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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10899
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Kimco Realty Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-2744380
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3333 New Hyde Park Road, New Hyde Park, NY 11042
(Address of principal executive offices - zip code)
(516) 869-9000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated
filer (as defined in rule 12-b of the Act).
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
110,413,027 shares outstanding as of October 31, 2003.
1 of 33
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Financial Statements - Condensed Consolidated
Balance Sheets as of September 30, 2003 and December 31, 2002.
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2003 and 2002.
Condensed Consolidated Statements of Comprehensive Income for the Three
and Nine Months Ended September 30, 2003 and 2002.
Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 2003 and 2002.
Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
accompanying Condensed Consolidated Financial Statements and Notes thereto.
These unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to reflect a fair statement of the results for
the interim periods presented, and all such adjustments are of a normal
recurring nature.
Results of Operations
Revenues from rental property increased $13.0 million or 12.1% to
$120.3 million for the three months ended September 30, 2003, as compared with
$107.3 million for the corresponding quarter ended September 30, 2002.
Similarly, revenues from rental property increased $31.2 million or 9.6% to
$357.6 million for the nine months ended September 30, 2003, as compared with
$326.4 million for the corresponding nine month period ended September 30, 2002.
These net increases resulted primarily from the combined effect of (i) the
acquisition of 11 operating properties during 2003 and through calendar year
2002 (13 shopping center properties) providing incremental revenues of $11.8
million and $29.8 million for the three and nine months ended September 30,
2003, respectively (ii) an overall increase in shopping center portfolio
occupancy to 89.5% at September 30, 2003 as compared to 86.0% at September 30,
2002 and the completion of certain development and redevelopment projects
providing incremental revenues of approximately $4.6 million and $20.0 million,
respectively, as compared to the corresponding three and nine months ended
September 30, 2002 offset by (iii) a decrease in revenues of $8.4 million for
the nine months ended September 30, 2003, resulting from the bankruptcy filing
of Kmart Corporation ("Kmart") and Ames Departments Stores, Inc. ("Ames") and
subsequent rejection of leases and (iv) a decrease of revenues of approximately
$3.4 million and $10.2 million for the three and nine months ended September 30,
2003, respectively, resulting from the sale of certain development properties
and tenant buyouts.
2
Rental property expenses, including depreciation and
amortization, increased approximately $6.3 million or 13.3% to $52.7 million for
the three months ended September 30, 2003, as compared with $46.4 million for
the corresponding quarter ended September 30, 2002. Similarly, rental property
expenses, including depreciation and amortization, increased $16.6 million or
11.8% to $156.9 million for the nine months ended September 30, 2003, as
compared with $140.3 million for the corresponding period in the preceding year.
The rental property expense components of operating and maintenance and
depreciation and amortization increased approximately $5.0 million and $15.8
million for the three and nine months ended September 30, 2003, respectively, as
compared to the corresponding periods in 2002. These increases were primarily
due to increased snow removal costs in 2003 and property acquisitions during
2003 and 2002.
Equity in income of real estate joint ventures, net increased
$2.1 million to $11.2 million for the three months ended September 30, 2003, as
compared to $9.1 million for the corresponding period in 2002. Similarly, equity
in income of real estate joint ventures, net increased $6.1 million to $30.5
million for the nine months ended September 30, 2003, as compared with $24.4
million for the corresponding period in 2002. These increases are primarily
attributable to the equity in income from the Kimco Income REIT joint venture
investment ("KIR"), the RioCan joint venture investment ("RioCan Venture") and
the Kimco Retail Opportunity Portfolio joint venture investment ("KROP"). The
Company has made additional capital investments in these joint ventures and
other joint ventures for the acquisition of additional shopping center
properties by the ventures through 2002 and the nine months ended September 30,
2003.
Minority interest in income of partnerships, net increased $2.0
million to $2.3 million for the three months ended September 30, 2003, as
compared to $0.3 million for the corresponding period in 2002. Similarly,
minority interest in income of partnerships, net increased $5.0 million to $5.7
million for the nine months ended September 30, 2003, as compared to $0.7
million for the corresponding period in 2002. These increases are primarily due
to the acquisition of a shopping center property through a partnership formed in
2002 by issuing approximately 2.4 million downREIT units valued at $80.0 million
at the date of acquisition. The downREIT units are convertible at a ratio of 1:1
into the Company's common stock and are entitled to a distribution equal to the
dividend rate on the Company's common stock multiplied by 1.1057.
Mortgage financing income decreased $0.9 million to $3.6 million
for the three months ended September 30, 2003, as compared to $4.5 million for
the corresponding quarter ended September 30, 2002. This decrease is primarily
due to lower interest income earned related to certain real estate lending
activities during the three months ended September 30, 2003 as compared to the
same period last year. Mortgage financing income increased $3.0 million to $15.8
million for the nine months ended September 30, 2003, as compared to $12.8
million for the corresponding nine month period ended September 30, 2002. This
increase is primarily due to increased interest income earned related to certain
real estate lending activities during the nine months ended September 30, 2003
as compared to the same period in 2002.
3
Management and other fee income increased approximately $1.7
million and $1.8 million for the three and nine months ended September 30, 2003,
respectively, as compared to the corresponding periods in 2002. These increases
are primarily due to (i) increased management fees from KIR resulting from the
growth of the KIR portfolio (ii) increased management and acquisition fees
resulting from the growth of the KROP portfolio and (iii) increased property
management activities providing incremental fee income of $1.1 million and $0.3
million for the three and nine months ended September 30, 2003, respectively, as
compared to the same periods in 2002.
Other income/(loss), net decreased approximately $2.1 million and
$7.1 million for the three and nine month periods ended September 30, 2003,
respectively, as compared to the same periods in 2002. These decreases are
primarily due to prior year pre-tax profits earned in 2002 from the Company's
participation in ventures established to provide inventory liquidation services
to regional retailers in bankruptcy.
Interest expense increased approximately $4.4 million and $8.4
million for the three and nine months ended September 30, 2003, respectively, as
compared with the same periods in 2002. These increases are primarily due to
higher average outstanding borrowings during the respective periods.
General and administrative expenses increased approximately $3.3
million and $5.7 million for the three and nine month periods ended September
30, 2003, respectively, as compared to the same periods in 2002. These increases
are primarily due to (i) increased staff levels associated with the growth of
the Company and (ii) other personnel related costs associated with a realignment
of our regional operations.
During February 2003, the Company reached agreement with a lender
in connection with two individual non-recourse mortgages encumbering two former
Kmart sites. The Company paid approximately $8.3 million in full satisfaction of
these loans which aggregated approximately $14.7 million. As a result of this
transaction, the Company recognized a gain on early extinguishment of debt of
approximately $6.3 million during the first quarter of 2003.
4
Effective January 1, 2001, the Company has 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 three months ended September 30, 2003, KDI sold five
out-parcels and one recently completed project, in separate transactions for
approximately $50.8 million which resulted in pre-tax gains of approximately
$8.3 million. Similarly, during the nine months ended September 30, 2003, KDI
sold 16 out-parcels and four recently completed projects, in separate
transactions for approximately $118.5 million, which resulted in the recognition
of pre-tax gains of approximately $15.3 million.
