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4-Traders Homepage  >  Equities  >  Nyse  >  Kimco Realty Corp    KIM

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KIMCO REALTY : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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04/28/2017 | 08:00pm CEST

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 includes this statement for purposes of complying with the 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," "will," "target," "forecast" 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 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 adverse economic and local real estate conditions, (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business, (iii) financing risks, such as the inability to obtain equity, debt or other sources of financing or refinancing on favorable terms to the Company, (iv) the Company's ability to raise capital by selling its assets, (v) changes in governmental laws and regulations, (vi) the level and volatility of interest rates and foreign currency exchange rates and managements' ability to estimate the impact thereof, (vii) risks related to the Company's international operations, (viii) the availability of suitable acquisition, disposition, development and redevelopment opportunities , and risks related to acquisitions not performing in accordance with our expectations, (ix) valuation and risks related to the Company's joint venture and preferred equity investments, (x) valuation of marketable securities and other investments, (xi) increases in operating costs, (xii) changes in the dividend policy for the Company's common stock, (xiii) the reduction in the Company's income in the event of multiple lease terminations by tenants or a failure by multiple tenants to occupy their premises in a shopping center, (xiv) impairment charges, (xv) unanticipated changes in the Company's intention or ability to prepay certain debt prior to maturity and/or hold certain securities until maturity and (xvi) the risks and uncertainties identified under Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016. Accordingly, there is no assurance that the Company's expectations will be realized. The Company disclaims any intention or obligation to update the forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to refer to any further disclosures the Company makes or related subjects in the Company's Current Reports on Form 8-K that the Company files with the Securities and Exchange Commission ("SEC").

The following discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto. These unaudited financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods presented, and all such adjustments are of a normal recurring nature.



Executive Summary


Kimco Realty Corporation is one of the nation's largest publicly-traded owners and operators of open-air shopping centers. As of March 31, 2017, the Company had interests in 518 shopping center properties aggregating 84.6 million square feet of gross leasable area ("GLA") located in 34 states, Puerto Rico and Canada. In addition, the Company had 380 other property interests, primarily through the Company's preferred equity investments and other real estate investments, totaling 5.8 million square feet of GLA.

The executive officers are engaged in the day-to-day management and operation of real estate exclusively with the Company, with nearly all operating functions, including leasing, asset management, maintenance, construction, legal, finance and accounting, administered by the Company.

The Company's strategy is to be the premier owner and operator of open-air shopping centers through investments primarily in the U.S. To achieve this strategy the Company is (i) continuing to transform the quality of its portfolio by disposing of lesser quality assets and acquiring larger, higher quality properties in key markets identified by the Company, for which substantial progress has been achieved as of the end of 2016, (ii) simplifying its business by: (a) reducing the number of joint venture investments and (b) exiting Mexico, South America and Canada, for which the exit of South America has been completed, Mexico has been substantially completed and the Company has essentially sold all of its operating properties in Canada, (iii) pursuing redevelopment opportunities within its portfolio to increase overall value and (iv) selectively acquiring land parcels in our key markets for real estate development projects for long-term investment. As part of the Company's strategy each property is evaluated for its highest and best use, which may include residential and mixed-use components. In addition, the Company may consider other opportunistic investments related to retailer controlled real estate such as, repositioning underperforming retail locations, retail real estate financing and bankruptcy transaction support. The Company has an active capital recycling program which provides for the disposition of certain U.S. properties. If the Company accepts sales prices for any of these assets that are less than their net carrying values, the Company would be required to take impairment charges and such amounts could be material. In order to execute the Company's strategy, the Company intends to continue to strengthen its balance sheet by pursuing deleveraging efforts over time, providing it the necessary flexibility to invest opportunistically and selectively, primarily focusing on U.S. open-air shopping centers.





