Exh. 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 herein. All years have been adjusted to reflect the impact of operating
properties sold during the three months ended March 31, 2005 and the years ended
December 31, 2004, 2003 and 2002 and properties classified as held for sale as
of March 31, 2005 and December 31, 2004, which are reflected in discontinued
operations in the Consolidated Statements of Income.
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)
--------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands, except per share information)
Operating Data:
Revenues from rental property (1) $513,926 $471,049 $424,196 $424,196 $413,436
Interest expense (3) $107,311 $102,492 $ 85,323 $ 87,005 $ 90,903
Depreciation and amortization (3) $101,066 $ 84,132 $ 69,067 $ 66,700 $ 64,522
Gain on sale of development properties $ 16,835 $ 17,495 $ 15,880 $ 13,418 $ -
Gain on sale of operating properties (3) $ - $ 3,177 $ - $ 3,040 $ 3,962
Provision for income taxes $ 8,320 $ 8,514 $ 12,904 $ 19,376 $ -
Income from continuing operations $280,628 $242,356 $241,003 $210,455 $184,604
Income per common share from continuing
operations:
Basic $ 2.41 $ 2.08 $ 2.13 $ 1.96 $ 1.71
Diluted $ 2.37 $ 2.05 $ 2.11 $ 1.87 $ 1.69
Weighted average number of shares of common stock:
Basic 111,430 107,092 104,458 96,317 92,688
Diluted 113,572 108,770 105,461 101,163 93,653
Cash dividends declared per common share $ 2.32 $ 2.19 $ 2.10 $ 1.96 $ 1.81
--------------------------------------------------------------------
December 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Balance Sheet Data:
Real estate, before accumulated depreciation $ 4,092,222 $ 4,174,664 $ 3,398,971 $ 3,201,364 $ 3,114,503
Total assets $ 4,749,597 $ 4,641,092 $ 3,758,350 $ 3,387,342 $ 3,175,294
Total debt $ 2,118,622 $ 2,154,948 $ 1,576,982 $ 1,328,079 $ 1,325,663
Total stockholders' equity $ 2,236,400 $ 2,135,846 $ 1,908,800 $ 1,892,647 $ 1,708,285
Cash flow provided by operations $ 365,176 $ 308,632 $ 278,931 $ 287,444 $ 250,546
Cash flow used for investing activities $ (303,378) $ (642,365) $ (396,655) $ (157,193) $ (191,626)
Cash flow (used for) provided by financing activities $ (71,866) $ 346,059 $ 59,839 $ (55,501) $ (67,899)
(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 three months ended March 31, 2005 and the years ended December
31, 2004, 2003 and 2002 and properties classified as held for sale as of March
31, 2005 and December 31, 2004, which are reflected in discontinued operations
in the Consolidated Statements of Income.
(3) Does not include amounts reflected in discontinued operations.
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. All years have been adjusted to reflect the
impact of operating properties sold during the three months ended March 31, 2005
and the years ended December 31, 2004, 2003 and 2002 and properties classified
as held for sale as of March 31, 2005 and December 31, 2004, which are reflected
in discontinued operations in the Consolidated Statements of Income.
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 4,
2005, the Company's portfolio was comprised of 773 property interests, including
696 operating properties primarily consisting of neighborhood and community
shopping centers, 32 retail store leases, 35 ground-up development projects and
ten undeveloped parcels of land, totaling approximately 113.4 million square
feet of leasable space located in 42 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
45 years. The executive officers are engaged in the day-to-day management and
operation of real estate exclusively with the Company, with nearly all operating
functions, including leasing, asset management, maintenance, construction,
legal, finance and accounting, administered by the Company.
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.
In addition, the Company continues to capitalize on its established expertise in
retail real estate by establishing other ventures in which the Company owns a
smaller equity interest and provides management, leasing and operational support
for those properties. The Company also provides preferred equity capital for
real estate entrepreneurs and provides real estate capital and advisory services
to both healthy and distressed retailers. The Company also makes selective
investments in secondary market opportunities where a security or other
investment is, in management's judgment, priced below the value of the
underlying real estate.
The Company's strategy is to maintain a strong balance sheet while investing
opportunistically and selectively. The Company intends to continue to execute
its plan of delivering solid growth in earnings and dividends. As a result of
the improved 2004 performance, the Board of Directors increased the quarterly
dividend to $0.61 from $0.57, effective for the first quarter of 2005.
7
Critical Accounting Policies
The Consolidated Financial Statements of the Company include the accounts of the
Company, its wholly-owned subsidiaries and all entities in which the Company has
a controlling voting interest or has been determined to be a primary beneficiary
of a variable interest entity in accordance with the provisions and guidance of
Interpretation No. 46 (R), Consolidation of Variable Interest Entities. 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.
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.
Operating expense reimbursements are recognized as earned. 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, real estate taxes and other operating expenses.
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
The Company's investments in real estate properties are stated 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.
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
("SFAS") No. 141, Business Combinations. Based on these estimates, the Company
allocates the purchase price to the applicable assets and liabilities. The
Company utilizes 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.
8
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the assets, as follows:
Buildings 15 to 50 years
Fixtures, building and leasehold improvements Terms of leases or useful
(including certain identified intangible assets) lives, whichever is shorter
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
represents ground-up development inventory of neighborhood and community
shopping center projects which are subsequently sold upon completion. These
assets are carried at cost and no depreciation is recorded. The cost of land and
buildings under development includes specifically identifiable costs. The
capitalized costs include pre-construction costs essential to the development of
the property, development costs, construction costs, interest costs, real estate
taxes, salaries and related costs of personnel directly involved and other costs
incurred during the period of development. The Company ceases cost
capitalization when the property is held available for occupancy upon
substantial completion of tenant improvements, but no later than one year from
the completion of major construction activity. If, in management's opinion, the
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
SFAS 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, trends, and prospects, as well as the effects of demand,
competition and other factors. To the extent impairment has occurred, the
carrying value of the property would be adjusted to an amount to reflect the
estimated fair value of the 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 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 2004 to 2003
Revenues from rental property increased $42.9 million or 9.1% to $513.9 million
for the year ended December 31, 2004, as compared with $471.0 million for the
year ended December 31, 2003. This net increase resulted primarily from the
combined effect of (i) acquisitions during 2004 and 2003 providing incremental
revenues of $40.4 million for the year ended December 31, 2004, and (ii) an
overall increase in shopping center portfolio occupancy to 93.6% at December 31,
2004, as compared to 90.7% at December 31, 2003 and the completion of certain
redevelopment projects and tenant buyouts providing incremental revenues of
approximately $16.6 million for the year ended December 31, 2004, as compared to
the corresponding periods last year, offset by (iii) a decrease in revenues of
approximately $14.1 million for the year ended December 31, 2004, as compared to
the corresponding period last year, resulting from the sale of certain
properties and the transfer of operating properties to various unconsolidated
joint venture entities during 2004 and 2003.
9
Rental property expenses, including depreciation and amortization, increased
approximately $27.1 million or 13.1% to $233.6 million for the year ended
December 31, 2004, as compared with $206.5 million for the preceding year. These
increases are primarily due to operating property acquisitions during 2004 and
2003, which were partially offset by property dispositions and operating
properties transferred to various unconsolidated joint venture entities.
Income from other real estate investments increased $7.3 million to $30.1
million for the year ended December 31, 2004, as compared to $22.8 million for
the preceding year. This increase is primarily due to increased investment in
the Company's Preferred Equity program, which contributed income of $11.4
million during 2004, as compared to $4.6 million in 2003.
Mortgage and other financing income decreased $3.8 million to $15.0 million for
the year ended December 31, 2004, as compared to $18.8 million for the year
ended December 31, 2003. This decrease is primarily due to lower interest and
financing income earned related to certain real estate lending activities during
2004 as compared to the preceding year.
Management and other fee income increased approximately $10.1 million to $25.4
million for the year ended December 31, 2004, as compared to $15.3 million in
the corresponding period in 2003. This increase is primarily due to incremental
fees earned from growth in the co-investment programs and fees earned from
disposition services provided to various retailers.
Other income/(expense), net increased approximately $14.3 million to $10.4
million for the year ended December 31, 2004, as compared to the preceding year.
This increase is primarily due to a prior-year write-down in the carrying value
of the Company's equity investment in Frank's Nursery, Inc., offset by increased
income in 2004 from other equity investments.
Interest expense increased $4.8 million or 4.7% to $107.3 million for the year
ended December 31, 2004, as compared with $102.5 million for the year ended
December 31, 2003. This increase is primarily due to an overall increase in
average borrowings outstanding during the year ended December 31, 2004, as
compared to the preceding year, resulting from the funding of investment
activity during 2004.
General and administrative expenses increased approximately $6.1 million to
$44.5 million for the year ended December 31, 2004, as compared to $38.4 million
in the preceding calendar year. This increase is primarily due to (i) a $0.9
million increase in professional fees, mainly attributable to compliance with
section 404 of the Sarbanes-Oxley Act, (ii) a $1.6 million increase due to the
expensing of the value attributable to stock options granted, (iii) increased
staff levels related to the growth of the Company and (iv) 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.
10
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 2004 that its investment in an operating
property comprised of approximately 0.1 million square feet of GLA, with a net
book value of $3.8 million, might not be fully recoverable. Based upon
management's assessment of current market conditions and lack of demand for the
property, the Company reduced its anticipated holding period of this investment.
As a result of the reduction in the anticipated holding period, together with
reassessment of the potential future operating cash flow for the property and
the effects of current market conditions, the Company determined that its
investment in this asset was not fully recoverable and recorded an adjustment of
property carrying value of approximately $3.0 million in 2004.
Equity in income of real estate joint ventures, net increased $14.1 million to
$56.4 million for the year ended December 31, 2004, as compared with $42.3
million for the preceding year. This increase is primarily attributable to the
equity in income from the increased investment in the RioCan joint venture
investment ("RioCan Venture"), the Kimco Retail Opportunity Portfolio joint
venture investment ("KROP") and the Company's growth of its various other real
estate joint ventures. The Company has made additional capital investments in
these and other joint ventures for the acquisition of additional shopping center
properties throughout 2004 and 2003.
During 2004, the Company (i) disposed of, in separate transactions, 16 operating
properties and one ground lease for an aggregate sales price of approximately
$81.1 million, including the assignment of approximately $8.0 million of
non-recourse mortgage debt encumbering one of the properties; cash proceeds of
approximately $16.9 million from the sale of two of these properties were used
in a 1031 exchange to acquire shopping center properties located in Roanoke, VA
and Tempe, AZ, (ii) transferred 17 operating properties to KROP for an aggregate
price of approximately $197.9 million and (iii) transferred 21 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 $491.2 million. For the year ended December 31, 2004, these
dispositions resulted in gains of approximately $15.8 million and a loss on sale
from three of the properties of approximately $5.1 million. Additionally, during
the three months ended March 31, 2005, the Company (i) disposed of, in separate
transactions, two operating properties for an aggregate sales price of $8.2
million, (ii) transferred two operating properties to KROP, as defined below,
for an aggregate price of approximately $29.1 million, and (iii) transferred
four operating properties to various co-investment ventures in which the Company
has 20% non-controlling interests for an aggregate price of approximately $63.2
million. These transactions resulted in aggregate gains of approximately $4.0
million which were recognized during the three months ended March 31, 2005.
Additionally, during the three months ended March 31, 2005, the Company
reclassified as held-for-sale three shopping center properties comprising
approximately 0.4 million square feet of GLA. The book value of each of these
properties, aggregating approximately $17.1 million, net of accumulated
depreciation of approximately $8.4 million, did not exceed each of their
estimated fair values. As a result, no adjustment of property carrying value has
been recorded. The Company's determination of the fair value for each of these
properties, aggregating approximately $22.1 million, is based upon executed
contracts of sale with third parties less estimated selling costs. The current
and prior comparative years operations of properties classified as held-for-sale
as of March 31, 2005 are included in the caption Income from discontinued
operations on the Company's Consolidated Statements of Income.
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, (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 and (vi)
terminated four leasehold positions in locations where a tenant in bankruptcy
had rejected its lease. These transactions resulted in gains of approximately
$50.8 million.
11
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, Accounting for the Impairment or Disposal of Long-Lived
Assets ("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. This adjustment is included, along with the related property
operations for the current and comparative years, in the caption Income from
discontinued operations in the Company's Consolidated Statements of Income.
