10-Q 1 b314648_10q.txt FORM 10-Q 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ----------------------- Commission file number 1-10899 --------------------------------------------------------- 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 ----- ----- 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. 64,238,685 shares outstanding as of October 31, 2001 1 of 22 PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Financial Statements - Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000. Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2001 and 2000. Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2001 and 2000. Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2001 and 2000. 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 decreased $1.4 million or 1.2% to $114.3 million for the three months ended September 30, 2001, as compared with $115.7 million for the corresponding quarter ended September 30, 2000. This net decrease is primarily due to the combined effect of (i) the acquisition of 14 shopping center properties during 2001 and 2000, new leasing within the portfolio and the completion of certain development projects providing incremental revenues of approximately $4.1 million for the three months ended September 30, 2001 as compared to the corresponding period in 2000, offset by (ii) the commencement of new redevelopment projects and tenant buyouts causing a temporary decrease in vacancy and the sale of certain shopping center properties during 2001 and 2000 resulting in a decrease in revenues of approximately $5.5 million for the three months ended September 30, 2001 as compared to the same period in 2000. 2 Revenues from rental property increased $10.8 million or 3.2% to $353.8 million for the nine months ended September 30, 2001, as compared with $343.0 million for the corresponding nine month period ended September 30, 2000. This net increase resulted primarily from the combined effect of (i) the acquisition of 14 shopping center properties during 2001 and 2000, new leasing within the portfolio and the completion of certain redevelopment and development projects providing incremental revenues of $15.8 million for the nine month period ended September 30, 2001 as compared to the same period in 2000, offset by (ii) the commencement of new redevelopment projects and sales of certain shopping center properties throughout 2001 and 2000 resulting in a decrease of revenues of approximately $5.0 million as compared to the corresponding nine month period in 2000. The rental property expense components of real estate tax, operating and maintenance, and depreciation and amortization increased approximately $0.5 million, $0.2 million, and $0.4 million, respectively, for the three months ended September 30, 2001 as compared with the same three month period in 2000. Similarly, the rental property expense components of real estate tax, operating and maintenance, and depreciation and amortization increased approximately $1.3 million, $4.1 million, and $2.8 million, respectively, for the nine months ended September 30, 2001 as compared with the same nine month period in 2000. These rental property expense increases are primarily due to property acquisitions, renovations within the existing portfolio, the completion of certain redevelopment and development projects, and increased snow removal costs during 2001 offset by the disposition of certain shopping center properties. Interest expense decreased $1.2 million and $1.1 million for the three and nine months ended September 30, 2001, respectively, as compared to the corresponding periods in 2000. These decreases are primarily due to reduced interest costs on the Company's floating-rate revolving credit facility and remarketing reset notes during the three and nine months ended September 30, 2001 as compared to the same periods in 2000. The Company has a non-controlling limited partnership interest in Kimco Income REIT ("KIR"), a limited partnership established to invest in high quality retail properties financed primarily through the use of individual non-recourse mortgages. Equity in income of KIR increased $0.9 million to $3.2 million for the three months ended September 30, 2001, as compared with $2.3 million for the corresponding period in 2000. Similarly, equity in income of KIR increased $2.2 million to $9.1 million for the nine months ended September 30, 2001, as compared with $6.9 million for the corresponding period in 2000. These increases are primarily due to the Company's increased capital investment in KIR. The additional capital investments received by KIR from the Company and its other institutional partners were used to purchase additional shopping center properties throughout calendar year 2000 and during the nine months ended September 30, 2001. 