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Results of Operations


Comparison of the three months ended March 31, 2017 and 2016



                                          Three Months Ended
                                               March 31,
                                         (amounts in millions)
                                     2017        2016       Change       % change

Revenues from rental property (1) $ 289.4 $ 293.1 $ (3.7 ) (1.3 %)


Rental property expenses: (2)
Rent                                $   2.8     $   2.8     $     -              -
Real estate taxes                      38.3        34.5         3.8           11.0 %
Operating and maintenance              34.2        34.6        (0.4 )         (1.2 %)
                                    $  75.3     $  71.9     $   3.4            4.7 %

Depreciation and amortization (3)   $  92.1     $  84.9     $   7.2            8.5 %




(1) Revenues from rental property decreased for the three months ended March 31,

    2017, primarily from the combined effect of (i) a decrease in revenues of $9.1
    million for the three months ended March 31, 2017, as compared to the
    corresponding period in 2016, due to properties sold during 2017 and 2016, and
    (ii) a decrease in revenues of $8.1 million for three months ended March 31,
    2017, as compared to the corresponding period in 2016, primarily due to tenant
    vacates during 2016 which includes below market rent write-offs, partially
    offset by (iii) the acquisition of operating properties during 2017 and 2016,
    providing incremental revenues for the three months ended March 31, 2017 of
    $13.5 million as compared to the corresponding period in 2016.



(2) Rental property expenses include (i) rent expense relating to ground lease

    payments for which the Company is the lessee, (ii) real estate tax expense for
    consolidated properties for which the Company has a controlling ownership
    interest and (iii) operating and maintenance expense, which consists of
    property related costs including repairs and maintenance costs, roof repair,
    landscaping, parking lot repair, snow removal, utilities, property insurance
    costs, security and various other property related expenses. Rental property
    expenses increased for the three months ended March 31, 2017, as compared to
    the corresponding period in 2016, primarily due to the increase in real estate
    tax expense and acquisitions of properties in 2017 and 2016, partially offset
    by the disposition of properties during 2017 and 2016.



(3) Depreciation and amortization increased for the three months ended March 31,

    2017, as compared to the corresponding period in 2016, primarily due to
    operating property acquisitions in 2017 and 2016, partially offset by property
    dispositions in 2017 and 2016.



During the three months ended March 31, 2017 and 2016, the Company recognized impairment charges related to adjustments to property carrying values of $1.6 million and $5.8 million, respectively, for which the Company's estimated fair value was primarily based on third party offers through signed contracts. These adjustments to property carrying values were recognized in connection with the Company's efforts to market certain properties and management's assessment as to the likelihood and timing of such potential transactions and the anticipated hold period for such properties. Certain of the calculations to determine fair value utilized unobservable inputs and as such are classified as Level 3 of the fair value hierarchy.

Interest expense decreased $6.0 million for the three months ended March 31, 2017, as compared to the corresponding period in 2016. This decrease is primarily the result of lower levels of borrowings and lower interest rates on borrowings during the three months ended March 31, 2017, as compared to the corresponding period in 2016.

Benefit/(provision) for income taxes, net changed $12.6 million to a benefit of $0.5 million for the three months ended March 31, 2017, as compared to a provision of $12.1 million the corresponding period in 2016. This change is primarily due to (i) a decrease in foreign tax expense of $10.6 million primarily relating to the sale of certain unconsolidated properties during 2016 within the Company's Canadian portfolio which were subject to foreign taxes at a consolidated reporting entity level and (ii) a decrease in tax provision of $2.0 million resulting from the Company's merger of its taxable REIT subsidiary into a wholly-owned LLC of the Company on August 1, 2016.

Equity in income of joint ventures, net decreased $55.2 million for the three months ended March 31, 2017, as compared to the corresponding period in 2016. This decrease is primarily due to (i) a decrease in gains of $53.5 million resulting from fewer sales of properties and interests within various joint venture investments, including the Company's Canadian Portfolio, during the three months ended March 31, 2017, as compared to the corresponding period in 2016, and (ii) lower equity in income of $1.7 million primarily resulting from the sales of properties within various joint venture investments and the acquisition of partnership interests in joint ventures by the Company during 2017 and 2016.