For those property dispositions for which SFAS No. 144 is applicable, the
operations and gain or loss on the sale of the property have been included in
the caption Discontinued operations in the Company's Consolidated Statements of
Income.
During 2004, KDI, the Company's wholly-owned development taxable REIT
subsidiary, in separate transactions, sold 28 out-parcels, three completed
phases of projects and five recently completed projects for approximately $169.4
million. These sales provided gains of approximately $12.4 million, net of
income taxes of approximately $4.4 million.
During the year ended December 31, 2003, KDI sold four projects and 26
out-parcels, in separate transactions, for approximately $134.6 million which
resulted in gains of approximately $10.5 million, net of income taxes of $7.0
million.
Income from continuing operations for the year ended December 31, 2004 was
$280.6, compared to $242.4 million for the year ended December 31, 2003. On a
diluted per share basis, income from continuing operations improved $0.32 to
$2.37 for the year ended December 31, 2004, as compared to $2.05 for the
preceding year. This improved performance is primarily attributable to (i) the
incremental operating results from the acquisition of operating properties
during 2004 and 2003, including the Mid-Atlantic Realty Trust transaction (see
Note 3 of the Notes to Consolidated Financial Statements included in this annual
report on Form 10-K), (ii) an increase in equity in income of real estate joint
ventures resulting from additional capital investments in the RioCan Venture,
KROP and other joint venture investments for the acquisition of additional
shopping center properties during 2004 and 2003, (iii) an increase in management
and other fee income related to the growth in the co-investment programs, (iv)
increased income from other real estate investments and (v) significant leasing
within the portfolio, which improved operating profitability.
Net income for the year ended December 31, 2004 was $297.1 million, compared to
$307.9 million for the year ended December 31, 2003. On a diluted per share
basis, net income decreased $0.11 to $2.51 for the year ended December 31, 2004,
as compared to $2.62 for the year ended December 31, 2003. This decrease is
primarily attributable to lower income from discontinued operations of $45.8
million for the year ended December 31, 2004 compared to the preceding year due
to property sales during 2004 and 2003 and gains on early extinguishment of debt
during 2003. In addition, the diluted per share results for the year ended
December 31, 2003 were decreased by a reduction in net income available to
common stockholders 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 3/8% Class C Cumulative Redeemable Preferred Stocks during the
second quarter of 2003.
12
Comparison 2003 to 2002
Revenues from rental property increased $46.9 million or 11.0% to $471.0 million
for the year ended December 31, 2003, as compared with $424.2 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 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 properties and tenant buyouts resulting in a decrease of revenues of
approximately $13.6 million as compared to the preceding year.
Rental property expenses, including depreciation and amortization, increased
$25.0 million or 13.8% to $206.5 million for the year ended December 31, 2003,
as compared to $181.4 million for the preceding year. The rental property
expense components of operating and maintenance and depreciation and
amortization increased approximately $24.0 million or 21.4% 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 (i) increased investment in the Company's preferred equity
program contributing $4.6 million during 2003, as compared to $1.0 million in
2002, (ii) contribution of $12.1 million from the Kimsouth investment resulting
from the disposition of 14 investment properties during 2003, offset by (iii) 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 $17.2 million or 20.2% to $102.5 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.
General and administrative expenses increased approximately $6.9 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.
13
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, might 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 determined that its investment in these assets was not
fully recoverable and 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 years 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.
14
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 of 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 where a tenant in bankruptcy
had rejected its lease. These transactions resulted in gains of approximately
$50.8 million.
For those property dispositions for which SFAS No. 144 is applicable, the
operations and gain or loss on the sale of the property have been included in
the caption Discontinued operations in 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. This adjustment is included, along with the related property operations
for the current and comparative years, in the caption Income from discontinued
operations in the Company's Consolidated Statements of Income.
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
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 in 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 gains of
approximately $10.5 million, net of income taxes of $7.0 million.
15
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 profits of
$9.5 million, net of income taxes of $6.4 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 $0.47 to $2.62 for the year ended December 31, 2003,
as compared to $2.15 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 stockholders 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.
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, 2004, the Company's five largest tenants were The Home Depot, TJX Companies,
Kohl's, Kmart Corporation and Wal-Mart, which represented approximately 3.6%,
3.1%, 2.6%, 2.6% and 1.8% respectively, of the Company's annualized base rental
revenues, including the proportionate share of base rental revenues from
properties in which the Company has less than a 100% economic interest.
Liquidity and Capital Resources
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, 2004, the Company's level of debt to total market capitalization
was 24%. In addition, the Company intends to maintain strong debt service
coverage and fixed charge coverage ratios as part of its commitment to
maintaining its investment-grade debt ratings. The Company may, from time to
time, seek to obtain funds through additional equity offerings, unsecured debt
financings and/or mortgage/construction loan financings and other capital
alternatives in a manner consistent with its intention to operate with a
conservative debt structure.
Since the completion of the Company's IPO in 1991, the Company has utilized the
public debt and equity markets as its principal source of capital for its
expansion needs. Since the IPO, the Company has completed additional offerings
of its public unsecured debt and equity, raising in the aggregate over $3.6
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.
16
The Company has a $500.0 million unsecured revolving credit facility, which is
scheduled to expire in June 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, 2004, there was
$230.0 million outstanding under this credit facility.
During September 2004, the Company entered into a three-year Canadian
denominated ("CAD") $150.0 million unsecured credit facility with a group of
banks. This facility bears interest at the CDOR Rate, as defined, plus 0.50%,
and is scheduled to expire in September 2007. Proceeds from this facility will
be used for general corporate purposes including the funding of Canadian
denominated investments. As of December 31, 2004, there was CAD $62.0 million
(approximately USD $51.7 million) outstanding under this credit facility.
The Company has a MTN program pursuant to which it may, from time to time, offer
for sale its senior unsecured debt for any general corporate purposes, including
(i) funding specific liquidity requirements in its business, including property
acquisitions, development and redevelopment costs and (ii) managing the
Company's debt maturities. As of February 18, 2005, the Company had $300.0
million available for issuance under the MTN program. (See Note 12 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. As of
December 31, 2004, the Company had over 350 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 February 18, 2005, the Company had
$309.7 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 $265.3 million in 2004, compared to $246.3 million in 2003 and
$235.6 million in 2002.
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 2005 will be approximately $60.0 million to $80.0 million. Additionally,
the Company anticipates its capital commitment toward ground-up development
during 2005 will be approximately $160.0 million to $200.0 million. The proceeds
from the sales of development properties and proceeds from construction loans in
2005 should be sufficient to fund the ground-up development capital
requirements.
17
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 facilities,
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 $365.2 million for 2004, $308.6 million for 2003 and $278.9 million for
2002.
Contractual Obligations and Other Commitments
The Company has debt obligations relating to its revolving credit facilities,
MTNs, senior notes, mortgages and construction loans with maturities ranging
from less than one year to 20 years. As of December 31, 2004, the Company's
total debt had a weighted average term to maturity of approximately 4.2 years.
In addition, the Company has non-cancelable operating leases pertaining to its
shopping center portfolio. As of December 31, 2004, 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, 2004 (in millions):
2005 2006 2007 2008 2009 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Long-Term Debt $258.7 $541.9 $295.2 $161.9 $212.8 $648.1 $2,118.6
Operating Leases
Ground Leases $ 10.5 $ 10.3 $ 9.9 $ 9.1 $ 8.6 $124.5 $ 172.9
Retail Store Leases $ 6.9 $ 6.0 $ 4.6 $ 2.9 $ 1.6 $ 1.7 $ 23.7
The Company has $200.3 million of medium term notes, $22.8 million of mortgage
debt and $35.6 million of construction loans maturing in 2005. The Company
anticipates satisfying these maturities with a combination of operating cash
flows, its unsecured revolving credit facilities and new debt issuances.
The Company has issued letters of credit in connection with completion
guarantees for certain construction projects, and guaranty of payment related to
the Company's insurance program. These letters of credit aggregate approximately
$45.9 million.
Additionally, the RioCan Venture, an entity in which the Company holds a 50%
non-controlling interest, has a CAD $7.0 million (approximately USD $5.8
million) letter of credit facility. This facility is jointly guaranteed by
RioCan and the Company and had approximately CAD $4.0 million (approximately USD
$3.3 million) outstanding as of December 31, 2004 relating to various
development projects. In addition to the letter of credit facility, various
additionally Canadian development projects in which the Company holds interests
ranging from 33?% to 50% have letters of credit issued aggregating approximately
CAD $2.2 million (approximately USD $1.8 million).
During 2004, the Company obtained construction financing on 11 ground-up
development projects for an aggregate loan commitment amount of up to $247.8
million. As of December 31, 2004, the Company had 19 construction loans with
total commitments of up to $413.3 million of which $156.6 million had been
funded to the Company. These loans had maturities ranging from 2 to 36 months
and interest rates ranging from 4.17% to 4.92% at December 31, 2004.
18
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, the
Company's 15% non-controlling interest in Price Legacy and varying
non-controlling 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.
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, 2004, KIR had interests in 69 properties comprising 14.4 million
square feet of GLA. As of December 31, 2004, KIR had 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 4.36% to 8.52%. As
of December 31, 2004, the Company's pro-rata share of non-recourse mortgages
relating to the KIR joint venture was approximately $500.0 million. (See Note 7
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, 2004,
the RioCan Venture consisted of 33 shopping center properties and three
development projects with approximately 7.7 million square feet of GLA. As of
December 31, 2004, the RioCan Venture had individual, non-recourse mortgage
loans on 33 of these properties aggregating approximately CAD $683.6 million
(USD $569.8 million). These non-recourse mortgage loans have maturities ranging
from one year to 29 years and rates ranging from 3.91% to 9.05%. As of December
31, 2004 the Company's pro-rata share of non-recourse mortgage loans relating to
the RioCan Venture was approximately CAD $337.8 million (USD $281.6 million).
(See Note 7 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, 2004, KROP consisted of 37
shopping center properties with approximately 5.3 million square feet of GLA. As
of December 31, 2004, KROP had non-recourse mortgage loans totaling $454.5
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, 2004 the weighted
average interest rate for all mortgage debt outstanding was 5.33% per annum. As
of December 31, 2004, the Company's pro-rata share of non-recourse mortgage
loans relating to the KROP joint venture was approximately $90.9 million.
Additionally, the Company and GECRE may provide interim financing. All such
financings bear interest at rates ranging from LIBOR plus 4.0% to LIBOR plus
5.25% and have maturities of less than a year. As of December 31, 2004, KROP had
no outstanding short term interim financing due to the Company or GECRE. (See
Note 7 of the Notes to Consolidated Financial Statements included in this annual
report on Form 10-K.)
19
During December 2004, the Company acquired the Price Legacy Corporation through
a newly formed joint venture, PL Retail LLC ("PL Retail"), in which the Company
has a non-controlling 15% interest. In connection with this transaction, the
joint venture acquired 33 operating properties aggregating approximately 7.6
million square feet of GLA located in ten states. As of December 31, 2004, PL
Retail had approximately $850.6 million outstanding in non-recourse mortgage
debt, of which approximately $513.4 million had fixed rates ranging from 4.66%
to 9.00% and approximately $337.2 had variable rates ranging from 2.54% to
8.00%. The fixed-rate loans have maturities ranging from 4 to 12 years and the
variable-rate loans have maturities ranging from 2 to 4 years. Additionally, the
Company has provided PL Retail approximately $30.6 million of secured mezzanine
financing. This interest only loan bears interest at a fixed rate of 7.5% and
matures in December 2006. The Company also provided PL Retail a secured
short-term promissory note of approximately $8.2 million. This interest only
note bears interest at LIBOR plus 4.5% and matures on June 30, 2005. As of
December 31, 2004, the Company's pro-rata share of non-recourse mortgages
relating to PL Retail was approximately $127.6 million. (See Note 7 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 1% to 50%. As of December 31, 2004, these
unconsolidated joint ventures had individual non-recourse mortgage loans
aggregating approximately $778.0 million. The Company's pro-rata share of these
non-recourse mortgages was approximately $261.1 million. (See Note 7 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 26 properties as of December 31, 2004. As of
December 31, 2004, the Kimsouth portfolio was comprised of 12 properties,
including the remaining office component of an operating property sold in 2004,
totaling 2.1 million square feet of GLA with non-recourse mortgage debt of
approximately $77.5 million encumbering the properties. All mortgages payable
are collateralized by certain properties and are due in monthly installments. As
of December 31, 2004, interest rates ranged from 4.06% to 6.68% and the
weighted-average interest rate for all mortgage debt outstanding was 5.71% per
annum. As of December 31, 2004, the Company's pro-rata share of non-recourse
mortgage loans relating to the Kimsouth portfolio was approximately $34.5
million.
