
FASB Staff Position 46-6, which deferred the effective date to
December 31, 2003 for applying the provisions of FIN 46 for
interests held by public companies in all VIE's created prior to
February 1, 2003. Additionally, in December 2003, the FASB issued
Interpretation No. 46(R), Consolidation of Variable Interest
Entities (revised December 2003) ("FIN 46(R)"). The provisions of
FIN 46(R) are effective as of March 31, 2004 for all non-special
purpose entity ("non-SPE") interests held by public companies in
all variable interest entities created prior to February 1, 2003.
These deferral provisions did not defer the disclosure provisions
of FIN 46(R).
The Company has evaluated its joint venture investments established
after January 31, 2003 and based upon its interpretation of FIN 46
and applied judgment, the Company has determined that these joint
venture investments are not VIEs and are not required to be
consolidated.
The Company continues to evaluate all of its investments in joint
ventures created prior to February 1, 2003 to determine whether any
of these entities are VIEs and whether the Company is considered to
be the primary beneficiary or a holder of a significant variable
interest in the VIE. If it is determined that certain of these
entities are VIEs, the Company will be required to consolidate
these entities in which the Company is the primary beneficiary or
make additional disclosures for entities in which the Company is
determined to hold a significant variable interest in the VIE as of
March 31, 2004.
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 losses 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 their risk. The
Company's exposure to losses associated with its unconsolidated
joint ventures is limited to its carrying value in these
investments.
33
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities ("SFAS No.
149"). This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities
under SFAS No. 133. The provisions of this statement are effective
for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 did not have a material adverse impact on the
Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity ("SFAS No. 150"). This statement establishes standards for
how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). The
provisions of this statement are effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise are effective at the beginning of the first interim
period beginning after June 15, 2003. On November 7, 2003, the FASB
deferred the classification and measurement provisions of SFAS No.
150 as they apply to certain mandatorily redeemable non-controlling
interests. This deferral is expected to remain in effect while
these provisions are further evaluated by the FASB. As a result of
this deferral, the adoption of SFAS No. 150 did not have a material
adverse impact on the Company's financial position or results of
operations.
At December 31, 2003, the estimated fair value of minority interests
relating to mandatorily redeemable non-controlling interests
associated with finite-lived subsidiaries of the Company is
approximately $3.9 million. These finite-lived subsidiaries have
termination dates ranging from 2019 to 2027.
Reclassifications
-----------------
Certain reclassifications of prior years' amounts have been made to
conform with the current year presentation.
2. Real Estate:
------------
The Company's components of Rental property consist of the following
(in thousands):
December 31,
2003 2002
----------- -----------
Land $ 664,069 $ 518,268
Buildings and improvements
Buildings 2,743,112 2,527,975
Building improvements 51,042 22,849
Tenant improvements 338,205 98,367
Fixtures & leasehold improvements 14,627 17,435
Other rental property, net (1) 19,871 --
----------- -----------
3,830,926 3,184,894
Accumulated depreciation and amortization (568,015) (516,558)
----------- -----------
Total $ 3,262,911 $ 2,668,336
=========== ===========
(1) At December 31, 2003, Other rental property, net consisted of (i)
intangible assets including, $33,007 of in-place leases, $12,913
of tenant relationships and $12,892 of above-market leases and
(ii) an intangible liability consisting of $38,941 of
below-market leases.
3. Mid-Atlantic Realty Trust Merger:
---------------------------------
During June 2003, the Company and Mid-Atlantic Realty Trust
("Mid-Atlantic") entered into a definitive merger agreement whereby
Mid-Atlantic would merge with and into a wholly-owned subsidiary of
the Company (the "Merger" or "Mid-Atlantic Merger"). The Merger
required the approval of holders of 66 2/3% of Mid-Atlantic's
outstanding shares. Subject to certain conditions, limited partners
in Mid-Atlantic's operating partnership were offered the same cash
consideration for each outstanding unit and offered the opportunity
(in lieu of cash) to exchange their interests for preferred units
in the operating partnership upon the closing of the transaction.
34
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The shareholders of Mid-Atlantic approved the Merger on September 30,
2003, and the closing occurred October 1, 2003. Mid-Atlantic
shareholders received cash consideration of $21.051 per share. In
addition, more than 99.0% of the limited partners in Mid-Atlantic's
operating partnership elected to have their partnership units
redeemed for cash consideration equal to $21.051 per unit.
The transaction had a total value of approximately $700.0 million
including the assumption of approximately $216.0 million of debt.
The Company funded the transaction with available cash, a new
$400.0 million bridge facility and funds from its existing
revolving credit facility.
In connection with the Merger, the Company acquired interests in 41
operating shopping centers, one regional mall, two shopping centers
under development and eight other commercial assets. The properties
have a gross leasable area of approximately 5.7 million square feet
of which approximately 95.0% of the stabilized square footage is
currently leased. The Company also acquired approximately 80.0
acres of undeveloped land. The properties are located primarily in
Maryland, Virginia, New York, Pennsylvania, Massachusetts and
Delaware. The Company has tentative agreements for a number of the
properties to be allocated to its strategic co-investment programs.
For financial reporting purposes the Merger was accounted for under
the purchase method of accounting in accordance with SFAS No. 141,
Business Combinations ("SFAS No. 141").
During December 2003, the Company disposed of the one regional mall and
the adjacent annex acquired in the Merger located in Bel Air, MD
for a sales price of approximately $71.0 million, which
approximated its net book value.
4. Property Acquisitions, Developments and Other Investments:
----------------------------------------------------------
Operating Properties -
During the years 2003, 2002 and 2001 the Company acquired operating
properties, in separate transactions, at aggregate costs of
approximately $293.9 million, $258.7 million, and $21.1 million,
respectively.
Ground-Up Development Properties -
Effective January 1, 2001, the Company elected taxable REIT subsidiary
status for its wholly-owned development subsidiary, Kimco
Developers, Inc. ("KDI"). KDI is primarily engaged in the ground-up
development of neighborhood and community shopping centers and the
subsequent sale thereof upon completion.
During the years 2003, 2002 and 2001 certain subsidiaries and
affiliates of the Company expended approximately $208.9 million,
$148.6 million, and $119.4 million, respectively, in connection
with the purchase of land and construction costs related to its
ground-up development projects.
Other Investments -
During October 2002, the Company purchased from various joint venture
partners, the remaining interest in a property located in
Harrisburg, PA for an aggregate purchase price of $0.5 million.
This property is now 100% owned by the Company.
These property acquisitions and other investments have been funded
principally through the application of proceeds from the Company's
public unsecured debt issuances, equity offerings and proceeds from
mortgage and construction financings.
5. Dispositions of Real Estate:
----------------------------
During 2003, the Company disposed of, in separate transactions, (i) 10
operating properties, for an aggregate sales price of approximately
$119.1 million, including the assignment of approximately $1.7
million of mortgage debt encumbering one of the properties, (ii)
two regional malls for an aggregate sales price of approximately
$135.6 million including the Bel Air, MD property referred to
above, (iii) one out-parcel for a sales price of approximately $8.1
million, (iv) transferred three operating properties to KROP, as
defined below, for a price of approximately $144.2 million which
approximated their net book value, (v) transferred an operating
property to a newly formed joint venture in which the Company has a
10% non-controlling interest for a price of approximately $21.9
million which approximated its net book value and (vi) terminated
four leasehold positions in locations where a tenant in bankruptcy
had rejected its lease. These transactions resulted in net gains of
approximately $50.8 million.
35
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2002, the Company, (i) disposed of, in separate transactions, 12
operating properties for an aggregate sales price of approximately
$74.5 million, including the assignment/repayment of approximately
$22.6 million of mortgage debt encumbering three of the properties
and (ii) terminated five leasehold positions in locations where a
tenant in bankruptcy had rejected its lease. These transactions
resulted in net gains of approximately $12.8 million.
During 2003, KDI sold four of its recently completed projects and 26
out-parcels, in separate transactions, for approximately $134.6
million, which resulted in the recognition of pre-tax gains of
approximately $17.5 million.