During the three months ended March 31, 2017, the Company acquired, in separate transactions, a controlling interest in two operating properties from certain joint venture partners in which the Company had noncontrolling interests. The Company recorded a gain on change in control of interests of $10.2 million related to the fair value adjustment associated with its previously held equity interest in the operating properties.





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Equity in income of other real estate investments, net decreased $7.1 million for the three months ended March 31, 2017, as compared to the corresponding period in 2016. This decrease is primarily due to a decrease in profit participation from capital transactions within the Company's Preferred Equity Program during the three months ended March 31, 2017, as compared to the corresponding period in 2016.

During the three months ended March 31, 2017, the Company disposed of four consolidated operating properties and two out-parcels, in separate transactions, for an aggregate sales price of $57.8 million. These transactions resulted in an aggregate gain of $1.7 million and aggregate impairment charges of $1.2 million.

During the three months ended March 31, 2016, the Company disposed of seven consolidated operating properties, in separate transactions, for an aggregate sales price of $101.2 million. These transactions resulted in an aggregate gain of $26.9 million, after income tax expense.

Net income attributable to the Company was $76.7 million for the three months ended March 31, 2017, as compared to $140.7 million for the three months ended March 31, 2016. On a diluted per share basis, net income available to the Company's common shareholders for the three months ended March 31, 2017, was $0.15 as compared to $0.31 for the three months ended March 31, 2016. These changes are primarily attributable to (i) a decrease in equity in income of joint ventures, net, resulting from the sales of properties within various joint venture investments and the acquisition of partnership interests in joint ventures by the Company during 2017 and 2016, (ii) a decrease in gains on sale of operating properties and (iii) a decrease in equity in income of other real estate investments, net resulting from a decrease in sales through the Company's preferred equity program and other investments, partially offset by (iv) a reduction in provision for income taxes, (v) an increase from gain on change of control of interests, (vi) a decrease in interest expense and (vii) a decrease in impairment charges of operating properties during 2017.



 Tenant Concentration


The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its properties, avoiding dependence on any single property, and a large tenant base. At March 31, 2017, the Company's five largest tenants were TJX Companies, The Home Depot, Ahold Delhaize, Bed Bath & Beyond and Albertsons, which represented 3.5%, 2.5%, 2.1%, 2.0% 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

The Company's capital resources include accessing the public debt and equity capital markets, mortgage and construction loan financing, borrowings under term loans and immediate access to an unsecured revolving credit facility (the "Credit Facility") with bank commitments of $2.25 billion which can be increased to $2.75 billion through an accordion feature.

The Company's cash flow activities are summarized as follows (in millions):



                                                              Three Months Ended
                                                                   March 31,
                                                              2017           2016
Net cash flow provided by operating activities              $   157.1      $  137.0

Net cash flow (used for)/provided by investing activities $ (65.4 ) $ 127.8 Net cash flow used for financing activities

                 $   (66.7 )    $ (232.3 )




Operating Activities


The Company anticipates that cash on hand, borrowings under its the 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 provided by operating activities for the three months ended March 31, 2017, were $157.1 million, as compared to $137.0 million for the comparable period in 2016. This increase of $20.1 million is primarily attributable to (i) an increase of cash flow due to new leasing, expansion, re-tenanting of core portfolio properties and a decrease in interest expense and (ii) changes in operating assets and liabilities due to timing of receipts and payments, partially offset by (iii) a decrease in operational distributions from the Company's joint venture programs, due to the sale of certain joint ventures during 2017 and 2016.