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, 2004, eleven of these properties were sold, whereby the
proceeds from the sales were used to pay down the mortgage debt by approximately
$24.2 million. As of December 31, 2004, the remaining 19 properties were
encumbered by third-party non-recourse debt of approximately $64.9 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.
20
During 2002, the Company established a preferred equity program, which provides
capital to developers and owners of shopping centers. The Company accounts for
its investments in preferred equity investments under the equity method of
accounting. As of December 31, 2004, the Company's invested capital in its
preferred equity investments approximated $157.0 million relating to 62 shopping
centers. As of December 31, 2004, these preferred equity investment properties
had individual non-recourse mortgage loans aggregating approximately $548.3
million. Due to the Company's preferred position in these investments, the
Company's pro-rata share of each investment is subject to fluctuation and is
dependent upon property cash flows. The Company's maximum exposure to losses
associated with its preferred equity investments is limited to its invested
capital.
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 VIEs 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. The adoption of FIN 46 (R) did not have a material impact on the Company's
financial position or results of operations.
21
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 its risk. The Company's exposure to losses associated with its
unconsolidated joint ventures is limited to its carrying value in these
investments. (See Notes 7 and 8 of the Notes to Consolidated Financial
Statements included in this annual report on Form 10-K.)
In December 2004, the FASB issued SFAS No. 123, (revised 2004) Share-Based
Payment ("SFAS No. 123(R)"), which supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123(R) established standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) is
effective for interim periods beginning after June 15, 2005. The impact of
adopting this statement is not expected to have a material adverse impact on the
Company's financial position or results of operations.
In December 2004, the FASB issued Statement No. 153 Exchange of Non-monetary
Assets - an amendment of APB Opinion No. 29 ("SFAS No. 153"). The guidance in
APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the
principle that exchanges of non-monetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion No.
29 to eliminate the exception for non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS No. 153 is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The impact of
adopting this statement is not expected to have a material adverse impact on the
Company's financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is interest rate risk. The following
table presents the Company's aggregate fixed rate and variable rate debt
obligations outstanding as of December 31, 2004, with corresponding
weighted-average interest rates sorted by maturity date (in millions).
2005 2006 2007 2008 2009 2010+ Total Fair Value
---- ---- ---- ---- ---- ----- ----- ----------
Secured Debt
Fixed Rate $ 1.2 $ 29.1 $ - $ 61.9 $ 32.8 $181.1 $ 306.1 $ 328.6
Average
Interest Rate 8.28% 8.27% - 7.15% 7.75% 7.35% 7.44%
Variable Rate $ 57.3 $ 97.8 $ 48.5 - - - $ 203.6 $ 203.6
Average
Interest Rate 4.42% 4.60% 4.35% - - - 4.49%
Unsecured Debt
Fixed Rate $ 200.2 $ 85.0 $195.0 $100.0 $180.0 $467.0 $1,227.2 $1,282.8
Average
Interest Rate 7.12% 7.30% 7.14% 3.95% 6.98% 5.43% 6.21%
Variable Rate - $ 330.0 $ 51.7 - - - $ 381.7 $ 381.7
Average
Interest Rate - 2.59% 3.08% - - - 2.66%
22
As of December 31, 2004, the Company has Canadian investments totaling CAD
$277.6 million (approximately USD $231.4 million) comprised of a real estate
joint venture investments and marketable securities. In addition, the Company
has Mexican real estate investments of MXN 691.8 million (approximately USD
$61.7 million). The foreign currency exchange risk has been mitigated through
the use of local currency denominated debt, 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 entered, and does not plan to enter, into any derivative
financial instruments for trading or speculative purposes. As of December 31,
2004, the Company had no other material exposure to market risk.
Item 8. Financial Statements and Supplementary Data
The response to this Item 8 is included as a separate section herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's chief executive officer and
chief financial officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fourth fiscal quarter to which this report relates that
have materially affected, or are reasonable likely to materially affect, the
Company's internal control over financial reporting.
23
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on our evaluation under the framework in Internal Control-Integrated Framework,
our management concluded that our internal control over financial reporting was
effective as of December 31, 2004.
Our management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
Item 15. Exhibits, Financial Statements and Schedules
(a) 1. Financial Statements Form 10-K
The following consolidated financial information Report
is included as a separate section here Page
------
Report of Independent Registered Public Accounting Firm 25
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2004
and 2003 27
Consolidated Statements of Income for the years
ended December 31, 2004, 2003 and 2002 28
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2004, 2003 and 2002 29
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2004, 2003 and 2002 30
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 31
Notes to Consolidated Financial Statements 32
2. Financial Statement Schedules (1)
Schedule II - Valuation and Qualifying Accounts (1)
Schedule III - Real Estate and Accumulated Depreciation (1)
All other schedules are omitted since the required
information is not present or is not present in amounts
sufficient to require submission of the schedule.
3. Exhibits
The exhibits listed on the accompanying Index to
Exhibits are filed as part of this report. (1)
(1) See 2004 Annual Report on Form 10-K, incorporated by reference in this
form 8K
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Kimco Realty Corporation:
We have completed an integrated audit of Kimco Realty Corporation's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedules
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Kimco
Realty Corporation and Subsidiaries (collectively, the "Company") at December
31, 2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules 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 of financial statements 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.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting 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 effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
25
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
New York, New York
March 3, 2005, except as to Note 6,
which is dated as of July 15, 2005
26
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
December 31, December 31,
2004 2003
------------ -------------
Assets:
Real Estate
Rental property
Land $ 651,281 $ 664,069
Building and improvements 3,077,409 3,204,997
----------- -----------
3,728,690 3,869,066
Less, accumulated depreciation and amortization 634,642 568,988
----------- -----------
3,094,048 3,300,078
Real estate under development 362,220 304,286
Undeveloped land parcels 1,312 1,312
----------- -----------
Real estate, net 3,457,580 3,605,676
Investment and advances in real estate joint ventures 595,175 487,394
Other real estate investments 188,536 113,085
Mortgages and other financing receivables 140,717 95,019
Cash and cash equivalents 38,220 48,288
Marketable securities 123,771 45,677
Accounts and notes receivable 52,182 57,080
Deferred charges and prepaid expenses 72,653 66,095
Other assets 80,763 122,778
----------- -----------
$ 4,749,597 $ 4,641,092
=========== ===========
Liabilities & Stockholders' Equity:
Notes payable $ 1,608,925 $ 1,686,250
Mortgages payable 353,071 375,914
Construction loans payable 156,626 92,784
Accounts payable and accrued expenses 97,952 92,239
Dividends payable 71,489 65,969
Other liabilities 118,243 92,173
----------- -----------
2,406,306 2,405,329
----------- -----------
Minority interests in partnerships 106,891 99,917
----------- -----------
Commitments and contingencies
Stockholders' Equity
Preferred stock, $1.00 par value, authorized 3,600,000 shares
Class F Preferred Stock, $1.00 par value, authorized 700,000 shares
Issued and outstanding 700,000 shares 700 700
Aggregate liquidation preference $175,000
Common stock, $.01 par value, authorized 200,000,000 shares
Issued and outstanding 112,426,406 and 110,623,967 shares, respectively 1,124 1,106
Paid-in capital 2,200,544 2,147,286
Cumulative distributions in excess of net income (3,749) (30,112)
----------- -----------
2,198,619 2,118,980
Accumulated other comprehensive income 37,781 16,866
----------- -----------
2,236,400 2,135,846
----------- -----------
$ 4,749,597 $ 4,641,092
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
27
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share information)
Year Ended December 31,
-----------------------------------------
2004 2003 2002
---- ---- ----
Revenues from rental properties $ 513,926 $ 471,049 $ 424,196
--------- --------- ---------
Rental property expenses:
Rent 11,044 10,843 10,902
Real estate taxes 66,432 59,326 58,238
Operating and maintenance 55,017 52,183 43,229
--------- --------- ---------
132,493 122,352 112,369
--------- --------- ---------
381,433 348,697 311,827
Income from other real estate investments 30,127 22,829 16,038
Mortgage financing income 15,032 18,869 19,413
Management and other fee income 25,445 15,315 12,068
Depreciation and amortization (101,066) (84,132) (69,067)
--------- --------- ---------
350,971 321,578 290,279
--------- --------- ---------
Interest, dividends and other investment income 18,756 19,182 18,565
Other income/(expense), net 10,414 (3,886) 2,564
Interest expense (107,311) (102,492) (85,323)
General and administrative expenses (44,477) (38,423) (31,474)
Gain on early extinguishment of debt -- 2,921 19,033
Adjustment of property carrying values (2,965) -- (11,000)
--------- --------- ---------
225,388 198,880 202,644
Provision for income taxes (3,919) (1,516) (6,552)
Equity in income of real estate joint ventures, net 56,385 42,276 37,693
Minority interests in income of partnerships, net (9,660) (7,781) (2,310)
Gain on sale of development properties
net of tax of $4,401, $6,998 and $6,352, respectively 12,434 10,497 9,528
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 280,628 242,356 241,003
--------- --------- ---------
DISCONTINUED OPERATIONS:
Income from discontinued operating properties 5,750 11,945 10,695
Gain on early extinguishment of debt -- 6,760 3,222
Loss on operating properties held for sale/sold (5,064) (4,016) (22,030)
Gain on disposition of operating properties 15,823 47,657 12,778
--------- --------- ---------
INCOME FROM DISCONTINUED OPERATIONS 16,509 62,346 4,665
--------- --------- ---------
Gain on sale of operating properties -- 3,177 --
--------- --------- ---------
NET INCOME 297,137 307,879 245,668
Original issuance costs associated with the redemption
of preferred stock -- (7,788) --
Preferred stock dividends (11,638) (14,669) (18,437)
--------- --------- ---------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 285,499 $ 285,422 $ 227,231
--------- --------- ---------
Per common share:
Income from continuing operations:
-Basic
-Diluted $ 2.41 $ 2.08 $ 2.13
========= ========= =========
Net income : $ 2.37 $ 2.05 $ 2.11
========= ========= =========
-Basic
-Diluted $ 2.56 $ 2.67 $ 2.18
========= ========= =========
$ 2.51 $ 2.62 $ 2.16
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
28
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)
YEAR ENDED DECEMBER 31,
2004 2003 2002
--------- --------- ---------
Net income $ 297,137 $ 307,879 $ 245,668
--------- --------- ---------
Other comprehensive income:
Change in unrealized gain on marketable securities 28,594 3,798 (4,456)
Change in unrealized gain on interest rate swaps -- 620 3,264
Change in unrealized gain/(loss) on warrants (8,252) 4,319 1,524
Change in unrealized gain/(loss) on foreign currency hedge agreements (15,102) (15,465) 195
Change in foreign currency translation adjustment 15,675 16,193 (436)
--------- --------- ---------
Other comprehensive income 20,915 9,465 91
--------- --------- ---------
Comprehensive income $ 318,052 $ 317,344 $ 245,759
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
29
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Preferred Stock Common Stock
------------------ ----------------- Paid-in
Issued Amount Issued Amount Capital
------------------ -------------------------------------
Balance, January 1, 2002 992 $ 992 103,353 $ 1,034 $ 1,976,442
Net income
Dividends ($2.10 per common share; $1.9375, $2.125 and
$2.0938 per Class A, Class B and Class C Depositary
Share, respectively)
Issuance of common stock 80 1 2,523
Exercise of common stock options 308 3 5,771
Conversion of Class D Preferred Stock to common stock (92) (92) 861 8 84
Other comprehensive income
---- ----- --------- -------- -----------
Balance, December 31, 2002 900 900 104,602 1,046 1,984,820
Net income
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)
Issuance of common stock 4,944 49 192,703
Exercise of common stock options 1,078 11 25,777
Redemption of Class A, B and C Preferred Stock (900) (900) (224,100)
Issuance of Class F Preferred Stock 700 700 168,086
Other comprehensive income
---- ----- --------- -------- -----------
Balance, December 31, 2003 700 700 110,624 1,106 2,147,286
Net income
Dividends ($2.32 per common share and $1.6625 per Class F
Depositary Share, respectively)
Issuance of common stock 113 1 5,420
Exercise of common stock options 1,690 17 46,040
Amortization of stock option awards 1,798
Other comprehensive income
---- ----- --------- -------- -----------
Balance, December 31, 2004 700 $ 700 112,427 $ 1,124 $ 2,200,544
==== ===== ========= ======== ===========
Cumulative
Distributions Accumulated Total
in Excess Other Comprehensive Stockholders'
of Net Income Income Equity
----------------------------------------------------------------
Balance, January 1, 2002 $ (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 2,524
Exercise of common stock options 5,774
Conversion of Class D Preferred Stock to common stock -
Other comprehensive income 91 91
--------- -------- -----------
Balance, December 31, 2002 (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 192,752
Exercise of common stock options 25,788
Redemption of Class A, B and C Preferred Stock (225,000)
Issuance of Class F Preferred Stock 168,786
Other comprehensive income 9,465 9,465
--------- -------- -----------