During 2002, KDI sold four of its recently completed projects and eight
out-parcels for approximately $128.7 million including the
assignment of approximately $17.7 million in mortgage debt
encumbering one of the properties. The sales resulted in pre-tax
gains of approximately $15.9 million.
6. Adjustment of Property Carrying Values:
---------------------------------------
As part of the Company's periodic assessment of its real estate
properties with regard to both the extent to which such assets are
consistent with the Company's long-term real estate investment
objectives and the performance and prospects of each asset the
Company determined in 2002 that its investment in four operating
properties comprised of an aggregate 0.4 million square feet of GLA
with an aggregate net book value of approximately $23.8 million,
may not be fully recoverable. Based upon management's assessment of
current market conditions and lack of demand for the properties,
the Company reduced its anticipated holding period of these
investments. As a result of the reduction in the anticipated
holding period, together with a reassessment of the potential
future operating cash flows of the properties and the effects of
current market conditions, the Company determined that its
investment in these assets was not fully recoverable and recorded
an adjustment of property carrying values aggregating approximately
$12.5 million in 2002, of which approximately $1.5 million is
included in the caption Income from discontinued operations on the
Company's Consolidated Statements of Income.
7. Discontinued Operations and Assets Held for Sale:
-------------------------------------------------
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("SFAS 144"). SFAS 144 established criteria
beyond that previously specified in Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of
("SFAS 121"), to determine when a long-lived asset is classified as
held for sale, and it provides a single accounting model for the
disposal of long-lived assets. SFAS 144 was effective beginning
January 1, 2002. In accordance with SFAS 144, the Company now
reports as discontinued operations assets held for sale (as defined
by SFAS 144) as of the end of the current period and assets sold
subsequent to January 1, 2002. All results of these discontinued
operations, are included in a separate component of income on the
Consolidated Statements of Income under the caption Discontinued
operations. This change has resulted in certain reclassifications
of 2003, 2002 and 2001 financial statement amounts.
The components of Income from discontinued operations for each of the
three years in the period ended December 31, 2003 are shown below.
These include the results of a full year of operations for
properties sold during the nine months ended September 30, 2004,
operations through the date of each respective sale for properties
sold during 2003 and 2002 and a full year of operations for those
assets classified as held-for-sale as of December 31, 2003, (in
thousands):
36
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
2003 2002 2001
-------- -------- --------
Discontinued Operations:
Revenues from rental property $ 21,069 $ 32,237 $ 43,041
Rental property expenses (6,778) (13,388) (12,122)
-------- -------- --------
Income from property operations 14,291 18,849 30,919
Depreciation of rental property (3,899) (6,730) (6,649)
Other expense -- (2,826) (3,283)
-------- -------- --------
Income from discontinued operating properties 10,392 9,293 20,987
Gain on early extinguishment of debt 6,760 3,222 --
Adjustment of property carrying values (4,016) (22,030) --
Gain on disposition of operating properties 47,657 12,778 --
-------- -------- --------
Income from discontinued operations $ 60,793 $ 3,263 $ 20,987
======== ======== ========
During December 2003, the Company identified two operating properties,
comprised of approximately 0.2 million square feet of GLA, as
held-for-sale in accordance with SFAS 144. The book value of these
properties, aggregating approximately $19.4 million, net of
accumulated depreciation of approximately $2.1 million, exceeded
their estimated fair value. The Company's determination of the fair
value of these properties, aggregating approximately $15.4 million,
is based upon contracts of sale with third parties less estimated
selling costs. As a result, the Company recorded an adjustment of
property carrying values of approximately $4.0 million.
Additionally, during March 2004, the Company reclassified as
held-for-sale two shopping center properties comprising
approximately 0.3 million square feet. The book value of these
properties, aggregating approximately $8.7 million, net of
accumulated depreciation of approximately $4.2 million, exceeded
their estimated fair value. The Company's determination of the fair
value of these properties, aggregating approximately $4.5 million,
was based upon contracts of sale with third parties less estimated
selling costs. As a result, the Company recorded an adjustment
of property carrying values of $4.2 million that was recognized
during the nine months ended September 30, 2004. During March and
June 2004, the Company, in separate transactions, completed the
sale of these two properties for an aggregate sales price of
approximately $5.0 million. The current and prior years comparative
operations of properties sold during the nine months ended
September 30, 2004 and classified as held-for-sale as of December
31, 2003, along with the adjustment of property carrying values
during 2003, is included in the caption Income from discontinued
operations on the Company's Consolidated Statements of Income.
During 2003, the Company reached agreement with certain lenders in
connection with three individual non-recourse mortgages encumbering
three former Kmart sites. The Company paid approximately $14.2
million in full satisfaction of these loans which aggregated
approximately $24.0 million. As a result of these transactions, the
Company recognized a gain on early extinguishment of debt of
approximately $9.7 million during 2003, of which $6.8 million is
included in Income from discontinued operations.
During November 2002, the Company disposed of an operating property
located in Chicago, IL. Net proceeds from this sale of
approximately $8.0 million were accepted by a lender in full
satisfaction of an outstanding mortgage loan of approximately $11.5
million. As a result of this transaction, the Company recognized a
gain of early extinguishment of debt of approximately $3.2 million.
During 2002, the Company identified two operating properties, comprised
of approximately 0.2 million square feet of GLA, as "Held for Sale"
in accordance with SFAS No. 144. The book value of these
properties, aggregating approximately $28.4 million, net of
accumulated depreciation of approximately $2.9 million, exceeded
their estimated fair value. The Company's determination of the fair
value of these properties, aggregating approximately $7.9 million,
is based upon executed contracts of sale with third parties less
estimated selling costs. As a result, the Company recorded an
adjustment of property carrying values of $20.5 million.
37
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
8. Investment and Advances in Real Estate Joint Ventures:
------------------------------------------------------
Kimco Income REIT ("KIR") -
During 1998, the Company formed KIR, an entity that was established for
the purpose of investing in high quality real estate properties
financed primarily with individual non-recourse mortgages. These
properties include, but are not limited to, fully developed
properties with strong, stable cash flows from credit-worthy
retailers with long-term leases. The Company originally held a
99.99% limited partnership interest in KIR. Subsequent to KIR's
formation, the Company sold a significant portion of its original
interest to an institutional investor and admitted three other
limited partners. As of December 31, 2003, KIR has received total
capital commitments of $569.0 million, of which the Company
subscribed for $247.0 million and the four limited partners
subscribed for $322.0 million. As of December 31, 2003, the Company
has a 43.3% non-controlling limited partnership interest in KIR.
During 2003, the limited partners in KIR contributed $30.0 million
towards their respective capital commitments, including $13.0
million by the Company. As of December 31, 2003, KIR had unfunded
capital commitments of $99.0 million, including $42.9 million from
the Company.
The Company's equity in income from KIR for the years ended December
31, 2003, 2002 and 2001 was approximately $19.8 million, $18.2
million and $14.7 million, respectively.
In addition, KIR entered into a master management agreement with the
Company, whereby, the Company will perform services for fees
related to management, leasing, operations, supervision and
maintenance of the joint venture properties. For the years ended
December 31, 2003, 2002 and 2001, the Company (i) earned management
fees of approximately $2.9 million, $2.5 million and $1.9 million,
respectively, (ii) received reimbursement of administrative fees of
approximately $0.4 million, $1.0 million and $1.4 million,
respectively, and (iii) earned leasing commissions of approximately
$0.5 million, $0.8 million and $0.3 million, respectively.
During 2003, KIR purchased two shopping center properties, in separate
transactions, aggregating approximately 0.6 million square feet of
GLA for approximately $103.5 million.
During 2003, KIR disposed of two out-parcels in Las Vegas, NV, for an
aggregate sales price of approximately $1.4 million, which
approximated their net book value.
During 2003, KIR obtained individual non-recourse, non-cross
collateralized fixed-rate ten year mortgages aggregating $78.0
million on two of its previously unencumbered properties with rates
ranging from 5.54% to 5.82% per annum. The net proceeds were used
to satisfy the outstanding balance on the secured credit facility
and partially fund the acquisition of various shopping center
properties.
During September 2003, KIR elected to terminate its secured revolving
credit facility. This facility was scheduled to expire in November
2003 and had $5.0 million outstanding at the time of termination,
which was paid in full. At December 31, 2002, there was $15.0
million outstanding under this facility.