3 Effective January 1, 2001, the Company has elected taxable REIT subsidiary status for its wholly-owned development subsidiary ("KDI"). KDI is primarily engaged in the ground-up development of neighborhood and community shopping centers and the subsequent sale thereof upon completion. During the nine months ended September 30, 2001, KDI sold one of its recently completed projects and four out-parcels, in separate transactions, for approximately $36.9 million, which resulted in net gains of approximately $4.3 million after provision for income taxes. During March 2001, the Company, through a taxable REIT subsidiary, formed a joint venture (the "Ward Venture") in which the Company has a 50% interest, for purposes of acquiring asset designation rights for substantially all of the real estate property interests of the bankrupt estate of Montgomery Ward LLC and its affiliates. These asset designation rights have provided the Ward Venture the ability to direct the ultimate disposition of the 315 fee and leasehold interests held by the bankrupt estate. The Ward Venture has completed transactions on 258 properties, and the Company has recognized net profits of approximately $12.0 million after provision for income taxes for the nine months ended September 30, 2001. The pre-tax profits from the Ward Venture are included in the Condensed Consolidated Statement of Income in equity in income of other real estate joint ventures, net. Other income, net decreased $2.7 million for the three months ended September 30, 2001 as compared with the same period in 2000. The net decrease is primarily due to higher realized gains on the sale of certain marketable equity and debt securities in the three months ended September 30, 2000 as compared to the current quarter. Other income, net increased $1.9 million for the nine months ended September 30, 2001 as compared with the same nine month period in 2000. The net increase is primarily the result of higher interest income, dividend income, and realized gains related to the Company's investment and sale of certain marketable equity and debt securities during the nine months ended September 30, 2001 as compared to the same period in 2000. Operating and administrative expenses increased approximately $0.7 million and $2.4 million for the three and nine month periods ended September 30, 2001, respectively, as compared to the same periods in 2000. These increases are primarily due to higher costs related to the growth of the Company including (i) increased senior management and staff levels, (ii) increased system related costs and (iii) other personnel related costs. In addition, the Company issued a stock grant award to a newly appointed executive officer of the Company valued at approximately $1.1 million during 2001. During the nine months ended September 30, 2001, the Company, in separate transactions, disposed of four operating properties, including the sale of a property to KIR, comprising approximately 0.6 million square feet of gross leasable area ("GLA"). Cash proceeds from three of these dispositions aggregated approximately $43.5 million, which approximated their aggregate net book value. During May 2001, the Company realized a gain of approximately $3.0 million from the sale of an 4 operating property in Elyria, OH. Cash proceeds from this disposition totaling $5.8 million, together with an additional $7.1 million cash investment, were used to acquire an exchange shopping center property located in Lakeland, FL during August 2001. During the nine months ended September 30, 2000, the Company, in separate transactions, disposed of eight shopping center properties comprising 1.1 million square feet of GLA for an aggregate sales price of approximately $19.7 million, including the assignment of $2.6 million of mortgage debt. Net gains on sales of these properties were approximately $2.1 million. Net income for the three and nine months ended September 30, 2001 was $59.3 million and $174.7 million, respectively. Net income for the three and nine months ended September 30, 2000 was $51.5 million and $151.2 million, respectively. On a diluted per share basis, net income improved $0.10 and $0.28 for the three and nine month periods ended September 30, 2001, respectively, including the gains on sales of certain operating properties in the respective periods in 2001 and 2000. This improved performance reflects the combined effect of internal growth and property acquisitions in the core portfolio, profits from KDI, income from the investment in KIR and profits from the Ward Venture investment, which strengthened profitability. Liquidity and Capital Resources 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. Since the IPO, the Company has completed additional offerings of its public unsecured debt and equity, raising in the aggregate over $2.2 billion for the purposes of, among other things, repaying indebtedness, acquiring interests in neighborhood and community shopping centers, funding ground-up development projects and expanding and improving properties in the portfolio. During August 2000, the Company established a $250.0 million unsecured revolving credit facility, which is scheduled to expire in August 2003. This credit facility, which replaced the Company's $215.0 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, 2001, there were no borrowings outstanding under this credit facility. The Company also has a $200.0 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. 5 In addition to the public equity and debt markets as capital sources, the Company may, from time to time, obtain non-recourse mortgage financing on selected properties. As of September 30, 2001, the Company had over 350 unencumbered property interests in its portfolio. During May 2001, the Company filed a shelf registration statement on Form S-3 for up to $750.0 million of debt securities, preferred stock, depositary shares, common stock and common stock warrants. As of September 30, 2001, the Company had $750.0 million available for issuance under this shelf registration statement. In connection with its intention to continue to qualify as a REIT for federal income tax purposes, the Company expects to continue paying regular dividends to its stockholders. These dividends will be paid from operating cash flows which are expected to increase due to property acquisitions and growth in operating income in 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, repayment of debt, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as the Board of Directors considers appropriate. It is management's intention that the Company continually has access to the capital resources necessary to expand and develop its business. Accordingly, the Company may seek to obtain funds through additional equity offerings, unsecured debt financings and/or mortgage financings in a manner consistent with its intention to operate with a conservative debt capitalization policy. 