During the nine months ended September 30, 2002, KDI sold three
projects and six out-parcels, in separate transactions, for approximately $51.6
million, including the assignment of approximately $17.7 million of mortgage
debt encumbering one of the properties. These sales resulted in pre-tax gains of
approximately $9.2 million.
During the nine months ended September 30, 2003, the Company (i)
disposed of, in separate transactions, six operating properties for an aggregate
sales price of approximately $112.5 million, including the assignment of
approximately $1.7 million of mortgage debt encumbering one of the properties,
(ii) terminated four leasehold positions in locations where a tenant in
bankruptcy had rejected its lease and (iii) transferred two operating properties
to KROP for a price of approximately $85.0 million which approximated their net
book value. These dispositions resulted in net gains of approximately $30.5
million for the nine months ended September 30, 2003.
During the nine months ended September 30, 2002, the Company (i)
disposed of three operating properties, in separate transactions, for an
aggregate sales price of approximately $17.0 million, including the assignment
of approximately $11.1 million of mortgage debt encumbering two of the
properties and (ii) terminated five leasehold positions in locations where a
tenant in bankruptcy had rejected its lease. These dispositions resulted in net
gains of approximately $1.5 million for the nine months ended September 30,
2002.
For those property dispositions for which SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("FASB 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 Condensed
Consolidated Statements of Income.
5
Net income for the three and nine months ended September 30, 2003
was $91.5 million and $223.8 million, respectively. Net income for the three and
nine months ended September 30, 2002 was $60.8 million and $182.7 million,
respectively. On a diluted per share basis, net income increased $0.27 to $0.80
for the three month period ended September 30, 2003 as compared to $0.53 for the
corresponding quarter in the previous year. On a diluted per share basis, net
income increased $0.30 to $1.90 for the nine month period ended September 30,
2003 as compared to $1.60 for the corresponding period in 2002. These increased
results are primarily attributable to (i) significant leasing within the
portfolio which improved operating profitability, (ii) increased contributions
from KIR, the RioCan Venture and KROP, and (iii) increases in gains on
development sales from KDI and gains from operating property sales. The diluted
per share results were partially offset by a reduction in net income available
to common shareholders of $0.07 resulting from the deduction of original
issuance costs associated with the redemption of the Company's 7 3/4% Class A,
8 1/2% Class B and 8 3/8% Class C Cumulative Redeemable Preferred Stocks during
the second quarter 2003. The increase in net income for the three and nine
months ended September 30, 2003 as compared to the same periods last year
includes the $6.3 million gain on early extinguishment of debt during the first
quarter of 2003 and gains on the disposition of operating properties in the
respective periods, including a $28.1 million gain on the sale of the Company's
operating mall in Leominster, MA during the third quarter of 2003.
Tenant Concentration
The Company seeks to reduce its operating and leasing risks
through diversification achieved by the geographic distribution of its
properties, avoiding dependence on any single property, and a large tenant base.
At September 30, 2003, the Company's five largest tenants include The Home
Depot, Kmart Corporation, Kohl's, TJX Companies and Wal-Mart, which represented
approximately 3.1%, 2.9%, 2.8%, 2.7% and 1.9%, respectively, of the Company's
annualized base rental revenues including the proportionate share of base rental
revenues from properties in which the Company has less than a 100% economic
interest.
On January 14, 2003, Kmart announced it would be closing an
additional 326 locations relating to its January 22, 2002 filing of protection
under Chapter 11 of the U.S. Bankruptcy Code. Nine of these locations (excluding
the KIR portfolio which includes three additional locations and Kimsouth which
includes two additional locations) are leased from the Company. The annualized
base rental revenues from these nine locations are approximately $4.3 million.
As of September 30, 2003, Kmart rejected its lease at seven of these locations
representing approximately $3.3 million of annualized base rental revenues. The
Company continues to negotiate leases with prospective tenants at six of these
sites and has terminated its lease at one site. No assurance can be provided
that the remaining locations will be leased in the near term or at comparable
rents previously paid by Kmart.
6
The Company generally will have the right to file claims in
connection with these rejected leases for lost rent equal to three years of
rental obligations as well as other amounts related to obligations under the
leases. Actual amounts to be received in satisfaction of these claims will be
subject to Kmart's final plan of reorganization which became effective May 6,
2003 and the availability of funds to pay creditors such as the Company.
During May 2003, the Company suspended debt service payment on an
individual non-recourse mortgage loan with an outstanding principal balance of
approximately $9.3 million. This non-recourse loan encumbers a former Kmart site
located in Chicago, IL. The Company is actively negotiating settlement terms
with the respective lender.
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 September 30, 2003, the Company's level of debt to total market
capitalization was 25%. 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 financings and other debt and equity alternatives in
a manner consistent with its intention to operate with a conservative debt
structure.
Since the completion of the Company's IPO in 1991, the Company
has utilized the public debt and equity markets as its principal source of
capital for its expansion needs. Since the IPO, the Company has completed
additional offerings of its public unsecured debt and equity, raising in the
aggregate over $3.3 billion for the purposes of, among other things, repaying
indebtedness, acquiring interests in neighborhood and community shopping
centers, funding ground-up development projects, expanding and improving
properties in the portfolio and other investments.
During June 2003, the Company established a $500.0 million
unsecured revolving credit facility, which is scheduled to expire in August
2006. This credit facility, which replaced the Company's $250.0 million
unsecured revolving credit facility, has made available funds to both finance
the purchase of properties and meet any short-term working capital requirements.
As of September 30, 2003, there was no outstanding balance under this credit
facility.
During October 2003, the Company obtained an additional $400.0
million unsecured bridge facility, which is scheduled to expire in September
2004, with an option to extend up to $150.0 million for an additional year. The
Company has fully utilized these proceeds to partially fund the Mid-Atlantic
Realty Trust transaction.
7
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 September 30,
2003, the Company had $609.7 million available for issuance under its shelf
registration statement.
The Company has a $250.0 million 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 September 30, 2003, the Company had $50.0
million available for issuance under this program.
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. As of September 30, 2003, the Company had over 380
unencumbered property interests in its portfolio.
In connection with its intention to continue to qualify as a REIT
for federal income tax purposes, the Company expects to continue paying regular
dividends to its stockholders. These dividends will be paid from operating cash
flows which are expected to increase due to increased investment in properties
and other real estate related opportunities, growth in operating income from the
existing portfolio and from other sources. 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.
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, availability under its
revolving credit facility, issuance of equity and public debt, as well as other
debt and equity alternatives, will provide the necessary capital required by the
Company. Cash flows from operations were $237.5 million for the nine months
ended September 30, 2003, as compared to $230.8 million for the corresponding
period ended September 30, 2002.
8
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, FIN 46 requires additional disclosures. The
Company's exposure to losses associated with its unconsolidated joint ventures
is limited to its carrying value in these investments. In October 2003, the FASB
announced that the effective date of FIN 46 was deferred from July 1, 2003 to
December 31, 2003 for interests held by public companies in all variable
interest entities created prior to February 1, 2003. The Company is evaluating
the potential impact of the adoption of FIN 46 on the Company's financial
position and results of operations for those entities created prior to February
1, 2003. The Company has assessed its joint venture entities formed subsequent
to February 1, 2003 and determined that the adoption of FIN 46 did not have a
material impact on the Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities ("FASB No. 149").
This statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB Statement No. 133,
Accounting for Derivatives Instruments and Hedging Activities. The provisions of
this statement are effective for contracts entered into or modified after June
30, 2003, and for hedging relationships designated after June 30, 2003. The
adoption of FASB No. 149 did not have a material adverse impact on the Company's
financial position or results of operations.
9
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("FASB
No. 150"). This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
provisions of this statement are effective for financial instruments entered
into or modified after May 31, 2003, and otherwise are effective at the
beginning of the first interim period beginning after June 15, 2003. On November
7, 2003, the FASB deferred the classification and measurement provisions of FASB
No. 150 as they apply to certain mandatorily redeemable non-controlling
interests. This deferral is expected to remain in effect while these provisions
are further evaluated by the FASB. As a result of this deferral, the adoption of
FASB No. 150 did not have a material adverse impact on the Company's financial
position or results of operations.
At September 30, 2003 the estimated fair value of minority
interests relating to mandatorily redeemable non-controlling interests
associated with finite-lived subsidiaries of the Company is approximately $3.9
million. These finite-lived subsidiaries have termination dates ranging from
2019 to 2027.
Forward-Looking Statements
This quarterly report on Form 10-Q, together with other
statements and information publicly disseminated by the Company contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 and include this statement for
purposes of complying with these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe the Company's
future plans, strategies and expectations, are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project" or
similar expressions. You should not rely on forward-looking statements since
they involve known and unknown risks, uncertainties and other factors which are,
in some cases, beyond the Company's control and which could materially affect
actual results, performances or achievements. Factors which may cause actual
results to differ materially from current expectations include, but are not
limited to, (i) general economic and local real estate conditions, (ii) the
inability of major tenants to continue paying their rent obligations due to
bankruptcy, insolvency or general downturn in their business, (iii) financing
risks, such as the inability to obtain equity or debt financing on favorable
terms, (iv) changes in governmental laws and regulations, (v) the level and
volatility of interest rates, (vi) the availability of suitable acquisition
opportunities and (vii) increases in operating costs. Accordingly, there is no
assurance that the Company's expectations will be realized.
10
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As of September 30, 2003, the Company had approximately $153.8
million of floating-rate debt outstanding. The interest rate risk on $85.0
million of such debt has been mitigated through the use of an interest rate swap
agreement (the "Swap") with a major financial institution. The Company is
exposed to credit risk in the event of non-performance by the counter-party to
the Swap. The Company believes it mitigates its credit risk by entering into the
Swap with a major financial institution. The Company believes the interest rate
risk represented by the remaining $68.8 million of floating-rate debt is not
material to the Company or its overall capitalization.
As of September 30, 2003, the Company has Canadian investments
totaling CAD $173.2 million (approximately USD $128.4 million) comprised of
marketable securities and real estate joint ventures. In addition, the Company
has Mexican real estate investments of approximately MXN $424.3 million
(approximately USD $38.8 million). The foreign currency exchange risk has been
mitigated through the use of foreign currency forward contracts (the "Forward
Contracts") and a cross currency swap (the "CC Swap") with major financial
institutions. The Company is exposed to credit risk in the event of
non-performance by the counter-party to the Forward Contracts and the CC Swap.
The Company believes it mitigates its credit risk by entering into the Forward
Contracts and the CC Swap with major financial institutions.
The Company has not, and does not plan to, enter into any
derivative financial instruments for trading or speculative purposes. As of
September 30, 2003, the Company had no other material exposure to market risks.
Item 4. Controls and Procedures
The Company's management, with the participation of the Company's
chief executive officer and chief financial officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on such evaluation, the Company's chief executive officer and
chief financial officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
There have not been any changes in the Company's internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that have materially affected, or are reasonable likely to materially
affect, the Company's internal control over financial reporting.
11
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
September 30, December 31,
2003 2002
-------------- --------------
Assets:
Operating real estate, net of accumulated depreciation
of $551,525 and $516,558, respectively $ 2,746,726 $ 2,669,648
Investments and advances in real estate joint ventures 447,412 390,484
Real estate under development 262,575 234,953
Other real estate investments 109,308 99,542
Mortgages and other financing receivables 79,161 94,024
Cash and cash equivalents 106,960 35,962
Marketable securities 43,876 66,992
Accounts and notes receivable 61,163 55,012
Other assets 126,480 110,261
------------- -------------
$ 3,983,661 $ 3,756,878
============= =============
Liabilities:
Notes payable $ 1,312,250 $ 1,302,250
Mortgages payable 205,954 230,760
Construction loans payable 62,420 43,972
Other liabilities, including minority interests in partnerships 300,137 272,568
------------- -------------
1,880,761 1,849,550
------------- -------------
Stockholders' equity:
Preferred stock , $1.00 par value, authorized 3,600,000 shares Class A
Preferred Stock, $1.00 par value, authorized 345,000 shares
Issued and outstanding 0 and 300,000 shares, respectively - 300
Aggregate liquidation preference $0 and $75,000, respectively
Class B Preferred Stock, $1.00 par value, authorized 230,000 shares
Issued and outstanding 0 and 200,000 shares, respectively - 200
Aggregate liquidation preference $0 and $50,000, respectively
Class C Preferred Stock, $1.00 par value, authorized 460,000 shares
Issued and outstanding 0 and 400,000 shares, respectively - 400
Aggregate liquidation preference $0 and $100,000, respectively
Class F Preferred Stock, $1.00 par value, authorized 700,000 shares Issued
and outstanding 700,000 and 0 shares, respectively
Aggregate liquidation preference $175,000 and $0, respectively 700 -
Common stock, $.01 par value, authorized 200,000,000 shares
Issued and outstanding 110,331,759 and 104,601,828 shares, respectively 1,103 1,046
Paid-in capital 2,139,319 1,984,820
Cumulative distributions in excess of net income (48,213) (85,367)
------------- -------------
2,092,909 1,901,399
Accumulated other comprehensive income 11,085 7,401
Notes receivable from officer stockholders (1,094) (1,472)
------------- -------------
2,102,900 1,907,328
------------- -------------
$ 3,983,661 $ 3,756,878
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
12
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2003 and 2002
(in thousands, except per share data)
Three Months Ended Sept 30, Nine Months Ended Sept 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Real estate operations:
Revenues from rental property $ 120,259 $ 107,290 $ 357,634 $ 326,354
---------- ---------- ---------- ----------