During 2002, KIR purchased five shopping center properties, in separate
transactions, aggregating approximately 1.8 million square feet of
GLA for approximately $213.5 million, including the assumption of
approximately $63.1 million of mortgage debt encumbering two of the
properties.
During July 2002, KIR disposed of a shopping center property in Aurora,
IL for an aggregate sales price of approximately $2.4 million,
which represented the approximate book value of the property.
During 2002, KIR obtained individual non-recourse, non-cross
collateralized fixed-rate ten year mortgages aggregating
approximately $170.3 million on seven of its previously
unencumbered properties with rates ranging from 5.95% to 7.38% per
annum. The net proceeds were used to finance the acquisition of
various shopping center properties.
38
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2003, the KIR portfolio was comprised of 70
shopping center properties aggregating approximately 14.6 million
square feet of GLA located in 21 states.
RioCan Investments -
During October 2001, the Company formed a joint venture (the "RioCan
Venture") with RioCan Real Estate Investment Trust ("RioCan") in
which the Company has a 50% non-controlling interest, 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 2003, the RioCan Venture acquired a shopping center property
comprising approximately 0.2 million square feet of GLA for a price
of approximately CAD $42.6 (approximately USD $29.0 million)
including the assumption of approximately CAD $28.7 (approximately
USD $19.6 million) of mortgage debt. Additionally during 2003, the
RioCan Venture acquired, in a single transaction, four parcels of
land adjacent to an existing property for a purchase price of
approximately CAD $18.7 million (approximately USD $14.2 million).
This property was subsequently encumbered with non-recourse
mortgage debt of approximately CAD $16.3 million (approximately USD
$12.4 million).
As of December 31, 2003, the RioCan Venture was comprised of 31
operating properties and three development properties consisting of
approximately 7.2 million square feet of GLA.
Kimco / G.E. Joint Venture ("KROP")
During 2001, the Company formed a joint venture (the "Kimco Retail
Opportunity Portfolio" or "KROP") with GE Capital Real Estate
("GECRE"), in which the Company has a 20% non-controlling interest
and manages the portfolio. The purpose of this joint venture is to
acquire established high growth potential retail properties in the
United States. Total capital commitments to KROP from GECRE and the
Company are for $200.0 million and $50.0 million, respectively, and
such commitments are funded proportionately as suitable
opportunities arise and are agreed to by GECRE and the Company.
During 2003, GECRE and the Company contributed approximately $45.6
million and $11.4 million, respectively, towards their capital
commitments. As of December 31, 2003, KROP had unfunded capital
commitments of $144.3 million, including $28.9 million by the
Company. Additionally, GECRE and the Company provided short-term
interim financing for all acquisitions made by KROP without a
mortgage in place at the time of acquisition. All such financing
bears interest at rates ranging from LIBOR plus 4.0% to LIBOR plus
5.25% and have maturities of less than one year. KROP had
outstanding short-term interim financing due to GECRE and the
Company totaling $16.8 million each as of December 31, 2003 and
$17.3 million each as of December 31, 2002.
During 2003, KROP purchased eight shopping centers, in separate
transactions, aggregating 1.9 million square feet of GLA for
approximately $250.2 million, including the assumption of
approximately $6.5 million of mortgage debt encumbering one of the
properties.
During December 2003, KROP disposed of a portion of a shopping center
in Columbia, MD, for an aggregate sales price of approximately $2.8
million, which approximated the book value of the property.
During 2002, KROP purchased 16 shopping centers aggregating 1.6 million
square feet of GLA for approximately $177.8 million, including the
assumption of approximately $29.5 million of mortgage debt
encumbering three of the properties.
39
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During October 2002, KROP disposed of a shopping center in Columbia, MD
for an aggregate sales price of approximately $2.9 million, which
resulted in a gain of approximately $0.7 million.
During 2003, KROP obtained individual non-recourse, non-cross
collateralized fixed rate mortgages aggregating approximately $89.3
million on three of its previously unencumbered properties with
rates ranging from 4.25% to 5.92% and terms ranging from five to
ten years.
During 2003, KROP obtained individual non-recourse, non-cross
collateralized variable-rate five year mortgages aggregating
approximately $35.6 million on five of its previously unencumbered
properties with rates ranging from LIBOR plus 2.2% to LIBOR plus
2.5%. In order to mitigate the risks of interest rate fluctuations
associated with these variable rate obligations, KROP entered into
interest rate cap agreements for the notional values of these
mortgages.
During 2002, KROP obtained a cross-collateralized mortgage with a
five-year term aggregating $73.0 million on eight properties with
an interest rate of LIBOR plus 1.8%. Upon the sale of one of the
collateralized properties, $1.9 million was repaid during 2002. In
order to mitigate the risks of interest rate fluctuations
associated with this variable rate obligation, KROP entered into an
interest rate cap agreement for the notional value of this
mortgage.
As of December 31, 2003, the KROP portfolio was comprised of 23
shopping center properties aggregating approximately 3.5 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 of shopping centers which are
either owned or held under long-term operating leases.
During June 2003, the Company acquired a former Service Merchandise
property located in Novi, MI, through a joint venture, in which the
Company has a 42.5% non-controlling interest. The property was
acquired for a purchase price of approximately $4.1 million.
During June 2003, the Company acquired a property located in South
Bend, IN, through a joint venture in which the Company has a 37.5%
non-controlling interest. The property was acquired for an
aggregate purchase price of approximately $4.9 million.
During July 2003, the Company acquired a property located in Pineville,
NC, through a joint venture, in which the Company has a 20%
non-controlling interest. The property was acquired for a purchase
price of approximately $27.3 million, including $19.3 million of
non-recourse mortgaged debt encumbering the property.
During August 2003, the Company acquired a property located in
Shaumburg, IL, through a joint venture in which the Company has a
45% non-controlling interest. The property was purchased for an
aggregate purchase price of approximately $66.6 million.
Simultaneous with the acquisition, the venture obtained a $51.6
million non-recourse mortgage at a floating interest rate of LIBOR
plus 2.25%.
During December 2003, the Company, in a single transaction, sold a
50.0% interest in each of its properties located in Saltillo and
Monterrey, Mexico for an aggregate sales price of approximately MXN
$240.4 million (USD $21.4 million) which approximated 50.0% of
their aggregate carrying value. As a result, the Company has a 50%
non-controlling interest in these properties and accounts for the
investment under the equity method of accounting.
Additionally, during the year ended December 31, 2003, the Company
acquired 11 properties, in separate transactions, through various
joint ventures in which the Company has a 50% non-controlling
interest. These properties were acquired for an aggregate purchase
price of approximately $113.3 million, including $40.5 million of
non-recourse debt encumbering six of the properties.
40
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2002, the Company acquired seven former Service Merchandise
locations, in separate transactions, through a venture in which the
Company has a 42.5% non-controlling interest. These properties were
purchased for an aggregate purchase price of approximately $20.9
million.
During July 2002, the Company acquired a property located in Kalamazoo,
MI, through a joint venture in which the Company has a 50%
non-controlling interest. The property was purchased for an
aggregate purchase price of approximately $6.0 million.
During December 2002, the Company acquired an out-parcel of an existing
property located in Tampa, FL, through a joint venture in which the
Company has a 50% non-controlling interest. The property was
purchased for an aggregate purchase price of approximately $4.9
million.
Additionally, during 2002, the Company, in separate transactions,
disposed of two operating properties through a joint venture in
which the Company has a 50% non-controlling interest. The
properties were located in Tempe, AZ and Glendale, AZ and sold for
approximately $19.2 million and $1.7 million, respectively.
The Company accounts for its investments in unconsolidated real estate
joint ventures under the equity method of accounting.