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 the payment of dividends 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 increased to $253.7 million for the nine months ended September 30, 2001 as compared to $206.7 million for the corresponding period ended September 30, 2000. 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 6 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 will, from time to time, enter into interest rate protection agreements which mitigate, but do not eliminate, the effect of changes in interest rates on its floating-rate debt. New Accounting Pronouncements Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FASB No. 133"), as amended. FASB No. 133 establishes accounting and reporting standards for derivative instruments. This accounting standard requires the Company to measure derivative instruments at fair value and to record them in the Condensed Consolidated Balance Sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. In addition, the fair value adjustments will be recorded in either stockholders' equity or earnings in the current period based on the designation of the derivative. The effective portions of changes in fair value of cash flow hedges are reported in Other Comprehensive Income ("OCI"), a component of stockholders' equity, and are subsequently reclassified into earnings when the hedged item affects earnings. The changes in fair value of derivative instruments which are not designated as hedging instruments and the ineffective portions of hedges are recorded in earnings for the current period. The principal financial instruments currently used by the Company are interest rate swaps, foreign currency exchange forward contracts and warrant contracts. The Company, from time to time, hedges the future cash flows of its floating-rate debt instruments to reduce exposure to interest rate risk principally through interest rate swaps with major financial institutions. The Company has an interest-rate swap agreement on its $110.0 million floating-rate medium-term note which has been designated and qualified as a cash flow hedge. The Company has determined that this swap agreement is highly effective in offsetting future variable interest cash flows related to the Company's debt portfolio. The adoption of FASB No. 133 as of January 1, 2001, resulted in a cumulative transition adjustment of $1.5 million to OCI and a corresponding liability of the same amount. For the nine months ended September 30, 2001, the change in the fair market value of the interest rate swap was $2.7 million and was recorded in OCI. 7 During September 2001, the Company entered into a foreign currency forward contract. The Company has designated this foreign currency forward contract as a fair value hedge. The Company expects this forward contract to be highly effective in limiting its exposure to the variability in the fair value of its Canadian ("CAD") $26.3 million investment (approximately USD $16.9 million) as it relates to changes in the exchange rate. The gain or loss on the forward contract will be recognized currently in earnings and the gain or loss on the CAD investment attributable to changes in the exchange rate will be recognized currently in earnings and shall adjust the carrying amount of the hedged investment. During September 2001, the Company acquired warrants to purchase the common stock of a Canadian REIT. The Company has designated the warrants as a cash flow hedge of the variability in expected future cash outflows upon purchasing the common stock. The Company has determined the hedged cash outflow is probable and expected to occur prior to the expiration date of the warrant. The Company has determined that the warrant is fully effective and recorded the change in fair value of the warrant in OCI. During the next twelve months, the Company expects to reclassify to earnings as expense approximately $3.9 million of the current balance in accumulated OCI. 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) financing risks, such as the inability to obtain equity or debt financing on favorable terms, (iii) changes in governmental laws and regulations, (iv) the level and volatility of interest rates (v) the availability of suitable acquisition opportunities and (vi) increases in operating costs. Accordingly, there is no assurance that the Company's expectations will be realized. 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk As of September 30, 2001, the Company had approximately $227.6 million of floating-rate debt outstanding. The interest rate risk on $110.0 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 this Swap with a major financial institution. The Company believes the interest rate risk represented by the remaining $117.6 million of floating-rate debt is not material to the Company or its overall capitalization. As of September 30, 2001, the Company had an investment in marketable securities in the amount of CAD $26.3 million (approximately USD $16.9 million as of September 30, 2001). The foreign currency exchange risk has been mitigated through the use of a foreign currency forward contract (the "Forward Contract") with a major financial institution. The Company is exposed to credit risk in the event of non-performance by the counter-party to the Forward Contract. The Company believes it mitigates its credit risk by entering into the Forward Contract with a major financial institution. The Company has not, and does not plan to, enter into any derivative financial instruments for trading or speculative purposes. As of September 30, 2001, the Company had no other material exposure to market risk. 9 KIMCO REALTY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share information)