Balance, December 31, 2003 (30,112) 16,866 2,135,846
Net income 297,137 297,137
Dividends ($2.32 per common share and $1.6625 per Class F
Depositary Share, respectively) (270,774) (270,774)
Issuance of common stock 5,421
Exercise of common stock options 46,057
Amortization of stock option awards 1,798
Other comprehensive income 20,915 20,915
--------- -------- -----------
Balance, December 31, 2004 $ (3,749) $ 37,781 $ 2,236,400
========= ======== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
30
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
---------------------------------------------
2004 2003 2002
--------- --------- ---------
Cash flow from operating activities:
Net income $ 297,137 $ 307,879 $ 245,668
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 102,872 89,068 76,674
Adjustment of property carrying values 2,965 - 33,031
Loss on operating properties held for sale/sold 5,064 4,016 -
Gain on sale of development properties (16,835) (17,495) (15,879)
Gain on sale of operating properties (15,823) (50,834) (12,778)
Gain on early extinguishment of debt - (9,681) (22,255)
Minority interests in income of partnerships, net 9,660 7,781 2,430
Equity in income of real estate joint ventures, net (56,385) (42,276) (37,693)
Income from other real estate investments (23,571) (19,976) (13,222)
Distributions of unconsolidated investments 94,994 67,712 40,275
Change in accounts and notes receivable (1,742) (596) (6,938)
Change in accounts payable and accrued expenses 2,850 (2,545) 12,612
Change in other operating assets and liabilities (36,010) (24,421) (22,994)
--------- --------- ---------
Net cash flow provided by operating activities 365,176 308,632 278,931
--------- --------- ---------
Cash flow from investing activities:
Acquisition of and improvements to operating real estate (351,369) (917,403) (244,750)
Acquisition of and improvements to real estate under development (204,631) (187,877) (113,450)
Investment in marketable securities (70,864) (23,680) (39,183)
Proceeds from sale of marketable securities 22,278 62,744 49,396
Proceeds from transferred operating properties 342,496 - -
Investments and advances to real estate joint ventures (203,569) (152,997) (157,427)
Reimbursements of advances to real estate joint ventures 80,689 93,729 16,665
Other real estate investments (113,663) (52,818) (69,288)
Reimbursements of advances to other real estate investments 34,045 13,264 1,179
Redemption of minority interests in real estate partnerships (3,781) (4,729) -
Investment in mortgage loans receivable (136,637) (64,652) (123,242)
Collection of mortgage loans receivable 103,819 41,529 89,053
Investment in unsecured claims (1,551) - -
Proceeds from sale of mortgage loan receivable - 36,723 -
Proceeds from sale of operating properties 43,077 423,237 84,139
Proceeds from sale of development properties 156,283 90,565 108,209
Other real estate investments - - 2,044
--------- --------- ---------
Net cash flow used for investing activities (303,378) (642,365) (396,655)
--------- --------- ---------
Cash flow from financing activities:
Principal payments on debt, excluding
normal amortization of rental property debt (54,322) (18,326) (30,689)
Principal payments on rental property debt (7,848) (5,813) (5,931)
Principal payments on construction loan financings (66,950) (40,644) (801)
Proceeds from mortgage/construction loan financings 348,386 110,816 67,773
Borrowings under revolving credit facilities 336,675 195,000 269,000
Repayment of borrowings under revolving credit facilities (100,000) (190,000) (229,000)
Proceeds from senior term loan - 400,000 -
Proceeds from issuance of unsecured senior notes 200,000 250,000 337,000
Repayment of unsecured senior notes/term loan (514,000) (271,000) (110,000)
Payment of unsecured obligation - - (11,300)
Dividends paid (265,254) (246,301) (235,602)
Proceeds from issuance of stock 51,447 387,327 9,389
Redemption of preferred stock - (225,000) -
--------- --------- ---------
Net cash flow (used for) provided by financing activities (71,866) 346,059 59,839
--------- --------- ---------
Change in cash and cash equivalents (10,068) 12,326 (57,885)
Cash and cash equivalents, beginning of year 48,288 35,962 93,847
--------- --------- ---------
Cash and cash equivalents, end of year $ 38,220 $ 48,288 $ 35,962
========= ========= =========
Interest paid during the year (net of capitalized interest
of $8,732, $8,887 and $9,089, respectively) $ 108,117 $ 97,215 $ 83,977
========= ========= =========
Income taxes paid during the period $ 10,694 $ 15,901 $ 12,035
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
31
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLDIATED 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, as amended (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 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, 2004, the Company's single largest
neighborhood and community shopping center accounted for only 1.2%
of the Company's annualized base rental revenues and only 0.9% of
the Company's total shopping center gross leasable area ("GLA"). At
December 31, 2004, the Company's five largest tenants were The Home
Depot, TJX Companies, Kohl's, Kmart Corporation, and Wal-Mart,
which represented approximately 3.6%, 3.1%, 2.6%, 2.6% and 1.8%,
respectively, of the Company's annualized base rental revenues,
including the proportionate share of base rental revenues from
properties in which the Company has less than a 100% economic
interest.
The principal business of the Company and its consolidated subsidiaries
is the ownership, development, management and operation of retail
shopping centers, including complementary services that capitalize
on the Company's established retail real estate expertise. The
Company does not distinguish its principal business or group its
operations on a geographical basis for purposes of measuring
performance. Accordingly, the Company believes it has a single
reportable segment for disclosure purposes in accordance with
accounting principles generally accepted in the United States of
America.
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 entities in which the Company has a controlling interest or
has been determined to be a primary beneficiary of a variable
interest entity in accordance with the provisions and guidance of
Interpretation No. 46(R), Consolidation of Variable Interest
Entities. 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.
32
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. Based on these estimates,
the Company allocates the purchase price to the applicable assets
and liabilities.
The Company utilizes 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 is estimated based on the present value of the
difference between the contractual amounts to be paid pursuant to
the leases and management's estimate of the market lease rates and
other lease provisions (i.e., expense recapture, base rental
changes, etc.) measured over a period equal to the estimated
remaining term of the lease. The capitalized above-market or
below-market intangible is amortized to rental income over the
estimated remaining term of the respective leases.
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 is
amortized over the estimated remaining term of the leases. If a
lease were to be terminated prior to its scheduled expiration, all
unamortized costs relating to that lease would be written off.
Depreciation and amortization are provided on the straight-line method
over the estimated useful lives of the assets, as follows:
Buildings 15 to 50 years
Fixtures, building and leasehold improvements Terms of leases or useful
(including certain identified intangible assets) lives, whichever is shorter
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations and replacements, which improve
and extend the life of the asset, are capitalized. The useful lives
of amortizable intangible assets are evaluated each reporting
period with any changes in estimated useful lives being accounted
for over the revised remaining useful life.
33
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Real Estate Under Development
Real estate under development represents the ground-up development
inventory of neighborhood and community shopping center projects
which are subsequently sold upon completion. These properties are
carried at cost and no depreciation is recorded on these assets.
The cost of land and buildings under development includes
specifically identifiable costs. The capitalized costs include
pre-construction costs essential to the development of the
property, development costs, construction costs, interest costs,
real estate taxes, salaries and related costs of personnel directly
involved and other costs incurred during the period of development.
The Company ceases cost capitalization when the property is held
available for occupancy upon substantial completion of tenant
improvements, but no later than one year from the completion of
major construction activity. If, in management's opinion, the net
sales price of these assets is less than the net carrying value,
the carrying value would be adjusted to an amount to reflect the
estimated fair value of the property.
Investments in Unconsolidated Joint Ventures
The Company accounts for its investments in unconsolidated joint
ventures under the equity method of accounting as the Company
exercises significant influence, but does not control, these
entities. These investments are recorded initially at cost and
subsequently adjusted for equity in earnings and cash contributions
and distributions.
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 its risk. The
Company's exposure to losses associated with its unconsolidated
joint ventures is limited to its carrying value in these
investments.
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 of
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.
34
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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.
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 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 the Company's 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 SFAS 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, Foreign Currency Translation, 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.
35
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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 entered, 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 16).
Earnings Per Share
The following table sets forth the reconciliation of earnings and the
weighted average number of shares used in the calculation of basic
and diluted earnings per share (amounts presented in thousands,
except per share data):
2004 2003 2002
--------- --------- ---------
Computation of Basic Earnings Per Share:
Income from continuing operations $ 280,628 $ 242,356 $ 241,003
Gain on sale of operating properties - 3,177 -
Original issuance costs associated with the redemption of
preferred stock - (7,788) -
Preferred stock dividends (11,638) (14,669) (18,437)
--------- --------- ---------
Income from continuing operations
applicable to common shares 268,990 223,076 222,566
Income from discontinued operations 16,509 62,346 4,665
--------- --------- ---------
Net income applicable to common shares $ 285,499 $ 285,422 $ 227,231
========= ========= =========
Weighted average common shares outstanding 111,430 107,092 104,458
========= ========= =========
Basic Earnings Per Share:
Income from continuing operations $ 2.41 $ 2.08 $ 2.13
Income from discontinued operations 0.15 0.59 0.05
--------- --------- ---------
Net income $ 2.56 $ 2.67 $ 2.18
========= ========= =========
Computation of Diluted Earnings Per Share:
Income from continuing operations applicable to common
shares (a) $ 268,990 $ 223,076 $ 222,556
Income from discontinued operations 16,509 62,346 4,665
--------- --------- ---------
Net income for diluted earnings per share $ 285,499 $ 285,422 $ 227,231
========= ========= =========
Weighted average common shares outstanding - Basic 111,430 107,092 104,458
Effect of dilutive securities (a):
Stock options/deferred stock awards 2,142 1,678 1,003
--------- --------- ---------
Shares for diluted earnings per share 113,572 108,770 105,461
========= ========= =========
Diluted Earnings Per Share:
Income from continuing operations $ 2.37 $ 2.05 $ 2.11
Income from discontinued operations 0.14 0.57 0.04
--------- --------- ---------
Net income $ 2.51 $ 2.62 $ 2.15
========= ========= =========
36
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(a) 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,
-------------------------------------------------------
2004 2003 2002
--------- --------- ---------
Net income, as reported $ 297,137 $ 307,879 $ 245,668
Add: Stock based employee compensation
expense included in reported net
income 1,650 148 -
Deduct: Total stock based employee
compensation expense determined
under fair value based method
for all awards (3,316) (3,095) (3,153)
--------- --------- ---------
Pro Forma Net Income - Basic $ 295,471 $ 304,932 $ 242,515
========= ========= =========
Earnings Per Share
Basic - as reported $ 2.56 $ 2.67 $ 2.18
========= ========= =========
Basic - pro forma $ 2.55 $ 2.64 $ 2.15
========= ========= =========
Net income for diluted earnings per share $ 285,499 $ 285,422 $ 227,231
Add: Stock based employee compensation
expense included in reported net
income 1,650 148 -
Deduct: Total stock based employee
compensation expense determined
under fair value based method
for all awards (3,316) (3,095) (3,153)
--------- --------- ---------
Pro Forma Net Income - Diluted $ 283,833 $ 282,475 $ 224,078
========= ========= =========
Earnings Per Share
Diluted - as reported $ 2.51 $ 2.62 $ 2.15
========= ========= =========
Diluted - pro forma $ 2.50 $ 2.60 $ 2.12
========= ========= =========
37
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 2004, 2003 and 2002 include: (i)
weighted average risk-free interest rates of 3.30%, 2.84% and
3.06%, respectively; (ii) weighted average expected option lives of
3.72 years, 3.8 years and 4.1 years, respectively; (iii) weighted
average expected volatility of 16.69%, 15.26% and 16.12%,
respectively, and (iv) weighted average expected dividend yield of
5.59%, 6.25% and 6.87%, respectively. The per share weighted
average fair value at the dates of grant for options awarded during
2004, 2003 and 2002 was $4.27, $2.35 and $1.50, 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 VIEs 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. The adoption
of FIN 46(R) did not have a material impact on the Company's
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123, (revised 2004)
Share-Based Payment ("SFAS No. 123(R)"), which supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123(R) established
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of
the entity's equity instruments or that may be settled by the
issuance of those equity instruments. This Statement focuses
primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No.