Summarized financial information for the recurring operations of these
real estate joint ventures, is as follows (in millions):
December 31,
2003 2002
-------- --------
Assets:
Real estate, net $3,313.0 $2,511.8
Other assets 156.2 132.5
-------- --------
$3,469.2 $2,644.3
======== ========
Liabilities and Partners' Capital:
Notes payable $ 33.6 $ 49.6
Mortgages payable 2,343.7 1,720.6
Other liabilities 107.2 116.6
Minority Interest 10.8 10.8
Partners' capital 973.9 746.7
-------- --------
$3,469.2 $2,644.3
======== ========
Year Ended December 31,
2003 2002 2001
------ ------ ------
Revenues from rental property $433.5 $314.8 $209.4
------ ------ ------
Operating expenses (121.9) (78.2) (52.9)
Interest (140.1) (108.0) (74.5)
Depreciation and amortization (68.0) (41.6) (31.0)
Other, net (9.3) (4.5) (3.0)
------ ------ ------
(339.3) (232.3) (161.4)
------ ------ ------
Net income $ 94.2 $ 82.5 $ 48.0
====== ====== ======
Other liabilities in the accompanying Consolidated Balance Sheets
include accounts with certain real estate joint ventures totaling
approximately $11.0 million and $5.3 million at December 31, 2003
and 2002, 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 generally accepted accounting
principles.
The Company's maximum exposure to losses associated with its
unconsolidated joint ventures is limited to its carrying value in
these investments. As of December 31, 2003 and 2002, the Company's
carrying value in these investments approximated $487.4 million and
$390.5 million, respectively.
41
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
9. Other Real Estate Investments:
Ward Venture -
During March 2001, through a taxable REIT subsidiary, the Company
formed a real estate joint venture, (the "Ward Venture") in which
the Company has a 50% interest, for purposes of acquiring asset
designation rights for substantially all of the real estate
property interests of the bankrupt estate of Montgomery Ward LLC
and its affiliates. These asset designation rights have provided
the Ward Venture the ability to direct the ultimate disposition of
the 315 fee and leasehold interests held by the bankrupt estate.
The asset designation rights expired in August 2002 for the
leasehold positions and expire in December 2004 for the fee owned
locations. During the marketing period, the Ward Venture will be
responsible for all carrying costs associated with the properties
until the property is designated to a user. As of December 31,
2003, there were five properties which continue to be marketed.
During 2003, the Ward Venture completed transactions on seven
properties, and the Company recognized pre-tax profits of
approximately $3.5 million.
During 2002, the Ward Venture completed transactions on 32 properties,
and the Company recognized pre-tax profits from the Ward Venture of
approximately $11.3 million.
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 SFAS No. 13,
Accounting for Leases (as amended).
During 2002, four of these properties were sold whereby the proceeds
from the sales were used to paydown the mortgage debt by
approximately $9.6 million.
During 2003, an additional four properties were sold whereby the
proceeds from the sales were used to paydown the mortgage debt by
approximately $9.1 million. As of December 31, 2003, the remaining
22 properties were encumbered by third-party non-recourse debt of
approximately $73.6 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.
At December 31, 2003 and 2002 the Company's net investment in
leveraged lease consists of the following (in millions):
2003 2002
------- -------
Remaining net rentals $ 81.9 $ 94.8
Estimated unguaranteed residual value 59.2 65.2
Non-recourse mortgage debt (73.6) (86.0)
Unearned and deferred income (63.6) (70.0)
------- -------
Net investment in leveraged lease $ 3.9 $ 4.0
======= =======
Kmart Venture -
During July 2002, the Company formed the Kmart Venture in which the
Company has a controlling interest for purposes of acquiring asset
designation rights for 54 former Kmart locations. The total
commitment to Kmart by the Kmart Venture, prior to the profit
sharing arrangement commencing, was approximately $43.0 million. As
of December 31, 2003, the Kmart Venture completed the designation
of all properties and has funded the total commitment of
approximately $43.0 million to Kmart.
42
In addition, the profit sharing arrangement commenced with the Company
recognizing pre-tax profits of approximately $0.6 million.
Kimsouth -
During November 2002, the Company, through its taxable REIT subsidiary,
together with Prometheus Southeast Retail Trust, completed the
merger and privatization of Konover Property Trust, which has been
renamed Kimsouth Realty, Inc., ("Kimsouth"). The Company acquired
44.5% of the common stock of Kimsouth, which consisted primarily of
38 retail shopping center properties comprising approximately 4.6
million square feet of GLA. Total acquisition value was
approximately $280.9 million including approximately $216.2 million
in assumed mortgage debt. The Company's investment strategy with
respect to Kimsouth includes re-tenanting, repositioning and
disposition of the properties.
During 2003, Kimsouth disposed of 14 shopping center properties, in
separate transactions, for an aggregate sales price of
approximately $84.0 million, including the assignment of
approximately $18.4 million of mortgage debt encumbering six of the
properties. During 2003, the Company recognized pre-tax profits
from the Kimsouth investment of approximately $12.1 million.
During December 2002, Kimsouth sold its joint venture interest in a
property to its joint venture partner for net proceeds of
approximately $4.6 million and disposed of another property for net
proceeds of approximately $2.9 million.
Selected financial information for Kimsouth is as follows (in
millions):
December 31,
2003 2002
------- -------
Assets:
Operating real estate, net $ 125.7 $ 282.3
Real estate held for sale 95.5 9.4
Other assets 20.8 28.9
------- -------
$ 242.0 $ 320.6
======= =======
Liabilities and Stockholders' Equity:
Mortgages payable $ 137.0 $ 185.0
Other liabilities 3.6 3.6
Stockholders' equity 101.4 132.0
------- -------
$ 242.0 $ 320.6
======= =======
Year Ended December 31,
2003 2002
------- -------
Revenues from Rental Property $ 11.4 $ 17.6
Operating expenses (3.8) (5.3)
Interest (9.7) (7.8)
Depreciation and amortization (4.3) (6.6)
Other, net (0.1) (8.6)
------- -------
Loss from continuing operations (6.5) (10.7)
Income from discontinued operations 19.9 4.1
------- -------
Net income/(loss) $ 13.4 $ (6.6)
======= =======
As of December 31, 2003, the Kimsouth portfolio was comprised of 22
properties aggregating approximately 3.2 million square feet of GLA
located in six states.
Preferred Equity Capital -
During 2002, the Company established a preferred equity program, which
provides capital to developers and owners of shopping centers.
During 2002, the Company provided, in separate transactions, an
aggregate of approximately $25.6 million in investment capital to
developers and owners of nine shopping centers. During 2003, the
Company provided, in separate transactions, an aggregate of
approximately $45.5 million in investment capital to developers and
owners of 14 shopping centers. Additionally during 2003, the
Company received full payment plus incentive payments related to
two preferred equity investments. As of December 31, 2003, the
Company's net investment under the preferred equity program was
$66.4 million relating to 21 shopping centers. For the year ended
December 31, 2003 and 2002, the Company earned approximately $4.6
million and $1.0 million, respectively, from these investments.
43
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,
2003, 2002 and 2001 was approximately $0.3 million, $0.8 million
and $3.2 million, respectively. These amounts represent sublease
revenues during the years ended December 31, 2003, 2002 and 2001 of
approximately $12.3 million, $13.9 million and $16.8 million,
respectively, less related expenses of $10.6 million, $11.7 million
and $12.2 million, respectively, and an amount, which in
management's estimate, reasonably provides for the recovery of the
investment over a period representing the expected remaining term
of the retail store leases. The Company's future minimum revenues
under the terms of all noncancellable 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 years are as follows (in millions): 2004,
$11.0 and $7.9; 2005, $10.3 and $7.7; 2006, $8.9 and $6.3; 2007,
$6.6 and $4.4; 2008, $3.9 and $2.7; and thereafter, $4.5 and $2.8,
respectively.
10. Mortgages and Other Financing Receivables:
------------------------------------------
During June 2003, the Company provided a five-year $3.5 million loan to
Grass America, Inc. ("Grass America") at an interest rate of 12.25%
per annum collateralized by certain real estate interests of Grass
America. The Company receives principal and interest payments on a
monthly basis.
During December 2003, the Company provided a four-year $8.25 million
term loan to Spartan Stores, Inc. ("Spartan") at a fixed rate of
16% per annum. This loan is collateralized by the real estate
interests of Spartan with the Company receiving principal and
interest payments monthly.