Rental property expenses:
Rent 2,787 2,633 8,358 8,469
Real estate taxes 16,452 15,437 46,751 45,905
Operating and maintenance 11,874 10,516 40,666 32,668
---------- ---------- ---------- ---------
31,113 28,586 95,775 87,042
---------- ---------- ---------- ---------
89,146 78,704 261,859 239,312
Equity in income of real estate joint ventures, net 11,167 9,101 30,459 24,411
Minority interests in income of partnerships, net (2,347) (262) (5,743) (738)
Income from other real estate investments 5,998 5,578 15,807 13,690
Mortgage financing income 3,645 4,467 15,773 12,754
Management and other fee income 4,259 2,521 10,822 9,060
Depreciation and amortization (21,593) (17,931) (61,081) (53,260)
---------- ---------- ---------- ---------
Income from real estate operations 90,275 82,178 267,896 245,229
---------- ---------- ---------- ---------
Other investments:
Interest, dividends and other investment income 5,701 2,380 13,394 15,472
Other income/(loss), net 273 2,372 (828) 6,257
---------- ---------- ---------- ---------
5,974 4,752 12,566 21,729
---------- ---------- ---------- ---------
Interest expense (26,419) (22,048) (74,020) (65,580)
General and administrative expenses (11,234) (7,918) (28,726) (23,067)
Gain on early extinguishment of debt - - 6,262 -
---------- ---------- ---------- ---------
Income from continuing operations before income taxes 58,596 56,964 183,978 178,311
Provision for income taxes (1,171) (634) (3,686) (6,422)
---------- ---------- ---------- ---------
Income from continuing operations 57,425 56,330 180,292 171,889
---------- ---------- ---------- ---------
Discontinued operations:
Income from discontinued operating properties 1,027 523 3,851 3,800
Gain on disposition of operating properties 28,053 966 30,465 1,512
---------- ---------- ---------- ---------
Income from discontinued operations 29,080 1,489 34,316 5,312
----------- ---------- ---------- ---------
Gain on sale of development properties
net of tax of $3,333, $1,957, $6,134 and $3,669, respectively 4,999 2,937 9,202 5,505
---------- ---------- ---------- ---------
Net Income 91,504 60,756 223,810 182,706
Original issuance costs associated with the redemption
of preferred stock - - (7,788) -
Preferred stock dividends (2,909) (4,609) (11,759) (13,828)
---------- ---------- ---------- ---------
Net income available to common shareholders $ 88,595 $ 56,147 $ 204,263 $ 168,878
========== ========== ========== =========
Per common share:
Income from continuing operations:
-Basic $ 0.55 $ 0.52 $ 1.60 $ 1.57
========== ========== ========== =========
-Diluted $ 0.54 $ 0.52 $ 1.59 $ 1.55
========== ========== ========== =========
Net income :
-Basic $ 0.82 $ 0.54 $ 1.93 $ 1.62
========== ========== ========== =========
-Diluted $ 0.80 $ 0.53 $ 1.90 $ 1.60
========== ========== ========== =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
13
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2003 and 2002
(in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income $ 91,504 $ 60,756 $ 223,810 $ 182,706
---------- ---------- ---------- ----------
Other comprehensive income:
Unrealized gain/(loss) on marketable securities 658 (3,637) 3,414 (2,628)
Unrealized gain on interest rate swaps 365 964 562 3,497
Unrealized gain on warrants 373 643 3,846 1,813
Unrealized gain/(loss) on foreign currency hedge
agreements 1,074 1,372 (10,421) 1,772
Foreign currency translation adjustment (5,863) - 6,283 -
---------- ---------- ---------- ----------
Other comprehensive income (3,393) (658) 3,684 4,454
---------- ---------- ---------- ----------
Comprehensive income $ 88,111 $ 60,098 $ 227,494 $ 187,160
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
14
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(in thousands)
------------ ------------
2003 2002
------------ ------------
------------ ------------
Cash flow provided by operations $ 237,539 $ 230,757
------------ ------------
Cash flow from investing activities:
Acquisition of and improvements to operating real estate (304,107) (100,829)
Acquisition of and improvements to real estate under (133,785) (69,707)
development
Investment in marketable securities (20,708) (34,314)
Proceeds from sale of marketable securities 54,349 47,171
Investments and advances to real estate joint ventures (112,326) (135,792)
Reimbursements of advances to real estate joint ventures 67,693 9,077
Other real estate investments (26,668) (20,128)
Redemption of minority interests in real estate (4,515) --
partnerships
Investment in joint ventures -- (11,419)
Reimbursements of advances in joint ventures -- 12,800
Investment in mortgage loans receivable (40,945) (92,232)
Collection of mortgage loans receivable 33,681 11,883
Collection of note receivable -- 400
Proceeds from sale of mortgage loan receivable 36,723 --
Investments in leveraged lease -- (3,968)
Investment in and advances received for designation rights -- 832
Proceeds from sale of operating properties 201,476 --
Proceeds from sale of development properties 80,291 33,913
------------ ------------
Net cash flow used for investing activities (168,841) (352,313)
------------ ------------
Cash flow from financing activities:
Principal payments on debt, excluding
normal amortization of rental property debt (12,475) (7,320)
Principal payments on rental property debt (4,224) (4,497)
Principal payments on construction loan financings (39,189) --
Proceeds from mortgage financing 21,360 28,900
Proceeds from construction loan financings 57,636 13,301
Borrowings under revolving credit facility 150,000 229,000
Repayment of borrowings under revolving credit facility (190,000) --
Proceeds from issuance of medium-term note 150,000 102,000
Repayment of medium-term note (100,000) (110,000)
Payment of unsecured obligation -- (11,300)
Dividends paid (183,813) (176,622)
Proceeds from issuance of stock 378,005 7,742
Redemption of preferred stock (225,000) --
------------ ------------
Net cash flow provided by financing activities 2,300 71,204
------------ ------------
Change in cash and cash equivalents 70,998 (50,352)
Cash and cash equivalents, beginning of period 35,962 93,847
------------ ------------
Cash and cash equivalents, end of period $ 106,960 $ 43,495
============ ============
Interest paid during the period $ 63,500 $ 55,927
============ ============
Income taxes paid during the period $ 13,491 $ 3,155
============ ============
Supplemental schedule of noncash investing/financing
activities:
Acquisition of real estate interest by assumption of
mortgage debt $ -- $ 3,477
============ ============
Disposition of real estate interest by assignment of
mortgage debt $ 23,068 $ 28,748
============ ============
Proceeds held in escrow from sale of real estate interests $ -- $ 4,512
============ ============
Acquisition of designation rights subject to an unsecured
obligation $ -- $ 33,000
============ ============
Notes received upon disposition of real estate interests $ 14,490 $ --
============ ============
Notes received upon exercise of stock options $ 100 $ 555
============ ============
Declaration of dividends paid in succeeding period $ 59,238 $ 57,527
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
15
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
-------------------
1. Interim Financial Statements
Principles of Consolidation -
The accompanying Condensed Consolidated Financial Statements
include the accounts of Kimco Realty Corporation (the "Company"), its
subsidiaries, all of which are wholly owned, and all partnerships in which the
Company has a controlling interest. The information furnished is unaudited and
reflects all adjustments which are, in the opinion of management, necessary to
reflect a fair statement of the results for the interim periods presented, and
all such adjustments are of a normal recurring nature. These Condensed
Consolidated Financial Statements should be read in conjunction with the
Company's Annual Report on Form 10-K and Current Report on Form 8-K dated June
6, 2003.