123(R) is effective for interim periods beginning after June 15,
2005. The impact of adopting this statement is not expected to have
a material adverse impact on the Company's financial position or
results of operations.
In December 2004, the FASB issued Statement No. 153, Exchange of
Non-monetary Assets - an amendment of APB Opinion No. 29 ("SFAS No.
153"). The guidance in APB Opinion No. 29, Accounting for
Non-monetary Transactions, is based on the principle that exchanges
of non-monetary assets should be measured based on the fair value
of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement
amends Opinion No. 29 to eliminate the exception for non-monetary
assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15,
2005. The impact of adopting this statement is not expected to have
a material adverse impact on the Company's financial position or
results of operations.
Reclassifications
Certain reclassifications of prior years' amounts have been made to
conform with the current year presentation.
38
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
2. Real Estate:
The Company's components of Rental property consist of the following
(in thousands):
December 31,
-----------------------------
2004 2003
----------- -----------
Land $ 651,281 $ 664,069
Buildings and improvements
Buildings 2,660,262 2,743,111
Building improvements 106,061 51,042
Tenant improvements 263,322 338,205
Fixtures & leasehold improvements 15,697 14,627
Other rental property, net (1) 32,067 58,012
----------- -----------
3,728,690 3,869,066
Accumulated depreciation and amortization (634,642) (568,988)
------------ ------------
Total $ 3,094,048 $ 3,300,078
=========== ===========
(1) At December 31, 2004 and 2003, Other rental property, net
consisted of intangible assets including $14,232 and $32,207,
respectively, of in-place leases, $10,188 and $12,913,
respectively, of tenant relationships and $7,647 and $12,892,
respectively, of above-market leases. In addition, at December
31, 2004 and 2003, the Company had intangible liabilities
relating to below-market leases from property acquisitions of
approximately $50.0 million and $38.1 million, respectively.
These amounts are included in the caption Other liabilities in
the Company's Consolidated Balance Sheets.
3. Property Acquisitions, Developments and Other Investments:
Operating Properties
Acquisition of Existing Shopping Centers -
During the years 2004, 2003 and 2002, the Company acquired operating
properties, in separate transactions, at aggregate costs of
approximately $440.5 million, $293.9 million and $258.7 million,
respectively.
Ground-Up Development -
During July 2004, the Company acquired land in Huehuetoca, Mexico,
through a joint venture in which the Company has a 95% controlling
interest, for a purchase price of approximately $6.9 million. The
property will be developed as a grocery-anchored retail center with
a projected total cost of approximately $15.3 million.
During August 2004, the Company acquired land located in San Luis
Potosi, Mexico, through a joint venture in which the Company
currently has a 64.4% controlling interest for a purchase price of
approximately $5.8 million. The property was developed into a
retail center by the grocery tenant anchoring the project. During
December 2004, the Company acquired the completed building
improvements from the tenant for a purchase price of approximately
77.2 million pesos ("MXN") (approximately USD $6.9 million).
During December 2004, the Company acquired land located in Reynosa,
Mexico for a purchase price of approximately $13.8 million. The
property will be developed as a grocery anchored retail center with
a projected total cost of approximately $22.0 million.
Other -
During June 2004, the Company acquired an operating property through
the acquisition of a 50% partnership interest in a joint venture in
which the Company held a 50% interest. The property, acquired for
approximately $12.5 million, is located in Tempe, AZ and is
comprised of 0.2 million square feet of GLA.
During December 2004, the Company acquired a shopping center property
through the acquisition of a 50% partnership interest in a joint
venture in which the Company held a 50% interest. The property,
acquired for approximately $4.5 million, is located in Tampa, FL
and is comprised of 0.1 million square feet of GLA.
Additionally during December 2004, the Company acquired interests in
two parking facilities and a medical office building located in
Allegheny, PA that are subject to a ground lease, for a purchase
price of approximately $29.8 million.
39
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Additionally during 2004, the Company acquired seven self-storage
facilities located in various states through a joint venture in
which the Company currently holds a 100% economic interest, for an
aggregate purchase price of approximately $28.5 million. The
Company has cross-collateralized these properties with
approximately $20.9 million of non-recourse floating rate mortgage
debt which matures in April 2006 and has an interest rate of LIBOR
plus 2.75% (5.17% at December 31, 2004). Based upon the provisions
of FIN 46(R), the Company has determined that this entity is a VIE.
The Company has further determined that the Company is the primary
beneficiary of this VIE and has therefore consolidated this entity
for financial reporting purposes. The Company's exposure to losses
associated with this entity is limited to the Company's capital
investment, which was approximately $7.5 million at December 31,
2004.
These operating property acquisitions, development costs and other
investments have been funded principally through the application of
proceeds from the Company's public unsecured debt issuances, equity
issuances and proceeds from mortgage financings.
Merchant Building Inventory -
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 2004, 2003 and 2002, KDI expended approximately $205.2
million, $208.9 million and $148.6 million, respectively, in
connection with the purchase of land and construction costs related
to its ground-up development projects.
These merchant building acquisition and development costs have been
funded principally through proceeds from sales of completed
projects and construction financings.
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?% 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.
The shareholders of Mid-Atlantic approved the Merger on September 30,
2003, and the closing occurred on 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
had a GLA 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 transferred many of the properties 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.
40
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
4. Dispositions of Real Estate:
Operating Real Estate -
During 2004, the Company (i) disposed of, in separate transactions, 16
operating properties and one ground lease for an aggregate sales
price of approximately $81.1 million, including the assignment of
approximately $8.0 million of non-recourse mortgage debt
encumbering one of the properties; cash proceeds of approximately
$16.9 million from the sale of two of these properties were used in
a 1031 exchange to acquire shopping center properties located in
Roanoke, VA, and Tempe, AZ, (ii) transferred 17 operating
properties to KROP, as defined below, for an aggregate price of
approximately $197.9 million and (iii) transferred 21 operating
properties, comprising approximately 3.2 million square feet of
GLA, to various co-investment ventures in which the Company has
non-controlling interests ranging from 10% to 30% for an aggregate
price of approximately $491.2 million. A significant portion of the
properties transferred were acquired in the Mid-Atlantic Merger.
(See Note 6.)
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, (v)
transferred an operating property to a newly formed joint venture
in which the Company holds a 10% non-controlling interest for a
price of approximately $21.9 million and (vi) terminated four
leasehold positions in locations where a tenant in bankruptcy had
rejected its lease. (See Note 6.)
Merchant Building Inventory -
During 2004, KDI sold, in separate transactions, five of its recently
completed projects, three completed phases of projects and 29
out-parcels for approximately $170.2 million. These sales resulted
in pre-tax gains of approximately $16.8 million.
During 2003, KDI sold four of its recently completed project and 26
out-parcels, in separate transactions, for approximately $134.6
million, which resulted in 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. These sales resulted in pre-tax
gains of approximately $15.9 million.
5. Adjustment of Property Carry 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 December 2004 that its investment in an
operating property comprised of approximately 0.1 million square
feet of GLA, with a book value of approximately $3.8 million, net
of accumulated depreciation of approximately $2.6 million, may not
be fully recoverable. Based upon management's assessment of current
market conditions and lack of demand for the property, the Company
reduced its anticipated holding period of this investment. As a
result, the Company determined that its investment in this asset
was not fully recoverable and recorded an adjustment of property
carrying value of approximately $3.0 million to reflect the
property's estimated fair value. The Company's determination of
estimated fair value is based upon third-party purchase offers less
estimated closing costs.
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.
41
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
6. Discontinued Operations and Assets Held for Sale:
In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144") the Company reports
as discontinued operations assets held-for-sale (as defined by SFAS
No. 144) as of the end of the current period and assets sold
subsequent to the adoption of SFAS No. 144. 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 2004, 2003 and 2002 financial statement
amounts.
The components of Income from discontinued operations for each of the
three years in the period ended December 31, 2004 are shown below.
These include the results of operations for properties sold during
the three months ended March 31, 2005, through the date of each
respective sale for properties sold during 2004, 2003 and 2002 and
a full year of operations for those assets classified as held for
sale as of March 31, 2005 and December 31, 2004 (in thousands):
2004 2003 2002
-------- -------- --------
Discontinued Operations:
Revenues from rental property $10,645 $ 25,560 $ 35,908
Rental property expenses (3,082) (8,425) (14,683)
-------- -------- --------
Income from property operations 7,563 17,135 21,225
Depreciation of rental property (1,805) (4,935) (7,607)
Interest expense (707) (6) (2,360)
Other income/(expense) 699 (249) (563)
-------- -------- --------
Income from discontinued operating properties 5,750 11,945 10,695
Gain on early extinguishment of debt - 6,760 3,222
Loss on operating properties held for sale/sold (5,064) (4,016) (22,030)
Gain on disposition of operating properties 15,823 47,657 12,778
-------- -------- --------
Income from discontinued operations $16,509 $ 62,346 $ 4,665
======== ======== ========
During December 2004, the Company reclassified as held-for-sale a
shopping center property located in Melbourne, FL, comprising
approximately 0.1 million square feet of GLA. The operations
associated with this property for the current and comparative
years, have been included in the caption Income from discontinued
operations on the Company's Consolidated Statements of Income.
During March 2004, the Company reclassified as held-for-sale two
shopping center properties comprising approximately 0.3 million
square feet of GLA. 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, is based upon contracts of
sale with third parties less estimated selling costs. As a result,
the Company has recorded a loss resulting from an adjustment of
property carrying values of $4.2 million. During March 2004, the
Company completed the sale of one of these properties, comprising
approximately 0.1 million square feet of GLA, for a sales price of
approximately $1.1 million. During June 2004, the Company completed
the sale of the other property, comprising approximately 0.2
million square feet of GLA, for a sales price of approximately $3.9
million. Additionally, during the three months ended March 31,
2005, the Company reclassified as held-for-sale three shopping
center properties comprising approximately 0.4 million square feet
of GLA. The book value of each of these properties, aggregating
approximately $17.1 million, net of accumulated depreciation of
approximately $8.4 million, did not exceed each of their estimated
fair values. As a result, no adjustment of property carrying value
has been recorded. The Company's determination of the fair value
for each of these properties, aggregating approximately $22.1
million, is based upon executed contracts of sale with third
parties less estimated selling costs. The current and prior years
comparative operations of properties classified as held-for-sale as
of March 31, 2005 and December 31, 2004, along with the adjustment
of property carrying values during 2004, is included in the caption
Income from discontinued operations on the Company's Consolidated
Statement of Income.
42
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During December 2003, the Company identified two operating properties,
comprised of approximately 0.2 million square feet of GLA, as
held-for-sale. 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 a loss resulting from an adjustment of
property carrying values of approximately $4.0 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 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, exceeding
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.
7. 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. KIR had 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. During
2004, the KIR partners elected to cancel the remaining unfunded
capital commitments of $99.0 million, including $42.9 million from
the Company. As of December 31, 2004, the Company had a 43.3%
non-controlling limited partnership interest in KIR.
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,
2004, 2003 and 2002, the Company (i) earned management fees of
approximately $2.9 million, $2.9 million and $2.5 million,
respectively, (ii) received reimbursement of administrative fees of
approximately $0.4 million, $0.4 million and $1.0 million,
respectively, and (iii) earned leasing commissions of approximately
$0.3 million, $0.5 million and $0.8 million, respectively.
43
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During April 2004, KIR disposed of an operating property located in Las
Vegas, NV, for a sales price of approximately $21.5 million, which
approximated its net book value.
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.
As of December 31, 2004, the KIR portfolio was comprised of 69
shopping center properties aggregating approximately 14.4 million
square feet of GLA located in 20 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 April 2004, the RioCan Venture acquired an operating property
located in Mississauga, Ontario, comprising approximately 0.2
million square feet of GLA, for a purchase price of approximately
CAD $44.2 million (approximately USD $32.3 million). During August
2004, the RioCan Venture obtained approximately CAD $28.7 million
(approximately USD $21.6 million) of mortgage debt on this
property. The loan bears interest at a fixed rate of 6.37% with
payments of principal and interest due monthly. The loan is
scheduled to mature in August of 2014.