During December 2003, the Company, through a taxable REIT subsidiary,
acquired a $24.0 million participation interest in 12% senior
secured notes of the FRI-MRD Corporation ("FRI-MRD") for $13.3
million. These notes, which are currently non-performing, are
collateralized by certain equity interests and a note receivable of
a FRI-MRD subsidiary.
During March 2002, the Company provided a $50.0 million ten-year loan
to Shopko Stores, Inc., at an interest rate of 11.0% per annum
collateralized by 15 properties. The Company receives principal and
interest payments on a monthly basis. During January 2003, the
Company sold a $37.0 million participation interest in this loan to
an unaffiliated third party. The interest rate of the $37.0 million
participation interest is a variable rate based on LIBOR plus
3.50%. The Company continues to act as the servicer for the full
amount of the loan.
During 2003, the Company provided, in separate transactions, an
aggregate $16.2 million of additional mortgage financing of which
$11.5 million has been repaid. These loans have maturities
generally ranging from 3 to 30 years and accrue interest at rates
ranging from 7% to 12%.
During March 2002, the Company provided a $15.0 million three-year loan
to Gottchalks, Inc., at an interest rate of 12.0% per annum
collateralized by three properties. The Company receives principal
and interest payments on a monthly basis. As of December 31, 2003,
the outstanding loan balance was approximately $13.3 million.
During May 2002, in connection with Frank's Nursery & Crafts, Inc.
("Franks") emergence from Chapter 11 under the U.S. Bankruptcy
Code, the Company received approximately 4.3 million shares of
Frank's common stock in settlement of its pre-petition claim. The
Company also provided exit financing in the form of a $15.0 million
three-year term loan at a fixed interest rate of 10.25% per annum
collateralized by 40 real estate interests. Simultaneously, the
Company provided an additional $17.5 million revolving loan, also
at an interest rate of 10.25% per annum. Interest is payable
quarterly in arrears. As of December 31, 2003, the aggregate
outstanding loan balance was approximately $32.5 million. As an
inducement to make these loans, Frank's issued the Company
approximately 4.4 million warrants with an exercise price of $1.15
per share and 5.0 million warrants with an exercise price of $2.00
per share. During 2003, the Company had written down the remaining
carrying value of its equity investment in Frank's common stock and
fully reserved the value of Frank's warrants with a corresponding
adjustment in OCI.
44
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During September 2002, a $27.5 million loan to Ames Department Stores,
Inc. ("AMES"), was restructured as a two-year $100.0 million
secured revolving loan of which the Company has a 40% interest.
This revolving loan is collateralized by all of Ames' real estate
interests. The loan bears interest at 8.5% per annum and provides
for contingent interest upon the successful disposition of the Ames
properties. There was no outstanding balance on the revolving loan
at December 31, 2003.
11. Cash and Cash Equivalents:
--------------------------
Cashand 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 $0.1 million at
December 31, 2003 and 2002.
Cashand cash equivalent balances may, at a limited number of banks and
financial institutions, exceed insurable amounts. The Company
believes it mitigates its risks by investing in or through major
financial institutions. Recoverability of investments is dependent
upon the performance of the issuers.
12. Marketable Securities:
----------------------
The amortized cost and estimated fair values of securities
available-for-sale and held-to-maturity at December 31, 2003 and
2002 are as follows (in thousands):
December 31, 2003
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
Available-for-sale:
Equity securities $18,513 $ 9,063 $ (272) $27,304
Held-to-maturity:
Other debt securities 18,373 2,926 (30) 21,269
------- ------- ------- -------
Total marketable securities $36,886 $11,989 $ (302) $48,573
======= ======= ======= =======
December 31, 2002
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
Available-for-sale:
Equity securities $38,875 $ 5,038 $ (873) $43,040
Held-to-maturity:
Other debt securities 23,952 2,002 (26) 25,928
------- ------- ------- -------
Total marketable securities $62,827 $ 7,040 $ (899) $68,968
======= ======= ======= =======
45
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2003, the contractual maturities of Other debt
securities classified as held-to-maturity are as follows: within
one year, $2.7 million; after one year through five years, $0.0;
after five years through 10 years, $12.1 million and after 10
years, $3.6 million. Actual maturities may differ from contractual
maturities as issuers may have the right to prepay debt obligations
with or without prepayment penalties.
13. Notes Payable:
--------------
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.
As of December 31, 2003, a total principal amount of $757.25 million,
in senior fixed-rate MTNs had been issued under the MTN program
primarily 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. These fixed-rate notes have maturities
ranging from ten months to ten years as of December 31, 2003 and
bear interest at rates ranging from 3.95% to 7.91%. Interest on
these fixed-rate senior unsecured notes is payable semi-annually in
arrears.
During May 2003, the Company issued $50.0 million of fixed-rate
unsecured senior notes under its MTN program. This fixed rate MTN
matures in May 2010 and bears interest at 4.62% per annum, payable
semi-annually in arrears. The proceeds from this MTN issuance were
used to partially fund the redemption of the Company's $75 million
7 3/4% Class A Cumulative Redeemable Preferred Stock.
During August 2003, the Company issued $100.0 million of fixed rate
unsecured senior notes under its MTN program. This fixed rate MTN
matures in August 2008 and bears interest at 3.95% per annum,
payable semi-annually in arrears. The proceeds from this MTN
issuance were used to redeem all $100.0 million of the Company's
remarketed reset notes maturing August 18, 2008 bearing interest at
LIBOR plus 1.25%.
During October 2003, the Company issued $100.0 million of fixed rate
unsecured senior notes under its MTN program. This fixed rate MTN
matures in October 2013 and bears interest at 5.19% per annum,
payable semi-annually in arrears. The proceeds from this MTN
issuance were used for the repayment of the Company's 6.5% $100.0
million fixed-rate unsecured senior notes that matured October 1,
2003.
During July 2002, the Company issued an aggregate $102.0 million of
unsecured debt under its MTN program. These issuances consisted of
(i) an $85.0 million floating-rate MTN which matures in August 2004
and bears interest at LIBOR plus 0.50% per annum and (ii) a $17.0
million fixed-rate MTN which matures in July 2012 and bears
interest at 5.98% per annum. The proceeds from these MTN issuances
were used toward the repayment of a $110.0 million floating-rate
MTN which matured in August 2002. In addition, the Company entered
into an interest rate swap agreement on the $85.0 million
floating-rate MTN which effectively fixed the interest rate at
2.3725% per annum until November 2003. During 2003, the Company
elected not to renew the interest rate swap on the $85.0 million
MTN. At December 31, 2003, the rate on this MTN was 1.66% per
annum.
During November 2002, the Company issued $35.0 million of 4.961%
fixed-rate Senior Notes due 2007 (the "2007 Notes"). Interest on
the 2007 Notes is payable semi-annually in arrears. Net proceeds
from the issuance totaling approximately $34.9 million, after
related transaction costs of approximately $0.1 million, were
primarily used to repay outstanding borrowings on the Company's
unsecured credit facilities.
Also, during November 2002, the Company issued $200.0 million of 6%
fixed-rate Senior Notes due 2012 (the "2012 Notes"). Interest on
the 2012 Notes is payable semi-annually in arrears. The Notes were
sold at 99.79% of par value. Net proceeds from the issuance
totaling approximately $198.3 million, after related transaction
costs of approximately $1.3 million, were primarily used to repay
outstanding borrowings on the Company's unsecured credit
facilities.
46
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2003, the Company has a total principal amount of
$470.0 million, in fixed-rate unsecured senior notes. These
fixed-rate notes have maturities ranging six months to ten years as
of December 31, 2003, and bear interest at rates ranging from 4.96%
to 7.50%. Interest on these fixed-rate senior unsecured notes is
payable semi-annually in arrears.
During June 2003, the Company established a $500.0 million unsecured
revolving credit facility (the "Credit Facility") with a group of
banks, which is scheduled to expire in August 2006. This Credit
Facility replaced the Company's $250.0 million unsecured revolving
credit facility. Under the terms of the Credit Facility, funds may
be borrowed for general corporate purposes, including the funding
of (i) property acquisitions, (ii) development and redevelopment
costs, and (iii) any short-term working capital requirements.