Certain 2002 amounts have been reclassified to conform to the
2003 financial statement presentation.
Income Taxes -
The Company and its qualified REIT 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 Real Estate
Investment Trust (a "REIT") for federal income tax purposes. Accordingly, the
Company generally will not be subject to federal income tax, provided that
distributions to its stockholders equal at least the amount of its REIT taxable
income as defined under Section 856 through 860 of the Internal Revenue Code, as
amended (the "Code"). However, in connection with the Tax Relief Extension Act
of 1999, 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 REIT subsidiaries
under the Code. As such, the Company will be subject to federal and state income
taxes on the income from these activities. During the nine months ended
September 30, 2003 and 2002, the Company's provision for federal and state
income taxes relating to activities conducted in its taxable REIT subsidiaries
were approximately $9.8 million and $10.1 million, respectively.
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):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Computation of Basic Earnings Per Share:
Income from continuing operations $ 57,425 $ 56,330 $ 180,292 $ 171,889
Gain on sale of development properties,
net of provision for income taxes 4,999 2,937 9,202 5,505
Original issuance costs associated with the
redemption of preferred stock -- -- (7,788) --
Preferred stock dividends (2,909) (4,609) (11,759) (13,828)
--------- --------- --------- ---------
Income from continuing operations
applicable to common shares 59,515 54,658 169,947 163,566
Income from discontinued operations 29,080 1,489 34,316 5,312
--------- --------- --------- ---------
Net income applicable to common shares $ 88,595 $ 56,147 $ 204,263 $ 168,878
========= ========= ========= =========
Weighted average common shares
outstanding - basic 107,909 104,539 105,945 104,418
Basic Earnings Per Share:
Income from continuing operations $ 0.55 $ 0.52 $ 1.60 $ 1.57
Income from discontinued operations 0.27 0.02 0.33 0.05
--------- --------- --------- ---------
Net income $ 0.82 $ 0.54 $ 1.93 $ 1.62
========= ========= ========= =========
Computation of Diluted Earnings Per Share:
Income from continuing operations
applicable to common shares $ 59,515 $ 54,658 $ 169,947 $ 163,566
Dividends on convertible downREIT units 1,423 -- 4,269 --
--------- --------- --------- ---------
Income from continuing operations for
diluted earnings per share 60,938 54,658 174,216 163,566
Income from discontinued operations 29,080 1,489 34,316 5,312
--------- --------- --------- ---------
Net income for diluted earnings per share $ 90,018 $ 56,147 $ 208,532 $ 168,878
========= ========= ========= =========
Weighted average common shares
outstanding - basic 107,909 104,539 105,945 104,418
Effect of dilutive securities:
Stock options 1,944 952 1,539 1,041
Assumed conversion of Class D Preferred
stock to common stock -- -- -- 5
Assumed conversion of downREIT units 2,383 -- 2,404 --
--------- --------- --------- ---------
Shares for diluted earnings per share 112,236 105,491 109,888 105,464
========= ========= ========= =========
Diluted Earnings Per Share:
Income from continuing operations $ 0.54 $ 0.52 $ 1.59 $ 1.55
Income from discontinued operations 0.26 0.01 0.31 0.05
--------- --------- --------- ---------
Net income $ 0.80 $ 0.53 $ 1.90 $ 1.60
========= ========= ========= =========
17
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), issued in March 2000. 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
("FASB No. 148"), which will apply the recognition provisions of FASB No. 123,
Accounting for Stock-Based Compensation ("FASB 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 for the three and nine months ended
September 30, 2003 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 FASB 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):
18
Three Months ended Nine Months ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 91,504 $ 60,756 $ 223,810 $ 182,706
Add: Stock based employee compensation
expense included in reported net income 26 -- 42 --
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards (763) (788) (2,253) (2,364)
--------- --------- --------- ---------
Pro forma net income - basic $ 90,767 $ 59,968 $ 221,599 $ 180,342
========= ========= ========= =========
Earnings Per Share
Basic - as reported $ 0.82 $ 0.54 $ 1.93 $ 1.62
========= ========= ========= =========
Basic - pro forma $ 0.81 $ 0.53 $ 1.91 $ 1.59
========= ========= ========= =========
Net income for diluted earnings per share $ 90,018 $ 56,147 $ 208,532 $ 168,878
Add: Stock based employee compensation
expense included in reported net income 26 -- 42 --
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards (763) (788) (2,253) (2,364)
--------- --------- --------- ---------
Pro Forma net income - diluted $ 89,281 $ 55,359 $ 206,321 $ 166,514
========= ========= ========= =========
Earnings Per Share
Diluted - as reported $ 0.80 $ 0.53 $ 1.90 $ 1.60
========= ========= ========= =========
Diluted - pro forma $ 0.80 $ 0.52 $ 1.88 $ 1.58
========= ========= ========= =========
In addition, there were approximately 29,250 and 1,251,550 stock
options that were anti-dilutive as of September 30, 2003 and 2002, 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, FIN 46 requires additional disclosures. The
Company's exposure to losses associated with its unconsolidated joint ventures
is limited to its carrying value in these investments. In October 2003, the FASB
announced that the effective date of FIN 46 was deferred from July 1, 2003 to
December 31, 2003 for interests held by public companies in all variable
interest entities created prior to February 1, 2003. The Company is evaluating
the potential impact of the adoption of FIN 46 on the Company's financial
position and results of operations for those entities created prior to February
1, 2003. The Company has assessed its joint venture entities formed subsequent
to February 1, 2003 and determined that the adoption of FIN 46 has not had a
material impact on the Company's financial position or results of operations.
19
In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities ("FASB No. 149").
This statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB Statement No. 133,
Accounting for Derivatives Instruments and Hedging Activities. The provisions of
this statement are effective for contracts entered into or modified after June
30, 2003, and for hedging relationships designated after June 30, 2003. The
adoption of FASB No. 149 did not have a material adverse impact on the Company's
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("FASB
No. 150"). This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
provisions of this statement are effective for financial instruments entered
into or modified after May 31, 2003, and otherwise are effective at the
beginning of the first interim period beginning after June 15, 2003. On November
7, 2003, the FASB deferred the classification and measurement provisions of FASB
No. 150 which apply to certain mandatorily redeemable non-controlling interests.
This deferral is expected to remain in effect while these provisions are further
evaluated by the FASB. As a result of this deferral, the adoption of FASB No.
150 did not have a material adverse impact on the Company's financial position
or results of operations.
At September 30, 2003 the estimated fair value of minority
interests relating to mandatorily redeemable non-controlling interests
associated with finite-lived subsidiaries of the Company is approximately $3.9
million. These finite-lived subsidiaries have termination dates ranging from
2019 to 2027.
2. Operating Properties Activities
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 No. 141, Business Combinations. Based on these estimates,
the Company allocates the purchase price to the applicable assets and
liabilities.
20
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 purchase price to identified intangible assets and
liabilities of an acquired property, the value of above-market and below-market
leases are estimated based on the present value of the difference between the
contractual amounts to be paid pursuant to the leases and management's estimate
of the market lease rates and other lease provisions (i.e. expense recapture,
base rental changes, etc.) measured over a period equal to the remaining
non-cancelable term of the lease. The capitalized above-market or below-market
intangible is amortized to rental income over the non-cancelable term of the
respective leases.