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 million (approximately USD $29.0
million) including the assumption of approximately CAD $28.7
million (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, 2004, the RioCan Venture was comprised of 33
operating properties and three development properties consisting of
approximately 7.7 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.
44
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2004, GECRE and the Company contributed approximately $71.4
million and $17.9 million, respectively, toward their capital
commitments. As of December 31, 2004, KROP had unfunded capital
commitments of $55.0 million, including $11.0 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. As of December 31,
2004, there was no outstanding short-term interim financing due to
GECRE or the Company. KROP had outstanding short-term interim
financing due to GECRE and the Company totaling $16.8 million each
as of December 31, 2003.
During 2004, KROP acquired 19 operating properties for an aggregate
purchase price of approximately $242.6 million, including the
assumption of approximately $63.5 million of individual
non-recourse mortgage debt encumbering eight of the properties.
During 2004, KROP disposed of five operating properties and three
out-parcels for an aggregate sales price of approximately $65.8
million, including the assignment of approximately $7.2 million of
non-recourse mortgage debt encumbering one of the properties. These
sales resulted in an aggregate gain of approximately $20.2 million.
During 2004, KROP obtained one non-recourse, cross-collateralized,
fixed-rate mortgage aggregating $30.7 million on four properties
with a rate of 4.74% for five years. KROP also obtained individual
non-recourse, non-cross-collateralized fixed-rate mortgages
aggregating approximately $22.0 million on two of its previously
unencumbered properties with rates ranging from 5.0% to 5.1% with
terms of five years.
During 2004, KROP obtained one non-recourse, cross-collateralized,
variable-rate mortgage aggregating $54.4 million on six properties
with a rate of LIBOR plus 2.25% with a term of two years. KROP also
obtained one non-recourse, non-cross collateralized variable rate
mortgage for $23.2 million on one of its previously unencumbered
properties with a rate of LIBOR plus 1.8% with a three-year term.
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 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 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.
As of December 31, 2004, the KROP portfolio was comprised of 37
shopping center properties aggregating approximately 5.3 million
square feet of GLA located in 15 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.
45
During January 2004, the Company acquired a property located in
Marlborough, MA, through a joint venture in which the Company has a
40% non-controlling interest. The property was acquired for a
purchase price of approximately $26.5 million, including the
assumption of approximately $21.2 million of non-recourse mortgage
debt encumbering the property.
During September 2004, the Company acquired a property located in
Pompano, FL, comprising approximately 0.1 million square feet of
GLA, through a newly formed joint venture in which the Company has
a 20% non-controlling interest, for approximately $20.4 million.
During October 2004, the Company transferred 50% of the Company's 90%
interest in an operating property located in Juarez, Mexico to a
joint venture partner for approximately USD $5.4 million, which
approximated its carrying value. As a result of this transaction,
the Company now holds a 45% non-controlling interest in this
property and now accounts for its investment under the equity
method of accounting.
Additionally during October 2004, the Company acquired an operating
property located in Valdosta, GA, comprising approximately 0.2
million square feet of GLA, through a newly formed joint venture in
which the Company has a 50% non-controlling interest. The property
was acquired for a purchase price of approximately $10.7 million,
including the assumption of approximately $8.0 million of
non-recourse mortgage debt encumbering the property.
During December 2004, a newly formed joint venture in which the Company
has a 15% non-controlling interest acquired the Price Legacy
Corporation ("Price Legacy"). Price Legacy was acquired for a
purchase price of approximately $1.2 billion, including the
assumption of approximately $328.7 million in existing non-recourse
mortgage debt. Simultaneously with the closing of this transaction,
the joint venture obtained approximately $521.9 million of
additional non-recourse mortgage debt. The Company's equity
investment in this joint venture was approximately $33.6 million.
Additionally, the Company provided approximately $30.6 million of
secured mezzanine financing. This interest only loan bears interest
at a fixed rate of 7.5% per annum payable monthly and matures in
December 2006. The Company also provided a secured short-term
promissory note of approximately $8.2 million. This interest only
note bears interest at LIBOR plus 4.5% payable monthly and matures
June 30, 2005. In connection with this transaction, the joint
venture acquired 33 operating properties aggregating approximately
7.6 million square feet of GLA located in ten states. Additionally,
the Company entered into a management agreement whereby, the
Company will perform services for fees related to management,
leasing, operations, supervision and maintenance of the properties.
Also during December 2004, the Company acquired an operating property
located in Bellevue, WA, comprising approximately 0.5 million
square feet of GLA, through a joint venture in which the Company
has a 50% non-controlling interest, for approximately $102.0
million.
During 2004, the Company transferred 12 operating properties,
comprising approximately 1.5 million square feet of GLA, to a newly
formed joint venture in which the Company has a 15% non-controlling
interest, for a price of approximately $269.8 million, including an
aggregate $161.2 million of individual non-recourse mortgage debt
encumbering the properties. Simultaneously with the transfer, the
Company entered into a management agreement whereby the Company
will perform services for fees related to management, leasing,
operations, supervision and maintenance of the joint venture
properties. In addition, the Company will earn fees related to the
acquisition and disposition of properties by the venture. During
2004, the Company earned management fees and acquisition fees of
approximately $1.1 million and $1.3 million, respectively.
Additionally during 2004, the Company transferred, in separate
transactions, eight operating properties comprising approximately
1.5 million square feet of GLA, to newly formed joint ventures in
which the Company has non-controlling interests ranging from 10% to
30%, for an aggregate price of approximately $216.0 million,
including the assignment of approximately $95.5 million of
non-recourse mortgage debt and $24.1 million of downReit units.
During 2003, the Company acquired, in separate transactions, three
operating properties through newly formed joint ventures in which
the Company has non-controlling interests ranging from 20% to
42.5%, for an aggregate purchase price of approximately $36.3
million, including the assumption of approximately $19.3 million of
non-recourse mortgage debt encumbering one of the properties.
46
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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 a
purchase price of approximately $66.6 million. Simultaneously 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
240.4 million pesos ("MXN") (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.
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,
2004 2003
---- ----
Assets:
Real estate, net $5,451.0 $3,313.0
Other assets 200.5 156.2
-------- --------
$5,651.5 $3,469.2
======== ========
Liabilities and Partners' Capital:
Mortgages payable $3,781.0 $2,330.0
Notes payable 40.0 33.6
Construction loans 29.1 13.7
Other liabilities 115.5 107.2
Minority interest 36.5 10.8
Partners' capital 1,649.4 973.9
-------- --------
$5,651.5 $3,469.2
======== ========
Year Ended December 31,
2004 2003 2002
----- ---- ----
Revenues from rental property $545.8 $423.3 $309.1
------ ----- -----
Operating expenses (155.6) (119.2) (76.8)
Interest (171.0) (137.9) (106.3)
Depreciation and amortization (97.1) (66.4) (40.6)
Other, net (5.8) (9.3) (5.2)
------ ----- -----
(429.5) (332.8) (228.9)
------ ----- -----
Income from continuing operations 116.3 90.5 80.2
Discontinued Operations:
Income from discontinued operations 1.8 3.7 1.6
Gain on dispositions of properties 20.2 0.0 0.7
------ ----- -----
Net income $138.3 $94.2 $82.5
====== ===== =====
47
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Other liabilities in the accompanying Consolidated Balance Sheets
include accounts with certain real estate joint ventures totaling
approximately $13.7 million and $11.0 million at December 31, 2004
and 2003, 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, 2004 and 2003, the Company's
carrying value in these investments approximated $595.2 million and
$487.4 million, respectively.
8. 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 expired in December 2004 for the fee owned
locations. During the marketing period, the Ward Venture was
responsible for all carrying costs associated with the properties
until the property was designated to a user. As of December 31,
2004, there was one remaining property which was sold pursuant to
an installment sales agreement. Per the agreement, the purchase
price for this property will be paid by November 15, 2006.
During 2004, the Ward Venture completed transactions on four properties
and the Company recognized pre-tax profits of approximately $2.5
million.
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 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 pay down the mortgage debt by
approximately $9.6 million.
During 2003, four properties were sold, whereby the proceeds from the
sales were used to pay down the mortgage debt by approximately $9.1
million.
During 2004, an additional three properties were sold, whereby the
proceeds from the sales were used to pay down the mortgage debt by
approximately $5.5 million. As of December 31, 2004, the remaining
19 properties were encumbered by third-party non-recourse debt of
approximately $64.9 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.
48
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
At December 31, 2004 and 2003, the Company's net investment in the
leveraged lease consisted of the following (in millions):
2004 2003
---- ----
Remaining net rentals $72.5 $73.7
Estimated unguaranteed residual value 48.8 53.3
Non-recourse mortgage debt (58.4) (66.2)
Unearned and deferred income (59.1) (57.2)
----- -----
Net investment in leveraged lease $ 3.8 $ 3.6
===== =====
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 non-controlling
investment in Kimsouth differs from its share of historical net
book value of assets and liabilities of Kimsouth. The Company's
investment strategy with respect to Kimsouth includes re-tenanting,
repositioning and disposition of the properties.
During 2004, Kimsouth disposed of 11 shopping center properties, in
separate transactions, for an aggregate sales price of
approximately $110.2 million, including the assignment of
approximately $2.7 million of mortgage debt encumbering one of the
properties. During 2004, the Company recognized pre-tax profits
from the Kimsouth investment of approximately $10.6 million, which
is included in the caption Income from Other Real Estate
Investments on the Company's Consolidated Statements of Income.
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.
Selected financial information for Kimsouth is as follows (in
millions):
December 31,
-------------------
2004 2003
---- ----
Assets:
Operating real estate, net $ - $125.7
Real estate held for sale 111.5 95.5
Other assets 7.6 20.8
------ ------
$119.1 $242.0
====== ======
Liabilities and Stockholders' Equity:
Mortgages payable $ 77.5 $137.0
Other liabilities 1.5 3.6
Stockholders' equity 40.1 101.4
------ ------
$119.1 $242.0
====== ======
Year Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
Discontinued Operations
Revenues from Rental Property $ 21.8 $ 34.4 $ 39.0
Operating expenses (7.5) (10.5) (12.3)
Interest (7.9) (13.7) (15.6)
Depreciation and amortization (4.5) (9.5) (11.4)
Other, net (0.4) (0.1) (8.7)
------ ------ ------
1.5 0.6 (9.0)
Gain on disposition of
properties 8.7 12.8 0.2
Gain on disposition of joint
ventures - - 2.2
Adjustment of property carrying
values (14.3) - -
------ ------ -----
Net income/(loss) from
discontinued operations $ (4.1) $ 13.4 $(6.6)
====== ====== =====
49
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2004, the Kimsouth portfolio was comprised of 12
properties, including the remaining office component of an
operating property sold in 2004, aggregating approximately 2.1
million square feet of GLA located in five states.
Preferred Equity Capital -
During 2002, the Company established a Preferred Equity program, which
provides capital to developers and owners of shopping centers.
During 2004 and 2003, the Company provided, in separate
transactions, an aggregate of approximately $101.0 million and
$45.5 million, respectively, in investment capital to developers
and owners of 54 shopping centers. As of December 31, 2004, the
Company's net investment under the Preferred Equity program was
approximately $157.0 million relating to 62 properties. For the
years ended December 31, 2004, 2003 and 2002, the Company earned
approximately $11.4 million, including incentive fees earned from
four capital transactions, $4.6 million, including incentive fees
earned from two capital transactions, and $1.0 million,
respectively, from these investments.
The Company accounts for its investments in Preferred Equity
investments under the equity method of accounting.
Summarized financial information relating to the Company's preferred
equity investments is as follows (in millions):
December 31,
--------------------
2004 2003
------ ------
Assets:
Real estate, net $715.5 $326.3
Other assets 29.3 18.8
------ ------
$744.8 $345.1
====== ======
Liabilities and Partners' Capital:
Notes and mortgages payable $548.3 $245.4
Other liabilities 15.4 6.5
Partners' capital 181.1 93.2
------ ------
$744.8 $345.1
====== ======
Year Ended December 31,
2004 2003
------ ------
Revenues from Rental Property $ 61.6 $ 38.8
------ ------
Operating expenses (19.4) (12.2)
Interest (21.2) (16.1)
Depreciation and amortization (9.6) (5.3)
Other, net (0.3) -
------ ------
(50.5) (33.6)
------ ------
11.1 5.2
Gain on disposition of properties 4.4 0.8
------ ------
Net income $ 15.5 $ 6.0
====== ======
The Company's maximum exposure to losses associated with its Preferred
Equity investments is limited to its invested capital. As of
December 31, 2004 and 2003, the Company's invested capital in its
Preferred Equity investments approximated $157.0 million and $66.4
million, respectively.