Interest on borrowings under the Credit Facility accrues at a
spread (currently 0.55%) to LIBOR, and fluctuates in accordance
with changes in the Company's senior debt ratings. The Company's
senior debt ratings are currently A-/stable from Standard & Poors
and Baa1/stable from Moody's Investor Services. As part of this
Credit Facility, the Company has a competitive bid option where the
Company may auction up to $250.0 million of its requested
borrowings to the bank group. This competitive bid option provides
the Company the opportunity to obtain pricing below the currently
stated spread to LIBOR of 0.55%. A facility fee of 0.15% per annum
is payable quarterly in arrears. Pursuant to the terms of the
Credit Facility, the Company, among other things, is (i) subject to
maintaining certain maximum leverage ratios on both unsecured
senior corporate debt and minimum unencumbered asset and equity
levels, and (ii) restricted from paying dividends in amounts that
exceed 90% of funds from operations, as defined. As of December 31,
2003, there was $45.0 million outstanding under this Credit
Facility.
During October 2003, the Company obtained a $400.0 million unsecured
bridge facility that bears interest at LIBOR plus 0.55%. This loan
is scheduled to expire September 30,2004 with an option to extend
up to $150.0 million for an additional year. The Company utilized
these proceeds to partially fund the Mid-Atlantic Realty Trust
transaction. Pursuant to the terms of this facility, the Company is
subject to the same covenants and requirements as the $500.0
million Credit Facility described above. As of December 31, 2003,
there was $329.0 million outstanding on this unsecured bridge
facility.
In accordance with the terms of the Indenture, as amended, pursuant to
which the Company's senior, unsecured notes have been issued, the
Company is (a) subject to maintaining certain maximum leverage
ratios on both unsecured senior corporate and secured debt, minimum
debt service coverage ratios and minimum equity levels, and (b)
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 July 2002, the Company established an additional $150.0 million
unsecured revolving credit facility. During December 2002, the
Company paid down the outstanding balance and terminated this
facility.
The scheduled maturities of all unsecured senior notes payable as of
December 31, 2003 are approximately as follows (in millions): 2004,
$514.0; 2005, $200.25; 2006, $130.0; 2007, $195.0; 2008, $100.0 and
thereafter, $547.0.
14. Mortgages Payable:
------------------
During October 2003, in connection with the Mid-Atlantic Merger, the
Company assumed approximately $181.7 million of individual
non-recourse mortgages encumbering twenty properties, including an
aggregate premium of $24.6 million related to the fair value
adjustment of these mortgages in accordance with SFAS No. 141. As
of December 31, 2003, the aggregate outstanding balance of these
mortgages was $180.9 million with the Company realizing a $0.8
million reduction in interest expense related to the amortization
of the mortgage premium.
As part of the Company's strategy to reduce its exposure to Kmart
Corporation, the Company had previously encumbered certain Kmart
sites with individual non-recourse mortgages. As a result of the
Kmart bankruptcy filing in January 2002 and the subsequent
rejection of leases including these encumbered sites, the Company,
during July 2002, had suspended debt service payments on these
loans and began active negotiations with the respective lenders.
47
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2003, the Company reached agreement with certain lenders in
connection with three individual non-recourse mortgages encumbering
three former Kmart sites. The Company paid approximately $14.2
million in full satisfaction of these loans which aggregated
approximately $24.0 million. As a result of these transactions, the
Company recognized a gain on early extinguishment of debt of
approximately $9.7 million during 2003, of which $6.8 million is
included in Income from discontinued operations.
During December 2002, the Company reached agreement with certain
lenders in connection with four former Kmart sites. The Company
paid approximately $24.2 million in full satisfaction of the loans
encumbering these properties which aggregated $46.5 million and the
Company recognized a gain on early extinguishment of debt of
approximately $22.3 million.
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 2023. Interest rates range from approximately 6.10%
to 9.75% (weighted average interest rate of 7.85% as of December
31, 2003). The scheduled maturities of all mortgages payable as of
December 31, 2003, are approximately as follows (in millions):
2004, $8.7; 2005, $14.2; 2006, $53.1; 2007, $12.6; 2008, $43.1 and
thereafter, $244.2.
One of the Company's properties is encumbered by approximately $6.4
million in floating-rate, tax-exempt mortgage bond financing. The
rate on this bond is reset annually, at which time bondholders have
the right to require the Company to repurchase the bonds. The
Company has engaged a remarketing agent for the purpose of offering
for resale the bonds in the event it is tendered to the Company.
All bonds tendered for redemption in the past have been remarketed
and the Company has arrangements, including letters of credit, with
banks to both collateralize the principal amount and accrued
interest on such bonds and to fund any repurchase obligations.
15. Construction Loans Payable:
----------------------------
During 2003, the Company obtained construction financing on seven
ground-up development projects for an aggregate loan commitment
amount of up to $152.2 million, of which approximately $45.6
million was funded for the year ended December 31, 2003. As of
December 31, 2003, the Company had a total of thirteen construction
loans with total commitments of up to $238.9 million of which $92.8
million had been funded. These loans have maturities ranging from 3
to 34 months and variable interest rates ranging from 2.87% to
5.00% at December 31, 2003. 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, 2003 are approximately as follows (in millions):
2004, $47.7; 2005, $30.1 and 2006, $15.0.
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 debt is based on discounted cash flow
analyses. 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 of the Company's financial
instruments. The following are financial instruments for which the
Company's estimate of fair value differs from the carrying amounts
(in thousands):
48
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31,
-------------------------------------------------------------------
2003 2002
----------------------------- -----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amounts Value Amounts Value
---------- ---------- ---------- ----------
Marketable Securities $ 45,677 $ 48,573 $ 66,992 $ 68,968
Notes Payable $1,686,250 $1,756,834 $1,302,250 $1,353,884
Mortgages Payable $ 375,914 $ 421,123 $ 230,760 $ 282,361
17. Financial Instruments - Derivatives and Hedging:
------------------------------------------------
The Company is exposed to the effect of 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.
The principal financial instruments currently used by the Company are
interest rate swaps, foreign currency exchange forward contracts,
cross currency swaps and warrant contracts. 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 with major financial institutions. The
Company had interest-rate swap agreements on its $85.0 million
floating-rate MTN and on its $100.0 million floating-rate
remarketed reset notes, which were designated and qualified as cash
flow hedges of the variability in floating-rate interest payments
on the hedged debt. The Company determined that these swap
agreements were highly effective in offsetting future variable
interest cash flows related to the Company's debt portfolio.
The swap agreement relating to the Company's $100.0 million
floating-rate remarketed reset notes matured in August 2003. This
agreement was not renewed as the Company elected to pay-off its
outstanding $100.0 million floating-rate remarketed reset notes
during August 2003.
The swap agreement relating to the Company's $85.0 million
floating-rate MTN matured in November 2003. The Company has elected
not to renew this contract.
For the years ended December 31, 2003 and 2002, the change in the fair
value of the interest rate swaps was $0.6 million and $3.3 million,
respectively, which was recorded in OCI, a component of
stockholders' equity, with a corresponding liability reduction for
the same amount.
As of December 31, 2003, the Company had foreign currency forward
contracts designated as hedges of its Canadian investments in real
estate aggregating approximately CAD $184.6 million. In addition,
the Company had foreign currency forward contracts and a cross
currency swap with an aggregate notional amount of approximately
$381.8 million pesos ("MXN") (approximately USD $34.0 million)
designated as hedges of its Mexican real estate investments. In
December 2003, the Company sold 50% of its Mexican investments and
assigned approximately MXN $156.9 million of the MXN hedges in
connection with the sale of the underlying investments that were
being hedged. At December 31, 2003, the Company had remaining
Mexican net investment hedges outstanding with a notional amount of
approximately MXN $224.9 million.
The Company has designated these foreign currency agreements as net
investment hedges of the foreign currency exposure of its net
investment in Canadian and Mexican real estate operations. The
Company believes these agreements are highly effective in reducing
the exposure to fluctuations in exchange rates. As such, gains and
losses on these net investment hedges were reported in the same
manner as a translation adjustment in accordance with SFAS No. 52,
Foreign Currency Translation. During 2003, $25.1 million of
unrealized losses and $0.2 million of unrealized gains were
included in the cumulative translation adjustment relating to the
Company's net investment hedges of its Canadian and Mexican
investments.