In determining the value of in-place leases, management considers
current market conditions and costs to execute similar leases in arriving at an
estimate of the carrying costs during the expected lease-up period from vacant
to existing occupancy. In estimating carrying costs, management includes real
estate taxes, insurance, other operating expenses and estimates of lost rental
revenue during the expected lease-up periods and costs to execute similar leases
including leasing commissions, legal and other related costs based on current
market demand. In estimating the value of tenant relationships, management
considers the nature and extent of the existing tenant relationship, the
expectation of lease renewals, growth prospects, and tenant credit quality,
among other factors. The value assigned to in-place leases and tenant
relationships are amortized over the non-cancelable term of the leases. If a
lease were to be terminated prior to its stated expiration, all unamortized
intangibles relating to that lease would be written off.
During the nine months ended September 30, 2003, the Company
acquired eleven operating properties, comprising approximately 1.5 million
square feet of gross leaseable area ("GLA"), for an aggregate purchase price of
approximately $245.5 million.
During the nine months ended September 30, 2003, the Company (i)
disposed of, in separate transactions, six operating properties for an aggregate
sales price of approximately $112.5 million, including the assignment of
approximately $1.7 million in mortgage debt encumbering one of the properties,
(ii) terminated four leasehold positions in locations where a tenant in
bankruptcy had rejected its lease and (iii) transferred two operating properties
to 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, for a price of approximately $85.0 million, which
approximated their aggregate net book value. These dispositions resulted in net
gains of approximately $30.5 million, for the nine months ended September 30,
2003. For those property dispositions for which SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FASB 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 condensed Consolidated Statements of
Income.
21
3. Discontinued Operations
In accordance with FASB No. 144, the Company reports as
discontinued operations assets held for sale (as defined by FASB No. 144) and
operating assets sold in the current period. All results of these discontinued
operations are included in a separate component of income on the Condensed
Consolidated Statements of Income under Discontinued operations. This change has
resulted in certain reclassifications of 2002 financial statement amounts.
The components of Income from operations related to discontinued
operations for the three months and nine months ended September 30, 2003 and
2002 are shown below. These include the results of operations through the date
of sale for each property sold during 2003 and 2002 and the operations for the
applicable period for those assets classified as held for sale as of September
30, 2003 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Discontinued operations:
Revenues from rental property $ 1,867 $ 4,208 $ 7,726 $ 16,613
Rental property expenses (533) (2,038) (2,456) (7,740)
-------- -------- -------- --------
Income from property operations 1,334 2,170 5,270 8,873
Depreciation and amortization (319) (1,267) (1,412) (3,922)
Interest expense 6 (380) (4) (1,177)
Other 6 -- (3) 26
-------- -------- -------- --------
Income from discontinued operating
properties 1,027 523 3,851 3,800
Gain on disposition of operating
properties, net 28,053 966 30,465 1,512
-------- -------- -------- --------
Income from discontinued operations $ 29,080 $ 1,489 $ 34,316 $ 5,312
======== ======== ======== ========
4. Kimco Developers, Inc. ("KDI")
Effective January 1, 2001, the Company elected taxable REIT
subsidiary status for its wholly-owned development subsidiary, KDI. During the
nine months ended September 30, 2003, KDI acquired eight land parcels, in
separate transactions, for the ground-up development of shopping centers and
subsequent sale thereof upon completion for an aggregate purchase price of
approximately $49.2 million.
22
During the nine months ended September 30, 2003, KDI sold four of
its recently completed projects and 16 out-parcels, in separate transactions,
for approximately $118.5 million, which resulted in the recognition of pre-tax
gains of approximately $15.3 million.
Additionally, during the nine months ended September 30, 2003,
KDI obtained construction financing on five ground-up development projects for
an aggregate loan amount of up to $124.5 million, of which approximately $17.0
million has been funded to KDI as of September 30, 2003. As of September 30,
2003, KDI had twelve loans with total commitments of up to $217.4 million of
which $62.4 million had been funded to KDI. These loans have maturities ranging
from 5 to 36 months and a weighted average interest rate of 3.88% at September
30, 2003.
5. Investment and Advances in Real Estate Joint Ventures
Kimco Income REIT -
During 1998, the Company formed Kimco Income REIT ("KIR"), a
limited partnership which the Company manages, established to invest in high
quality retail properties financed primarily through the use of individual
non-recourse mortgages. As of September 30, 2003, the KIR portfolio was
comprised of 70 properties aggregating 14.6 million square feet of GLA located
in 21 states.
The Company holds a 43.3% non-controlling limited partnership
interest in KIR and accounts for its investment in KIR under the equity method
of accounting. The Company's equity in income of KIR for the nine months ended
September 30, 2003 and 2002 was approximately $15.2 million and $13.0 million,
respectively. During the nine months ended September 30, 2003, the Company
contributed approximately $10.8 million in cash to KIR in connection with its
subscription agreement.
In addition, KIR entered into a master management agreement with
the Company, whereby, the Company will perform services for a fee relating to
the management, operation, supervision and maintenance of the joint venture
properties. For the nine months ended September 30, 2003 and 2002, the Company
earned management fees of approximately $2.2 million and $1.8 million,
respectively.
RioCan Venture -
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 GLA) in which the Company has a 50%
non-controlling interest, to acquire retail properties and development projects
in Canada. The acquisitions 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. As of September 30, 2003, the RioCan Venture consisted of 30 shopping
center properties and four development projects, aggregating 7.0 million square
feet of GLA. During the nine months ended September 30, 2003 and 2002, the
Company recognized equity in income of the RioCan Venture of approximately $8.7
million and $5.6 million, respectively.
23
KROP Venture -
During October 2001, the Company formed KROP, a venture with
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. The initial funding for this venture consists
of an equity pool of up to $250.0 million, provided $50.0 million by the Company
and $200.0 million by GECRE. The Company will be responsible for the day-to-day
management, redevelopment and leasing of the properties acquired and will be
paid fees for those services. In addition, the Company will earn fees related to
the acquisition and disposition of the properties by KROP. Capital contributions
will only be required as suitable opportunities arise and are agreed to by the
Company and GECRE.
As of September 30, 2003, the KROP venture consisted of 21
properties aggregating 3.1 million square feet of GLA located in ten states. For
the nine months ended September 30, 2003 and 2002, the Company recognized equity
in income of KROP of approximately $1.4 million and $0.5 million, respectively.
Additionally, during the nine months ended September 30, 2003 and 2002, the
Company earned management and acquisition fees of approximately $2.7 million and
$1.7 million, respectively.
Other Real Estate Joint Ventures -
During June 2003, the Company acquired a former Service
Merchandise property located in Novi, MI through a joint venture, in which the
Company has a 42.5% non-controlling interest. The property was purchased for a
purchase price of approximately $4.1 million.
During June 2003, the Company acquired a property located in
South Bend, IN, through a joint venture in which the Company has a 37.5%
non-controlling interest. The property was purchased for an aggregate purchase
price of approximately $4.9 million.