Investing Activities



Cash flows used for investing activities for the three months ended March 31, 2017, were $65.4 million, as compared to cash flows provided by investing activities of $127.8 million for the comparable period in 2016. This change of $193.2 million resulted primarily from (i) a decrease in distributions from liquidation of real estate joint ventures of $50.9 million, (ii) an increase in improvements to real estate under development of $39.1 million, (iii) a decrease in return of investment from liquidation of real estate joint ventures of $40.0 million, primarily due to the liquidation of certain Canadian joint ventures in 2016, (iv) an increase in acquisition of operating real estate and other related net assets of $27.0 million, (v) a decrease in proceeds from the sale of operating and development properties of $27.3 million and (vi) a decrease of $14.8 million in reimbursements of investments in and advances to real estate joint ventures.





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Acquisitions of Operating Real Estate and Other Related Net Assets-

During the three months ended March 31, 2017 and 2016, the Company expended $38.4 million and $11.4 million, respectively, towards the acquisition of operating real estate properties. The Company continues to transform its operating portfolio through its capital recycling program by acquiring what the Company believes are high quality U.S. retail properties and disposing of lesser quality assets. The Company anticipates acquiring approximately $300.0 million to $350.0 million of operating properties during the remainder of 2017. The Company intends to fund these acquisitions with proceeds from property dispositions, cash flow from operating activities, assumption of mortgage debt, if applicable, and availability under the Company's revolving line of credit.

Improvements to Operating Real Estate-

During the three months ended March 31, 2017 and 2016, the Company expended $30.1 million and $32.9 million, respectively, towards improvements to operating real estate. These amounts consist of the following (in thousands):



                                          Three Months Ended
                                               March 31,
                                           2017          2016
Redevelopment/renovations               $   24,034     $ 19,661
Tenant improvements/tenant allowances        4,075        9,684
Other                                        1,944        3,521
Total (1)                               $   30,053     $ 32,866




  (1) During the three months ended March 31, 2017 and 2016, the Company
      capitalized interest of $0.5 million and $0.7 million, respectively, and
      capitalized payroll of $0.6 million and $0.6 million, respectively, in
      connection with the Company's improvements to operating real estate.



During the three months ended March 31, 2017 and 2016, the Company capitalized personnel costs of $3.0 million and $3.1 million, respectively, relating to deferred leasing costs.

The Company has an ongoing program to redevelop and re-tenant its properties to maintain or enhance its competitive position in the marketplace. The Company is actively pursuing redevelopment opportunities within its operating portfolio which it believes will increase the overall value by bringing in new tenants and improving the assets' value. The Company has identified three categories of redevelopment, (i) large scale redevelopment, which involves demolishing and building new square footage, (ii) value creation redevelopment, which includes the subdivision of large anchor spaces into multiple tenant layouts, and (iii) creation of out-parcels and pads which are located in the front of the shopping center properties. The Company anticipates its capital commitment toward these redevelopment projects and re-tenanting efforts during 2017 will be approximately $225.0 million to $275.0 million. The funding of these capital requirements will be provided by cash flow from operating activities and availability under the Company's revolving line of credit.

Real Estate Under Development-

The Company is engaged in select real estate development projects, which are expected to be held as long-term investments. As of March 31, 2017, the Company had in progress a total of seven consolidated real estate development projects located in the U.S. The Company anticipates its capital commitment toward these development projects during 2017 will be approximately $250.0 million to $300.0 million. The funding of these capital requirements will be provided by cash flow from operating activities and availability under the Company's revolving line of credit. The Company anticipates costs to complete these projects to be approximately $650.0 million to $700.0 million. Additionally, during the three months ended March 31, 2017, the Company capitalized interest of $2.4 million, real estate taxes and insurance of $0.5 million and payroll of $1.3 million, in connection with these real estate development projects.



Financing Activities


Cash flows used for financing activities for the three months ended March 31, 2017, were $66.7 million, as compared to $232.3 million for the comparable period in 2016. This change of $165.6 million resulted primarily from (i) an increase in proceeds from issuance of unsecured notes of $400.0 million, (ii) a decrease in repayments under unsecured term loan/notes of $50.0 million and (iii) a decrease in principal payments of $43.5 million, partially offset by (iv) a decrease in proceeds from unsecured revolving credit facility, net of $195.0 million, (v) a decrease in proceeds from issuance of stock of $110.9 million, (vi) an increase in financing origination costs of $9.8 million and (vii) an increase in dividends paid of $9.3 million.