During 2001, the Company acquired warrants to purchase the common stock
of a Canadian REIT. The Company has designated the warrants as a
cash flow hedge of the variability in expected future cash outflows
upon purchasing the common stock. The Company has determined the
hedged cash outflow is probable and expected to occur prior to the
expiration date of the warrants. The Company has determined that
the warrants are fully effective.
49
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
For the year ended December 31, 2003, the change in fair value of the
warrants resulted in an unrealized gain of approximately $6.0
million, which was recorded in OCI with a corresponding increase in
Other assets for the same amount.
The following table summarized the notional values and fair values of
the Company's derivative financial instruments as of December 31,
2003:
Fair Value
Hedge Type Notional Value Rate Maturity (in millions)
---------- -------------- ---- -------- -------------
Warrants - cash flow 2,500,000 shares of CAD 9/06 $8.3
common stock $11.02
Foreign currency forwards - net CAD $184.6 million 1.4013 - 1/05 - 7/06 ($23.8)
investment 1.6194
Foreign currency forwards - net MXN $142.5 million 11.838 - 10/04 ($0.5)
investment 12.615 11/04
MXN cross currency swap MXN $82.4 million 7.227 10/07 ($0.2)
- net investment
Foreign currency forwards - fair value CAD $5.0 million 1.5918 4/05 ($0.6)
As of December 31, 2003, these derivative instruments were reported at
their fair value as other liabilities of $25.1 million and other
assets of $8.3 million. The Company does not expect to reclassify
to earnings any of the current balance during the next 12 months.
18. Preferred Stock, Common Stock and DownREIT Unit Transactions:
-------------------------------------------------------------
At December 31, 2002, the Company had outstanding 3,000,000 Depositary
Shares (the "Class A Depositary Shares"), each such Class A
Depositary Share representing a one-tenth fractional interest of a
share of the Company's 7-3/4% Class A Cumulative Redeemable
Preferred Stock, par value $1.00 per share (the "Class A Preferred
Stock"), 2,000,000 Depositary Shares (the "Class B Depositary
Shares"), each such Class B Depositary Share representing a
one-tenth fractional interest of a share of the Company's 8-1/2%
Class B Cumulative Redeemable Preferred Stock, par value $1.00 per
share (the "Class B Preferred Stock") and 4,000,000 Depositary
Shares (the "Class C Depositary Shares"), each such Class C
Depositary Share representing a one-tenth fractional interest of a
share of the Company's 8-3/8% Class C Cumulative Redeemable
Preferred Stock, par value $1.00 per share (the "Class C Preferred
Stock").
During June 2003, the Company redeemed all 2,000,000 outstanding
depositary shares of the Company's Class B Preferred Stock, all
3,000,000 outstanding depositary shares of the Company's Class A
Preferred Stock and all 4,000,000 outstanding depositary shares of
the Company's Class C Preferred Stock, each at a redemption price
of $25.00 per depositary share, totaling $225.0 million, plus
accrued dividends. In accordance with Emerging Issues Task Force
("EITF") D-42, the Company deducted from the calculation of net
income available to common shareholders original issuance costs of
approximately $7.8 million associated with the redemption of the
Class A Preferred Stock, Class B Preferred Stock and Class C
Preferred Stock.
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, of $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. Net proceeds from the sale of the Class F Depositary
Shares, totaling approximately $169.0 million (after related
transaction costs of $6.0 million) were used to redeem all of the
Company's Class B Preferred Stock and Class C Preferred Stock and
to fund a portion of the redemption of the Company's Class A
Preferred Stock.
50
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Voting Rights - As to any matter on which the Class F Preferred Stock,
("Preferred Stock") may vote, including any action by written
consent, each share of 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 Preferred Stock). As a result, each Class F 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 per share ($25.00 per Class F
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 June 2003, the Company completed a primary public stock offering
of 2,070,000 shares of the Company's common stock. The net proceeds
from this sale of common stock, totaling approximately $76.0
million (after related transaction costs of $0.7 million) were used
for general corporate purposes, including the acquisition of
interests in real estate properties.
During September 2003, the Company completed a primary public stock
offering of 2,760,000 shares of the Company's common stock. The net
proceeds from this sale of common stock, totaling approximately
$112.7 million (after related transaction costs of $1.0 million)
were used for general corporate purposes, including the acquisition
of interests in real estate properties.
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 2.4 million downREIT units
(the "Units") which are convertible at a ratio of 1:1 into the
Company's common stock. The downREIT unit holder has the right to
convert the Units anytime 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 $33.57 per share the unit holder
would be entitled to additional shares, however, the maximum number
of additional shares is limited to 251,966 based upon a floor
common stock price of $30.36. The Company has the option to settle
the conversion in cash. Dividends on the Units are paid quarterly
at the rate of the Company's common stock dividend multiplied by
1.1057. The value of the units is included in Minority interests in
partnerships on the accompanying Consolidated Balance Sheets.
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, 2003,
2002 and 2001 (in thousands):
2003 2002 2001
-------- -------- --------
Acquisition of real estate interests by assumption of
mortgage debt $180,893 $ 3,477 $ 17,220
Acquisition of real estate interest by issuance of
convertible downREIT units $ -- $ 80,000 $ --
Acquisition of real estate through purchase of
partnership interests $ -- $ 6,638 $ --
Investment in real estate joint ventures by issuance
of stock and contribution of property $ -- $ -- $ 3,420
Disposition of real estate interests by assignment of
mortgage debt $ 23,068 $ 28,747 $ --
Proceeds held in escrow from sale of real estate
interests $ 41,194 $ 5,433 $ --
Notes received upon disposition of real estate
interests $ 14,490 $ -- $ 400
Notes received upon exercise of stock options $ 100 $ 555 $ 850
Declaration of dividends paid in succeeding period $ 65,969 $ 59,646 $ 57,345
51
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
20. Transactions with Related Parties:
----------------------------------
The Company, along with its joint venture partner provided KROP
short-term interim financing for all acquisitions by KROP for which
a mortgage was not in place at the time of closing. All such
financing had maturities of less than one year and bears interest
at rates ranging from LIBOR plus 4.0% to LIBOR plus 5.25% and LIBOR
plus 4.0% and LIBOR plus 4.5% for the years ended December 31, 2003
and 2002, respectively. KROP had outstanding short-term interim
financing due to GECRE and the Company totaling $16.8 million each
as of December 31, 2003 and $17.3 million each as of December 31,
2002. The Company earned $1.0 million and $0.8 million during 2003
and 2002, respectively, related to such interim financing.
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.
Reference is made to Notes 8 and 9 for additional information
regarding transactions with related parties.
21. Commitments and Contingencies:
------------------------------
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 2087. 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, 2003, 2002 and 2001, respectively.
The future minimum revenues from rental property under the terms of all
noncancellable tenant leases, assuming no new or renegotiated
leases are executed for such premises, for future years are
approximately as follows (in millions): 2004, $381.7; 2005, $352.2;
2006, $315.3; 2007, $280.5; 2008, $239.6 and thereafter, $1,477.2.
Minimum rental payments under the terms of all noncancellable operating
leases pertaining to its shopping center portfolio for future years
are approximately as follows (in millions): 2004, $11.3; 2005,
$10.9; 2006, $10.2; 2007, $9.9; 2008, $8.9 and thereafter, $153.5.
The Company has issued letters of credit in connection with the
collateralization of tax-exempt mortgage bonds, completion
guarantees for certain construction projects, and guaranty of
payment related to the Company's insurance program. These letters
of credit aggregate approximately $15.3 million.
52
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Additionally, the RioCan Venture, an entity in which the Company holds
a 50% non-controlling interest, has a CAD $5.0 million
(approximately USD $3.9 million) letter of credit facility. This
facility is jointly guaranteed by RioCan and the Company and has
approximately CAD $3.1 million (approximately USD $2.4 million)
outstanding as of December 31, 2003 relating to various development
projects.
During 2003, the limited partners in KIR, an entity in which the
Company holds a 43.3% non-controlling interest, contributed $30.0
million towards their respective capital commitments, including
$13.0 million by the Company. As of December 31, 2003, KIR had
unfunded capital commitments of $99.0 million, including $42.9
million from the Company.