During July 2003, the Company acquired a property located in
Pineville, NC through a joint venture, in which the Company has a 20%
non-controlling interest. The property was purchased for a purchase price of
approximately $27.3 million, including $19.3 million of non-recourse mortgaged
debt encumbering the property.
24
During August 2003, the Company acquired a property located in
Shaumburg, IL through a joint venture in which the Company has a 45%
non-controlling interest. The property was purchased for an aggregate purchase
price of approximately $66.6 million. Simultaneous with the acquisition, the
venture obtained a $51.6 million 17 month non-recourse mortgage at a floating
interest rate of LIBOR plus 2.25%.
Additionally, during the nine months ended September 30, 2003,
the Company acquired six properties, in separate transactions, through joint
ventures in which the company has a 50% non-controlling interest. These
properties were purchased for an aggregate purchase price of approximately $80.6
million, including $19.9 million of non-recourse debt encumbering two of the
properties.
6. Other Real Estate Investments
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 mortgage debt. The Company's investment strategy with respect
to Kimsouth includes re-tenanting, repositioning and disposition of the
properties. During the nine months ended September 30, 2003, Kimsouth sold nine
properties for net proceeds of approximately $43.5 million including the
assignment of approximately $12.3 million of mortgage debt encumbering five of
the properties. For the nine months ended September 30, 2003, the Company
recognized equity in income of Kimsouth of $8.0 million before income taxes.
Additionally, during the nine months ended September 30, 2003, the Company
earned management fees of approximately $0.6 million.
Preferred Equity Program -
During 2002, the Company established a preferred equity program,
which provides capital to developers and owners of shopping centers. As of
September 30, 2003, the Company has provided an aggregate of approximately $56.3
million in investment capital to developers and owners of 20 properties. The
Company earned approximately $2.8 million and $0.5 million for the nine months
ended September 30, 2003 and 2002, respectively from these investments.
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7. Mortgages and Other Financing Receivables
During August 2001, the Company through a joint venture in which
the Company has a 50% interest, provided $27.5 million of debtor-in-possession
financing (the "Ames Loan") to Ames Department Stores, Inc., ("Ames"), a
retailer in bankruptcy. This loan bore interest at prime plus 6.0%, was
collateralized by all real estate owned by Ames and was scheduled to mature in
August 2003.
During September 2002, the Ames Loan, was restructured as a
two-year $100.0 million secured revolving loan of which the Company has a 40%
interest. This revolving loan is collateralized by all of Ames' real estate
interests. The loan bears interest at 8.5% per annum and provides for contingent
interest upon the successful disposition of the Ames properties. During January
2003, Ames paid the outstanding balance of approximately $4.1 million. As of
September 30, 2003, there was no balance outstanding on this revolving loan.
During the nine months ended September 30, 2003, the Company earned
approximately $5.9 million in additional interest.
During March 2002, the Company provided a $50.0 million ten-year
loan to Shopko Stores Inc., at an interest rate of 11.0% per annum
collateralized by 15 properties. The Company receives principal and interest
payments on a monthly basis. During January 2003, the Company sold a $37.0
million participation interest in this loan to an unaffiliated third party. The
interest rate of the $37.0 million participation interest is a variable rate
based on LIBOR plus 3.50%. The Company continues to act as the servicer for the
full amount of the loan.
During May 2002, the Company provided a $15.0 million three-year
loan 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. An additional $17.5 million revolving loan at an interest
rate of 10.25% per annum was also established. As of September 30, 2003, the
aggregate outstanding loan balance was approximately $30.5 million. As an
inducement to make these loans, Frank's issued the Company approximately 4.4
million warrants with an exercise price of $1.15 per share, and 5.0 million
warrants with an exercise price of $2.00 per share.
Additionally, during the nine months ended September 30, 2003,
the Company provided, in separate transactions, an aggregate $19.7 million of
additional mortgage financing of which approximately $11.5 million has been
repaid. These loans have maturities generally ranging from 3 to 30 years and
accrue interest at rates ranging from 7.00% to 12.25%.
8. Mortgages Payable
During February 2003, the Company reached agreement with a lender
in connection with two individual non-recourse mortgages encumbering two former
Kmart sites. The Company paid approximately $8.3 million in full satisfaction of
these loans which aggregated approximately $14.7 million. As a result of this
transaction, the Company recognized a gain on early extinguishment of debt of
approximately $6.3 million during the first quarter of 2003.
26
During May 2003, the Company suspended debt service payments on
an individual non-recourse mortgage loan with an outstanding principal balance
of approximately $9.3 million. This non-recourse loan encumbers a former Kmart
site located in Chicago, IL. The Company is actively negotiating settlement
terms with the respective lender.
9. Debt Financing
During May 2003, the Company issued $50.0 million of fixed-rate
unsecured senior notes under its medium-term notes ("MTN") program. This fixed
rate MTN matures in May 2010 and bears interest at 4.62% per annum, payable
semi-annually in arrears. The proceeds from this MTN issuance were used to
partially fund the redemption of the Company's $75 million 7 3/4% Class A
Cumulative Redeemable Preferred Stock.
During August 2003, the Company issued $100.0 million of
fixed-rate unsecured senior notes under its MTN program. This fixed rate MTN
matures in August 2008 and bears interest at 3.95% per annum, payable
semi-annually in arrears. The proceeds from this MTN issuance were used to
redeem all $100.0 million of the Company's remarketed reset notes maturing
August 18, 2008 bearing interest at LIBOR plus 1.25%.
During October 2003, the Company issued $100.0 million of
fixed-rate unsecured senior notes under its MTN program. This fixed rate MTN
matures in October 2013 and bears interest at 5.19% per annum, payable
semi-annually in arrears. The proceeds from this MTN issuance were used for the
repayment of the Company's 6.5% $100.0 million fixed-rate unsecured senior notes
which matured October 1, 2003.
Additionally, during October 2003, the Company obtained a $400.0
million unsecured bridge facility that bears interest at LIBOR plus 0.55%. This
loan is scheduled to expire September 30, 2004 with an option to extend up to
$150.0 million for an additional year. The Company has fully utilized the
proceeds to partially fund the Mid-Atlantic Realty Trust transaction.
10. Preferred Stock and Common Stock Transactions
During June 2003, the Company redeemed all 2,000,000 outstanding
depositary shares of the Company's 8 1/2% Class B Cumulative Redeemable
Preferred Stock, par value $1.00 per share ("Class B Preferred Stock"), all
3,000,000 outstanding depositary shares of the Company's 7 3/4% Class A
Cumulative Redeemable Preferred Stock, par value $1.00 per share ("Class A
Preferred Stock") and all 4,000,000 outstanding depositary shares of the
Company's 8 3/8% Class C Cumulative Redeemable Preferred Stock, par value $1.00
per share ("Class C Preferred Stock"), each at a redemption price of $25.00 per
depositary share, totaling $225.0 million, plus accrued dividends.
27
During June 2003, the Company issued 7,000,000 Depositary Shares
(the "Class F Depositary Shares"), each representing a one-tenth fractional
interest in 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.
Additionally, 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.