The Company continually evaluates its debt maturities, and, based on management's current assessment, believes it has viable financing and refinancing alternatives that will not materially adversely impact its expected financial results. The Company continues to pursue borrowing opportunities with large commercial U.S. and global banks, select life insurance companies and certain regional and local banks. The Company has noticed a continuing trend that, although pricing remains dependent on specific deal terms, generally spreads for non-recourse mortgage financing had been widening due to global economic issues, but have recently stabilized. However, the unsecured debt markets are functioning well and credit spreads are at manageable levels.





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Debt maturities for the remainder of 2017 consist of $408.0 million of consolidated debt; $235.3 million of unconsolidated joint venture debt and $36.1 million of debt on properties included in the Company's Preferred Equity Program, assuming the utilization of extension options where available. The 2017 consolidated debt maturities are anticipated to be repaid with operating cash flows, borrowings from the Company's revolving credit facility and debt refinancing where applicable. The 2017 debt maturities on properties in the Company's unconsolidated joint ventures and Preferred Equity Program are anticipated to be repaid through debt refinancing, unsecured credit facilities and partner capital contributions, as deemed appropriate.

The Company intends to maintain strong debt service coverage and fixed charge coverage ratios as part of its commitment to maintain its investment-grade debt ratings. The Company may, from time-to-time, seek to obtain funds through additional common and preferred equity offerings, unsecured debt financings and/or mortgage/construction loan financings and other capital alternatives.

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 $12.6 billion. Proceeds from public capital market activities have been used for the purposes of, among other things, repaying indebtedness, acquiring interests in open-air shopping centers, funding real estate development projects, expanding and improving properties in the portfolio and other investments.

During February 2015, the Company filed a shelf registration statement on Form S-3, which is effective for a term of three years, for the future unlimited offerings, from time-to-time, of debt securities, preferred stock, depositary shares, common stock and common stock warrants. The Company, pursuant to this shelf registration statement 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.

At the Market Continuous Offering Program ("ATM program") -

During February 2015, the Company established an ATM program, pursuant to which the Company may offer and sell shares of its common stock, par value $0.01 per share, with an aggregate gross sales price of up to $500.0 million through a consortium of banks acting as sales agents. Sales of the shares of common stock may be made, as needed, from time to time in "at the market" offerings as defined in Rule 415 of the Securities Act of 1933, including by means of ordinary brokers' transactions on the NYSE or otherwise (i) at market prices prevailing at the time of sale, (ii) at prices related to prevailing market prices or (iii) as otherwise agreed to with the applicable sales agent. The Company did not sell any shares of common stock under the ATM program during the three months ended March 31, 2017. As of March 31, 2017, the Company had $211.9 million available under this ATM program.

Medium Term Notes ("MTN") and Senior Notes -

The Company's supplemental indentures governing its MTN and senior notes contains the following covenants, all of which the Company is compliant with:

© Edgar Online, source Glimpses

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Financials ($)
Sales 2017 1 176 M
EBIT 2017 401 M
Net income 2017 260 M
Debt 2017 5 278 M
Yield 2017 5,37%
P/E ratio 2017 36,32
P/E ratio 2018 33,34
EV / Sales 2017 11,8x
EV / Sales 2018 11,5x
Capitalization 8 636 M
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Consensus
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Mean consensus OUTPERFORM
Number of Analysts 21
Average target price 26,2 $
Spread / Average Target 29%
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Managers
NameTitle
Conor C. Flynn Chief Executive Officer & Director
Ross Cooper President & Chief Investment Officer
Milton Cooper Executive Chairman
David Jamieson Chief Operating Officer & Executive Vice President
Glenn Gary Cohen Chief Financial Officer, Treasurer & Executive VP
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