50
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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,
2004, 2003 and 2002 was approximately $3.9 million, $0.3 million
and $0.8 million, respectively. These amounts represent sublease
revenues during the years ended December 31, 2004, 2003 and 2002 of
approximately $13.3 million, $12.3 million and $13.9 million,
respectively, less related expenses of $8.0 million, $10.6 million
and $11.7 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 non-cancellable 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): 2005,
$9.5 and $6.9; 2006, $8.8 and $6.0; 2007, $7.1 and $4.6; 2008, $4.6
and $2.9; 2009, $2.9 and $1.6; and thereafter, $5.4 and $1.7,
respectively.
9. Mortgages and Other Financing Receivables:
During May 2002, the Company provided a secured $15 million three-year
term loan and a secured $7.5 million revolving credit facility to
Frank's Nursery & Crafts, Inc. ("Frank's"), at an interest rate of
10.25% per annum collateralized by 40 real estate interests.
Interest is payable quarterly in arrears. During 2003, the
revolving credit facility was amended to increase the total
borrowing capacity to $17.5 million. During January 2004, the
revolving loan was further amended to provide up to $33.75 million
of borrowings from the Company. During September 2004, Frank's
filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
The Company committed to provide an additional $27.0 million of
Debtor-in-Possession financing with a term of one year at an
interest rate of Prime plus 1.00% per annum. As of December 31,
2004, the aggregate outstanding loan balance on these facilities
was approximately $23.3 million.
During March 2002, the Company provided a $15.0 million three-year term
loan to Gottchalks, Inc., at an interest rate of 12.0% per annum
collateralized by three properties. The Company received principal
and interest payments on a monthly basis. During March 2004,
Gottchalks, Inc., elected to prepay the remaining outstanding loan
balance of approximately $13.2 million in full satisfaction of this
loan.
During 2003, the Company provided a five-year $3.5 million term 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 received principal and interest payments on a
monthly basis. During May 2004, Grass America elected to prepay the
remaining outstanding loan balance of approximately $3.5 million in
full satisfaction of this loan.
During April 2004, the Company provided a $2.7 million term loan at a
fixed rate of 11.0% and a $4.1 million revolving line of credit at
a fixed rate of 12.0% to a retailer. Both facilities are interest
only, payable monthly and mature May 1, 2007. As of December 31,
2004, the aggregate outstanding loan balance of these facilities
was approximately $4.7 million.
During May 2004, the Company provided a construction loan commitment of
up to MXN 51.5 million (approximately USD $4.7 million) to a
developer for the construction of a retail center in Cancun,
Mexico. The loan bears interest at a fixed rate of 11.25% and
provides for an additional 20% participation of property cash
flows, as defined. This facility is initially interest only and
then converts to an amortizing loan at the earlier of 120 days
after construction completion or upon opening of the grocery anchor
tenant. This facility is collateralized by the related property and
matures in May 2014. As of December 31, 2004, there was
approximately MXN 41.2 million (USD $3.7 million) outstanding on
this loan.
During July 2004, the Company provided an $11.0 million five-year term
loan to a retailer at a floating interest rate of Prime plus 3.00%
per annum or, at the borrowers election, LIBOR plus 5.5% per annum.
The facility is interest only, payable monthly in arrears and is
collateralized by certain real estate interests of the borrower. As
of December 31, 2004, the outstanding loan balance was
approximately $11.0 million.
51
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During September 2004, the Company acquired a $3.5 million mortgage
receivable for $2.7 million. The interest rate on this mortgage
loan is Prime plus 1.0% per annum with principal and interest paid
monthly. This loan matures in February 2006 and is collateralized
by a shopping center comprising 0.3 million square feet of GLA in
Wilkes-Barre, PA. As of December 31, 2004, the outstanding loan
balance was approximately $3.4 million.
During December 2004, the Company provided a $5.2 million interest-only
five-year term loan to a grocery chain. The interest rate on this
loan is Prime plus 6.50% per annum payable monthly in arrears and
is collateralized by certain real estate interests of the borrower.
As of December 31, 2004, the outstanding loan balance was
approximately $5.2 million.
Additionally during December 2004, the Company acquired a $3.3 million
6.9% mortgage receivable for $2.2 million. This mortgage loan pays
principal and interest quarterly and matures in February 2019 and
is collateralized by a medical office facility in Somerset, PA.
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 was collateralized by the real estate
interests of Spartan, with the Company receiving principal and
interest payments monthly. During December 2004, Spartan elected to
prepay the remaining outstanding loan balance of approximately $7.6
million in full satisfaction of this loan.
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.
10. Cash and Cash Equivalents:
Cash and cash equivalents (demand deposits in banks, commercial paper
and certificates of deposit with original maturities of three
months or less) includes tenants' security deposits, escrowed funds
and other restricted deposits approximating $0.5 million and $0.1
million at December 31, 2004 and 2003, respectively.
Cash and 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.
52
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
11. Marketable Securities:
The amortized cost and estimated fair values of securities
available-for-sale and held-to-maturity at December 31, 2004 and
2003 are as follows (in thousands):
December 31, 2004
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
--------- ---------- ----------- --------------
Available-for-sale:
Equity securities $61,042 $36,808 $ (87) $ 97,763
Held-to-maturity:
Other debt securities 26,008 2,166 (30) 28,144
------- ------- ------ --------
Total marketable securities $87,050 $38,974 $(117) $125,907
======= ======= ====== ========
December 31, 2003
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated 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
======= ======= ====== =======
As of December 31, 2004, the contractual maturities of Other debt
securities classified as held-to-maturity are as follows: within
one year, $2.8 million; after one year through five years, $0.0;
after five years through 10 years, $14.9 million and after 10
years, $8.3 million. Actual maturities may differ from contractual
maturities as issuers may have the right to prepay debt obligations
with or without prepayment penalties.
12. Notes Payable:
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, 2004, a total principal amount of $807.25 million
in senior fixed-rate MTNs was outstanding. These fixed-rate notes
had maturities ranging from four months to nine years as of
December 31, 2004 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. Proceeds from these issuances
were primary used for the acquisition of neighborhood and community
shopping centers, the expansion and improvement of properties in
the Company's portfolio and the repayment of certain debt
obligations of the Company.
During July 2004, the Company issued $100.0 million of floating-rate
unsecured senior notes under its medium-term notes ("MTN") program.
This floating rate MTN matures August 1, 2006 and bears interest at
LIBOR plus 20 basis points per annum, payable quarterly in arrears
commencing November 1, 2004. The proceeds from this MTN issuance
were primarily used for the repayment of the Company's $85.0
million floating-rate unsecured notes due August 2, 2004, which
bore interest at LIBOR plus 50 basis points per annum. Remaining
proceeds were used for general corporate purposes.
53
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During August 2004, the Company issued $100.0 million of fixed-rate
unsecured senior notes under its MTN program. This fixed-rate MTN
matures in August 2011 and bears interest at 4.82% per annum
payable semi-annually in arrears. The proceeds from this MTN
issuance were used to repay the Company's $50.0 million, 7.62%
fixed-rate unsecured senior notes that matured in October 2004 and
the Company's $50.0 million, 7.125% senior notes which matured in
June 2004.
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 $100.0
million, 6.5% fixed-rate unsecured senior notes that matured
October 1, 2003.
During October 2003, the Company obtained a $400.0 million unsecured
bridge facility that bore interest at LIBOR plus 0.55%. The Company
utilized these proceeds to partially fund the Mid-Atlantic Realty
Trust ("MART") transaction. This facility was scheduled to mature
on September 30, 2004; however, the facility was fully repaid and
was terminated as of June 30, 2004.
As of December 31, 2004, the Company has a total principal amount of
$420.0 million in fixed-rate unsecured senior notes. These
fixed-rate notes had maturities ranging four months to nine years
as of December 31, 2004, 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 whereby
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,
2004, there was $230.0 million outstanding under this Credit
Facility.
During September 2004, the Company entered into a three-year Canadian
denominated ("CAD") $150.0 million unsecured revolving credit
facility with a group of banks. This facility bears interest at the
CDOR Rate, as defined, plus 0.50% and is scheduled to expire in
September 2007. Proceeds from this facility will be used for
general corporate purposes including the funding of Canadian
denominated investments. As of December 31, 2004, there was CAD
$62.0 million (approximately USD $51.7 million) outstanding under
this facility.
54
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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.
The scheduled maturities of all unsecured senior notes payable as of
December 31, 2004 were approximately as follows (in millions):
2005, $200.3; 2006, $415.0; 2007, $246.7; 2008, $100.0; 2009,
$180.0 and thereafter, $466.9.
13. Mortgages Payable:
During 2004, the Company (i) obtained an aggregate of approximately
$217.6 million of individual non-recourse mortgage debt on 15
operating properties, (ii) assumed approximately $158.0 million of
individual non-recourse mortgage debt relating to the acquisition
of 12 operating properties, including approximately $6.0 million of
fair value debt adjustments, (iii) assigned approximately $323.7
million of individual non-recourse mortgage debt relating to the
transfer of 24 operating properties to various co-investment
ventures in which the Company has non-controlling interests ranging
from 10% to 30%, (iv) paid off approximately $47.9 million of
individual non-recourse mortgage debt that encumbered four
operating properties and (v) assigned approximately $9.3 million of
non-recourse mortgage debt relating to the sale of one operating
property.
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.
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.
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 2027. Interest rates range from approximately 4.42%
to 9.75% (weighted-average interest rate of 7.08% as of December
31, 2004). The scheduled principal payments of all mortgages
payable, excluding unamortized fair value debt adjustments of
approximately $13.6 million, as of December 31, 2004, were
approximately as follows (in millions): 2005, $22.8; 2006, $68.2;
2007, $8.1; 2008, $60.0; 2009, $20.6 and thereafter, $159.8.
One of the Company's properties was encumbered by approximately $6.4
million in floating-rate, tax-exempt mortgage bond financing. The
rate on these bonds was reset annually, at which time bondholders
had the right to require the Company to repurchase the bonds. The
Company had engaged a remarketing agent for the purpose of offering
for resale the bonds in the event they were tendered to the
Company. All bonds tendered for redemption in the past were
remarketed and the Company had 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. During 2004, the Company fully paid the outstanding
balance of this tax-exempt mortgage bond financing.
14. Construction Loans Payable:
During 2004, the Company obtained construction financing on 11
ground-up development projects for an aggregate loan commitment
amount of up to $247.8 million, of which approximately $63.2
million was funded for the year ended December 31, 2004. As of
December 31, 2004, the Company had a total of 19 construction loans
with total commitments of up to $413.3 million, of which $156.6
million had been funded. These loans had maturities ranging from 2
to 36 months and variable interest rates ranging from 4.17% to
4.92% at December 31, 2004. 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, 2004, were approximately as follows (in
millions): 2005, $35.6; 2006, $72.5 and 2007, $48.5.
55
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
15. 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 and minority interests relating to
mandatorily redeemable non-controlling interests associated with
finite-lived subsidiaries of the Company 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. The following are
financial instruments for which the Company's estimate of fair
value differs from the carrying amounts (in thousands):
December 31,
------------
2004 2003
---- ----
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
------- ---------- ------- ----------
Marketable Securities $ 123,771 $ 125,907 $ 45,677 $ 48,573
Notes Payable $ 1,608,925 $ 1,663,474 $ 1,686,250 $ 1,756,834
Mortgages Payable $ 353,071 $ 375,566 $ 375,914 $ 421,123
Mandatorily Redeemable Minority
Interests (termination dates ranging
from 2019 - 2027) $ 2,057 $ 3,842 $ 1,797 $ 3,906
16. 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 periodically 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 2003.
The swap agreement relating to the Company's $85.0 million
floating-rate MTN matured in November 2003. This MTN matured and
was paid in full during August 2004.
For the year ended December 31, 2003, the change in the fair value of
the interest-rate swaps was $0.6 million, which was recorded in
OCI, a component of stockholders' equity, with a corresponding
liability reduction for the same amount. The Company had no
interest-rate swaps outstanding during 2004.