11. Tenant Concentration
On January 14, 2003, Kmart announced it would be closing an
additional 326 locations relating to its January 22, 2002 filing of protection
under Chapter 11 of the U.S. Bankruptcy Code. Nine of these locations (excluding
the KIR portfolio which includes three additional locations and Kimsouth which
includes two additional locations) are leased from the Company. The annualized
base rental revenues from these nine locations were approximately $4.3 million.
As of September 30, 2003, Kmart rejected its lease at seven of these locations
representing approximately $3.3 million of annualized base rental revenues. The
Company continues to negotiate leases with prospective tenants at six of theses
sites and has terminated its lease at one site. No assurance can be provided
that the remaining locations will be leased in the near term or at comparable
rents previously paid by Kmart.
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As of September 30, 2003, Kmart represented 2.9% of annualized
base rents and 4.9% of leased GLA, including the proportionate share of base
rental revenues and GLA from properties in which the Company has less than a
100% economic interest.
The Company generally will have the right to file claims in
connection with rejected leases for lost rent equal to three years of rental
obligations as well as other amounts related to obligations under the leases.
Actual amounts to be received in satisfaction of these claims will be subject to
Kmart's final plan of reorganization which became effective May 6, 2003 and the
availability of funds to pay creditors such as the Company.
12. Pro Forma Financial Information
As discussed in Note 2, the Company and certain of its affiliates
acquired and disposed of interests in certain operating properties during the
nine months ended September 30, 2003. The pro forma financial information set
forth below is based upon the Company's historical Condensed Consolidated
Statements of Income for the nine months ended September 30, 2003 and 2002,
adjusted to give effect to these transactions as of January 1, 2002.
The pro forma financial information is presented for
informational purposes only and may not be indicative of what actual results of
operations would have been had the transactions occurred as of January 1, 2002,
nor does it purport to represent the results of future operations. (Amounts
presented in millions, except per share figures).
Nine Months Ended September 30,
2003 2002
---- ----
Revenues from rental property $ 363.9 $ 340.4
Net income $ 192.6 $ 182.8
Net income per common share:
Basic $ 1.63 $ 1.62
======== ========
Diluted $ 1.61 $ 1.60
======== ========
13. Mid-Atlantic Realty Trust Merger
On June 18, 2003, the Company and Mid-Atlantic Realty Trust
("Mid-Atlantic") announced that the two companies had entered into a definitive
merger agreement (the "Merger Agreement"). Under the terms of the Merger
Agreement, which was unanimously approved by the Boards of both companies, the
Company will acquire all of the outstanding shares of Mid-Atlantic for $21.00
per share subject to adjustment under certain conditions in a cash transaction
in which Mid-Atlantic will merge with and into a wholly-owned subsidiary of the
Company. The merger requires the approval of holders of 66 2/3% of
Mid-Atlantic's outstanding shares.
29
Subject to certain conditions, limited partners in Mid-Atlantic's
operating partnership will be offered the same cash consideration for each
outstanding unit and will be 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 merger of the Company does not require the
approval of the limited partners of Mid-Atlantic's operating partnership.
The merger of Mid-Atlantic with and into a subsidiary of the Company
was approved by the shareholders of Mid-Atlantic on September 30, 2003 and the
closing occurred October 1, 2003. Mid-Atlantic shareholders received cash
consideration of $21.051 per share. In addition, more than 99% 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 has a total value of approximately $700.0 million
including Mid-Atlantic's existing indebtedness, which as of September 30, 2003,
was approximately $233.0 million. The Company funded the transaction with
available cash, a new $400 million bridge facility and funds from its existing
revolving credit facility.
Mid-Atlantic owns interests in 41 operating shopping centers, one
regional mall, two shopping centers under development and eight other commercial
assets. The properties have a gross leasable area of approximately 5.7 million
square feet of which approximately 95.0% of the stabilized square footage is
currently leased. Mid-Atlantic also owns approximately 80 acres of undeveloped
land. Mid-Atlantic's properties are located primarily in Maryland, Virginia, New
York, Pennsylvania, Massachusetts and Delaware. The Company has tentative
agreements for a number of the properties to be allocated to its strategic
co-investment programs.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not presently involved in any litigation, nor to
its knowledge is any litigation threatened against the Company or its
subsidiaries, that in management's opinion, would result in any material adverse
effect on the Company's ownership, management or operation of its properties, or
which is not covered by the Company's liability insurance.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits -
4.1 Agreement to File Instruments
Kimco Realty Corporation (the "Registrant") hereby agrees to file
with the Securities and Exchange Commission, upon request of the Commission, all
instruments defining the rights of holders of long-term debt of the Registrant
and its consolidated subsidiaries, and for any of its unconsolidated
subsidiaries for which financial statements are required to be filed, and for
which the total amount of securities authorized thereunder does not exceed 10
percent of the total assets of the Registrant and its subsidiaries on a
consolidated basis.
31
10.12 Credit Agreement
$400,000,000 Credit Agreement dated as of October 1, 2003 among
Kimco Realty Corporation, the Several Lenders from Time to Time Parties Hereto,
Wachovia Bank, National Association and The Bank of Nova Scotia, as Syndication
Agents, Keybank National Association, as Documentation Agent, Bank One, NA as
administrative Agent, Banc One Capital Markets, Inc. and Scotia Capital as
Co-Bookrunners and Co-Lead Arrangers.
31.1 Certification of the Company's Chief Executive Officer,
Milton Cooper, pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Company's Chief Financial Officer,
Michael V. Pappagallo, pursuant to Section 302 of the Sarbanes-Oxley Act 0f
2002.
32.1 Certification of the Company's Chief Executive Officer,
Milton Cooper, and the Company's Chief Financial Officer Michael V. Pappagallo,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Form 8-K -
A Current Report on Form 8-K dated July 29, 2003 was furnished
under Item 9 relating to the announcement of the Company's second quarter 2003
operating results.
A Current Report on Form 8-K was filed on July 30, 2003 under
Item 7 for the first amendment to the Distribution Agreement, dated July 28,
2003, by and among the Company and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Banc of America Securities LLC, Banc one Capital
Markets, Inc., BNY Capital Markets, Inc. ("BNY"), Credit Suisse First Boston
LLC, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Morgan Stanley & Co.
Incorporated, UBS Securities LLC ("UBS") and Wachovia Capital Markets, LLC
("Wachovia") relating to the appointment of BNY, UBS and Wachovia as additional
agents relating to the issuance and sale by the Company of its Series C
Medium-Term Notes with maturities of nine months or more from the date of
issuance.
A Current Report on Form 8-K was filed on September 10, 2003
under Item 7 to disclose the Underwriting and Terms Agreements, dated September
9, 2003, by and between Banc of America Securities LLC and the Company in
connection with the Company's 2,760,000 common stock offering during September
2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KIMCO REALTY CORPORATION
November 10, 2003 /s/ Milton Cooper
- ----------------- -------------------------
(Date) Milton Cooper
Chief Executive Officer
November 10, 2003 /s/ Michael V. Pappagallo
- ----------------- -------------------------
(Date) Michael V. Pappagallo
Chief Financial Officer
33