22. Incentive Plans:
----------------
The Company maintains a stock option plan (the "Plan") pursuant to
which a maximum 18,500,000 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-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 in 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.
Information with respect to stock options under the Plan for the years
ended December 31, 2003, 2002 and 2001 is as follows:
Weighted Average
Exercise Price
Shares Per Share
---------- --------------
Options outstanding, December 31, 2000 5,538,795 $22.44
Exercised (1,694,227) $20.62
Granted 2,119,175 $30.71
Forfeited (54,390) $25.76
----------
Options outstanding, December 31, 2001 5,909,353 $25.90
Exercised (307,831) $18.76
Granted 1,562,525 $31.27
Forfeited (61,974) $27.99
----------
Options outstanding, December 31, 2002 7,102,073 $27.37
Exercised (1,078,203) $23.92
Granted 1,621,438 $43.34
Forfeited (89,503) $31.16
----------
Options outstanding, December 31, 2003 7,555,805 $31.24
==========
Options exercisable -
December 31, 2001 2,369,288 $21.98
========== ======
December 31, 2002 3,298,417 $24.06
========== ======
December 31, 2003 3,619,774 $26.47
========== ======
The exercise prices for options outstanding as of December 31, 2003
range from $14.78 to $44.36 per share. The weighted average
remaining contractual life for options outstanding as of December
31, 2003 was approximately 7.7 years. Options to purchase
5,109,883, 1,731,321 and 3,293,846 shares of the Company's common
stock were available for issuance under the Plan at December 31,
2003, 2002 and 2001, respectively.
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, is fully vested and funded as of December 31, 2003.
Company contributions to the plan were approximately $0.8 million,
$0.7 million and $0.7 million for the years ended December 31,
2003, 2002 and 2001, respectively.
53
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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 income to taxable income for
the years ended December 31, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
(Estimated) (Actual) (Actual)
--------- --------- ---------
GAAP net income $ 307,879 $ 245,668 $ 236,538
Less: GAAP net income of taxable REIT subsidiaries (12,814) (23,573) (29,063)
--------- --------- ---------
GAAP net income from REIT operations (Note 1) 295,065 222,095 207,475
Net book depreciation in excess of, (less than) tax depreciation (40,781) 4,132 3,612
Deferred and prepaid rents (6,000) (5,944) (6,647)
Exercise of non-qualified stock options (11,900) (2,151) (15,354)
Book/tax differences from investments in real estate joint ventures (10,838) (18,994) (3,206)
Book/tax difference on sale of real property (30,432) (13,346) 3,864
Book adjustment to property carrying values 4,016 33,030 --
Other book/tax differences, net (3,600) 11,719 8,999
--------- --------- ---------
Adjusted taxable income subject to 90% dividend
Requirements $ 195,530 $ 230,541 $ 198,743
========= ========= =========
Note 1 - All adjustments to "GAAP net income from REIT operations" are
net of amounts attributable to minority interest and taxable REIT
subsidiaries.
Reconciliation between Cash Dividends Paid and Dividends Paid
Deductions (in thousands):
----------------------------------------------------------------------
Cash dividends paid exceeded the dividends paid deduction for the year
ended December 31, 2003 and amounted to $246,301. For the years
ended December 31, 2002 and 2001, cash dividends paid were equal to
the dividends paid deduction and amounted to $235,602 and $209,785,
respectively.
Characterization of Distributions:
The following characterizes distributions paid for the years ended
December 31, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
---- ---- ----
Preferred Dividends
-------------------
Ordinary income $13,169 84% $17,935 96% $26,253 100%
Capital gain 2,451 16% 764 4% - -
-------- ---- -------- ---- -------- ----
$15,620 100% $18,699 100% $26,253 100%
-------- -------- --------
Common Dividends
----------------
Ordinary income $171,071 74% $208,040 96% $174,380 95%
Capital gain 31,840 14% 8,863 4% - -
Return of capital 27,770 12% - - 9,152 5%
-------- ----- -------- ---- -------- ----
$230,681 100% $216,903 100% $183,532 100%
-------- -------- --------
Total dividends
distributed $246,301 $235,602 $209,785
======== ======== ========
54
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Taxable REIT Subsidiaries ("TRS"):
----------------------------------
Commencing January 1, 2001, the Company is subject to federal, state
and local income taxes on the income from its TRS activities.
Income taxes have been provided for on the asset and liability method
as required by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. 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 TRS income and provision for income taxes for the years
ended December 31, 2003, 2002 and 2001, are summarized as follows
(in thousands):
2003 2002 2001
------- ------- -------
Net income before income taxes $21,328 $36,477 $48,439
------- ------- -------
Less provision for income taxes:
Federal 7,104 10,538 15,682
State and local 1,410 2,366 3,694
------- ------- -------
Total tax provision 8,514 12,904 19,376
------- ------- -------
TRS net income $12,814 $23,573 $29,063
======= ======= =======
Deferred tax assets of approximately $11.0 million and $4.4 million and
deferred tax liabilities of approximately $7.5 million and $1.7
million are included in the caption Other assets and Other
liabilities on the accompanying Consolidated Balance Sheets at
December 31, 2003 and 2002, respectively. These deferred tax assets
and liabilities relate primarily to differences in the timing of
the recognition of income/(loss) between GAAP and tax basis of
accounting of (i) real estate joint ventures, (ii) other real
estate investments and (iii) other deductible temporary
differences.
The income tax provision differs from the amount computed by applying
the statutory federal income tax rate to taxable income before
income taxes as follows (in thousands):
2003 2002 2001
-------- -------- --------
Federal provision at statutory tax
rate (35%) $ 7,465 $ 12,767 $ 16,954
State and local taxes, net of federal
benefit 1,049 2,010 2,422
Other -- (1,873) --
-------- -------- --------
$ 8,514 $ 12,904 $ 19,376
======== ======== ========
24. Supplemental Financial Information:
-----------------------------------
The following represents the results of operations, expressed in
thousands except per share amounts, for each quarter during years
2003 and 2002:
2003 (Unaudited)
-----------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
----------- ----------- ----------- -----------
Revenues from rental property(1) $ 118,581 $ 114,048 $ 117,409 $ 125,503
Net income $ 70,961 $ 61,346 $ 91,504 $ 84,068
Net income per common share:
Basic $ .63 $ .47 $ .82 $ .73
Diluted $ .63 $ .46 $ .80 $ .72
2002 (Unaudited)
-----------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
----------- ----------- ----------- -----------
Revenues from rental property (1) $ 106,120 $ 106,632 $ 104,702 $ 110,413
Net income $ 60,894 $ 61,055 $ 60,756 $ 62,963
Net income per common share:
Basic $ .54 $ .54 $ .54 $ .56
Diluted $ .53 $ .54 $ .53 $ .56
55
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(1) All periods have been adjusted to reflect the impact of operating
properties sold during the nine months ended September 30, 2004 and
during the year ended December 31, 2003 and 2002, and properties
classified as held for sale as of December 31, 2003 which are reflected
in the caption Discontinued operations on the accompanying Consolidated
Statements of Income.
Accounts and notes receivable in the accompanying Consolidated Balance
Sheets are net of estimated unrecoverable amounts of approximately
$9.7 million and $5.8 million at December 31, 2003 and 2002,
respectively.
25. Pro Forma Financial Information (Unaudited):
--------------------------------------------
As discussed in Notes 3, 4 and 5, the Company and certain of its
subsidiaries acquired and disposed of interests in certain
operating properties during 2003. The pro forma financial
information set forth below is based upon the Company's historical
Consolidated Statements of Income for the years ended December 31,
2003 and 2002, adjusted to give effect to these transactions as of
January 1, 2002.
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 on January
1, 2002, nor does it purport to represent the results of operations
for future periods.
(Amounts presented in millions, except per share figures.)
Years ended December 31,
-------------------------
2003 2002
-------- --------
Revenues from rental property $ 526.2 $ 505.6
Net income $ 260.4 $ 269.0
Net income per common share:
Basic $ 2.22 $ 2.29
======== ========
Diluted $ 2.19 $ 2.27
======== ========
56