56
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2004 and 2003, respectively, 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 MXN 82.4 million and MXN 381.8
million (approximately USD $7.4 million and $34.0 million)
designated as hedges of its Mexican real estate investments at
December 31, 2004 and 2003, respectively. 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, 2004 and 2003, the Company had remaining Mexican
net investment hedges outstanding with a notional amount of
approximately MXN 82.4 million and MXN 224.9 million, respectively.
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 2004 and 2003, $15.1 million
and $15.5 million, respectively, of unrealized losses and $0.0 and
$0.2 million, respectively, 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 2.5 million
shares of common stock of a Canadian REIT. The Company designated
the warrants as a cash flow hedge of the variability in expected
future cash outflows upon purchasing the common stock. The Company
exercised its warrants in October 2004.
For the year ended December 31, 2004, the change in fair value of the
warrants exercised resulted in a reduction of the unrealized gain
of approximately $8.3 million. For the year ended December 31,
2003, the change in fair value of the warrants resulted in an
increase in the unrealized gain of approximately $6.0 million.
These changes were recorded in OCI with a corresponding change in
Other assets for the same amount.
The following table summarizes the notional values and fair values of
the Company's derivative financial instruments as of December 31,
2004 and 2003:
As of December 31, 2004
Fair Value
Hedge Type Notional Value Rate Maturity (in millions)
---------- -------------- ---- -------- -------------
Foreign currency forwards - net CAD $184.6 million 1.4013 - 1/05 - 7/06 ($37.5)
investment 1.6194
MXN cross-currency swap MXN 82.4 million 7.227 10/07 $0.3
- net investment
Foreign currency forwards - fair CAD $5.0 million 1.5918 4/05 ($1.0)
value
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 - ($23.8)
investment 1.6194 7/06
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 CAD $5.0 million 1.5918 4/05 ($0.6)
value
57
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2004 and 2003, these derivative instruments were
reported at their fair value as other liabilities of $38.5 million
and $25.1 million, respectively, and other assets of $0.3 million
and $8.3 million, respectively. The Company does not expect to
reclassify to earnings any of the current balance during the next
12 months.
17. Preferred Stock, Common Stock and DownREIT Unit Transactions:
At January 1, 2003, 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?% 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, or $1.6625 per annum. The Class F
Depositary Shares are redeemable, in whole or part, for cash on or
after June 5, 2008 at the option of the Company, at a redemption
price of $25.00 per Depositary Share, plus any accrued and unpaid
dividends thereon. The Class F Depositary Shares are not
convertible or exchangeable for any other property or securities of
the Company. 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.
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.
58
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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 at any time after one year. In addition, the
Company has the right to mandatorily require a conversion after ten
years. If at the time of conversion the common stock price for the
20 previous trading days is less than $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.
18. 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, 2004,
2003 and 2002 (in thousands):
2004 2003 2002
---- ---- ----
Acquisition of real estate interests by assumption of
mortgage debt $151,987 $180,893 $ 3,477
Acquisition of real estate interest by issuance of
downREIT units $ 28,349 $ - $ 80,000
Acquisition of real estate through purchase of
partnership interests $ - $ - $ 6,638
Disposition of real estate interests by assignment of
downREIT units $ 24,114 $ - $ -
Acquisition of real estate interests through proceeds
held in escrow $ 69,681 $ - $ -
Disposition/transfer of real estate interests by
assignment of mortgage debt $320,120 $ 23,068 $ 28,747
Proceeds held in escrow through sale of real estate
interests $ 9,688 $ 41,194 $ 5,433
Notes received upon disposition of real estate
interests $ 6,277 $ 14,490 $ -
Notes received upon exercise of stock options $ - $ 100 $ 555
Declaration of dividends paid in succeeding period $ 71,497 $ 65,969 $ 59,646
19. 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 bore interest at
rates ranging from LIBOR plus 4.0% to LIBOR plus 5.25% for the
years ended December 31, 2004 and 2003. KROP had outstanding
short-term interim financing due to GECRE and the Company totaling
$16.8 million each as of December 31, 2003 and no outstanding
short-term interim financing due to GECRE or the Company as of
December 31, 2004. The Company earned $0.2 million and $1.0 million
during 2004 and 2003, respectively, related to such interim
financing.
59
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.
In December 2004, in conjunction with the Price Legacy transaction,
the Company, which holds a 15% non-controlling interest, provided
the acquiring joint venture approximately $30.6 million of secured
mezzanine financing. This interest only loan bears interest at a
fixed rate of 7.5% per annum payable monthly in arrears and matures
in December 2006. The Company also provided the joint venture a
short-term secured promissory note for approximately $8.2 million.
This interest only note bears interest at LIBOR plus 4.5% payable
monthly in arrears and matures on June 30, 2005.
Reference is made to Notes 7 and 8 for additional information
regarding transactions with related parties.
20. 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, 2004, 2003 and 2002.
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): 2005, $377.6; 2006, $345.2;
2007, $313.4; 2008, $274.5; 2009, $242.0 and thereafter, $1,412.7.
Minimum rental payments under the terms of all non-cancellable
operating leases pertaining to the Company's shopping center
portfolio for future years are approximately as follows (in
millions): 2005, $10.5; 2006, $10.3; 2007, $9.9; 2008, $9.1; 2009,
$8.6 and thereafter, $124.5.
The Company has issued letters of credit in connection with completion
guarantees for certain development projects, and guaranty of
payment related to the Company's insurance program. These letters
of credit aggregate approximately $45.9 million.
Additionally, the RioCan Venture, an entity in which the Company holds
a 50% non-controlling interest, has a CAD $7.0 million
(approximately USD $5.8 million) letter of credit facility. This
facility is jointly guaranteed by RioCan and the Company and had
approximately CAD $4.0 million (approximately USD $3.3 million)
outstanding as of December 31, 2004, relating to various
development projects. In addition to the letter of credit facility,
various additional Canadian development projects in which the
Company holds interests ranging from 33?% to 50% have letters of
credit issued aggregating approximately CAD $2.2 million
(approximately USD $1.8 million).
During 2003, the limited partners in KIR, an entity in which the
Company holds a 43.3% non-controlling interest, contributed $30.0
million toward 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. During 2004, the KIR partners elected to
cancel the remaining unfunded capital commitments.
60
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
21. Incentive Plans:
The Company maintains a stock option plan (the "Plan") pursuant to
which a maximum of 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 at its sole discretion. In addition, the
Plan provides for the granting of certain options to each of the
Company's non-employee directors (the "Independent Directors") and
permits such Independent Directors to elect to receive deferred
stock awards in lieu of directors' fees.
Information with respect to stock options under the Plan for the years
ended December 31, 2004, 2003 and 2002 is as follows:
Weighted-Average
Exercise Price
Shares Per Share
--------- -----------------
Options outstanding, January 1, 2002 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
Exercised (1,689,874) $27.25
Granted 1,943,750 $55.44
Forfeited (189,895) $38.50
---------
Options outstanding, December 31, 2004 7,619,786 $38.12
=========
Options exercisable -
December 31, 2002 3,298,417 $24.06
========= ======
December 31, 2003 3,619,774 $26.47
========= ======
December 31, 2004 4,067,881 $29.90
========= ======
The exercise prices for options outstanding as of December 31, 2004
range from $16.61 to $58.49 per share. The weighted-average
remaining contractual life for options outstanding as of December
31, 2004 was approximately 7.7 years. Options to purchase
3,166,133, 5,109,883 and 1,731,321 shares of the Company's common
stock were available for issuance under the Plan at December 31,
2004, 2003 and 2002, 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 (capped at $170,000), is fully vested and funded as of
December 31, 2004. The Company contributions to the plan were
approximately $1.0 million, $0.8 million and $0.7 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
22. 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.
61
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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, 2004, 2003 and 2002 (in thousands):
2004 2003 2002
(Estimated) (Actual) (Actual)
----------- -------- --------
GAAP net income $297,137 $307,879 $245,668
Less: GAAP net income of taxable REIT subsidiaries (19,396) (12,814) (23,573)
-------- -------- --------
GAAP net income from REIT operations (a) 277,741 295,065 222,095
Net book depreciation in excess of (less than) tax depreciation 961 (36,663) (2,501)
Deferred and prepaid rents (7,200) (6,000) (5,944)
Exercise of non-qualified stock options (29,673) (11,370) (2,151)
Book/tax differences from investments in real estate joint ventures (2,472) (2,472) (12,361)
Book/tax difference on sale of real property (18,159) (32,319) (13,346)
Valuation adjustment of foreign currency contracts (19,901) (15,466) -
Adjustment of property carrying values 2,965 4,016 33,030
Other book/tax differences, net 15,913 (6,747) 11,719
-------- -------- --------
Adjusted taxable income subject to 90% dividend
requirements $220,175 $188,044 $230,541
======== ======== ========
Certain amounts in the prior periods have be reclassified to conform to
the current year presentation.
(a) - 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 years
ended December 31, 2004 and 2003 and amounted to $265,254 and
$246,301, respectively. For the year ended December 31, 2002, cash
dividends paid were equal to the dividends paid deduction and
amounted to $235,602.
Characterization of Distributions:
The following characterizes distributions paid for the years ended
December 31, 2004, 2003 and 2002 (in thousands):
2004 2003 2002
---- ---- ----
Preferred Dividends
Ordinary income $11,638 100% $13,169 84% $17,935 96%
Capital gain - - 2,451 16% 764 4%
-------- ---- -------- ---- -------- ----
$11,638 100% $15,620 100% $18,699 100%
-------- -------- --------
Common Dividends
Ordinary income $215,573 85% $171,071 74% $208,040 96%
Capital gain - - 31,840 14% 8,863 4%
Return of capital 38,043 15% 27,770 12% - -
-------- ----- -------- ----- -------- ----
$253,616 100% $230,681 100% $216,903 100%
-------- -------- --------
Total dividends
distributed $265,254 $246,301 $235,602
======== ======== ========
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.
62
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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, 2004, 2003 and 2002, are summarized as follows
(in thousands):
2004 2003 2002
---- ---- ----
TRS income before income taxes $27,716 $21,328 $36,477
------- ------- -------
Less provision for income taxes:
Federal 6,939 7,104 10,538
State and local 1,381 1,410 2,366
------- ------- -------
Total tax provision 8,320 8,514 12,904
------- ------- -------
TRS net income $19,396 $12,814 $23,573
======= ======= =======
Deferred tax assets of approximately $11.8 million and $11.0 million
and deferred tax liabilities of approximately $7.3 million and $7.5
million are included in the captions Other assets and Other
liabilities on the accompanying Consolidated Balance Sheets at
December 31, 2004 and 2003, respectively. These deferred tax assets
and liabilities relate primarily to differences in the timing of
the recognition of income/(loss) between the GAAP and tax basis of
accounting for (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):
2004 2003 2002
---- ---- ----
Federal provision at statutory tax
rate (35%) $9,700 $7,465 $12,767
State and local taxes, net of federal
benefit 1,801 1,049 2,010
Other (3,181) - (1,873)
------ ------ -------
$8,320 $8,514 $12,904
====== ====== =======
23. Supplemental Financial Information:
The following represents the results of operations, expressed in
thousands except per share amounts, for each quarter during the
years 2004 and 2003:
2004 (Unaudited)
------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
Revenues from rental property(1) $139,137 $129,908 $121,909 $123,972
Net income $71,389 $71,430 $78,511 $75,807
Net income per common share:
Basic $.62 $.62 $.68 $.65
Diluted $.61 $.61 $.67 $.64
2003 (Unaudited)
------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
Revenues from rental property(1) $117,456 $113,055 $116,404 $124,134
Net income $70,961 $61,346 $91,504 $84,068
Net income per common share:
Basic $.63 $.47 $.82 $.73
Diluted $.63 $.46 $.81 $.72
63
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 2004 and 2003, and properties
classified as held for sale as of December 31, 2004, 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
$8.7 million and $9.7 million at December 31, 2004 and 2003,
respectively.
24. 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 2004. 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,
2004 and 2003, adjusted to give effect to these transactions as of
January 1, 2003.
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, 2003, nor does it purport to represent the results of operations
for future periods. (Amounts presented in millions, except per
share figures.)
Year ended December 31,
-----------------------
2004 2003
---- ----
Revenues from rental property $511.5 $494.4
Net income $285.5 $256.7
Net income per common share:
Basic $2.46 $2.19
===== =====
Diluted $2.41 $2.15
===== =====
64