September 30, December 31, 2001 2000 ------------------- ------------------- Assets: Operating real estate, net of accumulated depreciation of $435,488 and $391,946, respectively $ 2,548,199 $ 2,594,872 Real estate under development 206,224 127,685 Investment and advances in KIR 162,186 142,437 Investments and advances in other real estate joint ventures 71,305 61,601 Investments in retail store leases 10,218 11,316 Cash and cash equivalents 33,654 19,097 Marketable securities 80,984 63,225 Accounts and notes receivable 49,857 44,673 Other assets 121,578 106,442 ------------------- ------------------- $ 3,284,205 $ 3,171,348 =================== =================== Liabilities: Notes payable $ 1,035,250 $ 1,080,250 Mortgages payable 294,094 245,413 Other liabilities, including minority interests in partnerships 196,742 141,346 ------------------- ------------------- 1,526,086 1,467,009 ------------------- ------------------- Stockholders' Equity: Preferred stock, $1.00 par value, authorized 5,000,000 shares Class A Preferred Stock, $1.00 par value, authorized 345,000 shares Issued and outstanding 300,000 shares 300 300 Aggregate liquidation preference $75,000 Class B Preferred Stock, $1.00 par value, authorized 230,000 shares Issued and outstanding 200,000 shares 200 200 Aggregate liquidation preference $50,000 Class C Preferred Stock, $1.00 par value, authorized 460,000 shares Issued and outstanding 400,000 shares 400 400 Aggregate liquidation preference $100,000 Class D Convertible Preferred Stock, $1.00 par value, authorized 700,000 shares Issued and outstanding 412,489 and 418,254 shares, respectively 412 418 Aggregate liquidation preference $103,122 and $104,564, respectively Common stock, $.01 par value, authorized 200,000,000 shares Issued and outstanding 64,171,244 and 63,144,859 shares, respectively 642 631 Paid-in capital 1,850,956 1,819,446 Cumulative distributions in excess of net income (96,215) (113,110) ------------------- ------------------- 1,756,695 1,708,285 Accumulated other comprehensive income 3,324 -- Notes receivable from officer stockholders (1,900) (3,946) ------------------- ------------------- 1,758,119 1,704,339 ------------------- ------------------- $ 3,284,205 $ 3,171,348 =================== ===================
The accompanying notes are an integral part of these condensed consolidated financial statements. 10 KIMCO REALTY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the Three and Nine Months ended September 30, 2001 and 2000 (in thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30, 2001 2000 2001 2000 Revenues from rental property $ 114,295 $ 115,726 $ 353,764 $ 342,949 ---------------- ------------ -------------- -------------- Rental property expenses: Rent 3,405 3,328 10,378 10,110 Real estate taxes 14,406 13,896 42,859 41,575 Interest 22,141 23,352 67,523 68,575 Operating and maintenance 10,182 9,985 36,271 32,191 Depreciation and amortization 18,490 18,098 55,629 52,852 ---------------- ------------ -------------- -------------- 68,624 68,659 212,660 205,303 ---------------- ------------ -------------- -------------- Income from rental property 45,671 47,067 141,104 137,646 Income from investment in retail store leases 857 998 2,684 3,035 ---------------- ------------ -------------- -------------- 46,528 48,065 143,788 140,681 Equity in income of KIR 3,200 2,266 9,123 6,899 Equity in income of other real estate joint ventures, net 22,846 1,260 26,069 3,579 Minority interests in income of partnerships, net (351) (628) (1,489) (1,499) Management fee income 1,608 1,404 5,844 4,313 Other income, net 2,406 5,118 16,096 14,152 Operating and administrative expenses (7,056) (6,405) (21,483) (19,067) ---------------- ------------ -------------- -------------- Income before gain on sale of shopping center properties and income taxes 69,181 51,080 177,948 149,058 Gain on sale of development properties 590 -- 6,806 -- Gain on sale of operating properties -- 432 3,040 2,109 ---------------- ------------ -------------- -------------- Income before income taxes 69,771 51,512 187,794 151,167 Provision for income taxes (10,521) -- (13,138) -- ---------------- ------------ -------------- -------------- Net income $ 59,250 $ 51,512 $ 174,656 $ 151,167 ================ ============ ============== ============== Net income applicable to common shares $ 52,707 $ 44,942 $ 154,973 $ 131,409 ================ ============ ============== ============== Net income per common share: Basic $0.82 $0.72 $2.43 $2.14 ====== ====== ====== ===== Diluted $0.81 $0.71 $2.40 $2.12 ====== ====== ====== =====
The accompanying notes are an integral part of these condensed consolidated financial statements. 11 KIMCO REALTY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Three and Nine Months ended September 30, 2001 and 2000 (in thousands)
Three Months Ended September 30, Nine Months Ended September 30, 2001 2000 2001 2000 --------------- -------------- -------------- ----------------- Net income $ 59,250 $ 51,512 $ 174,656 $ 151,167 --------------- -------------- -------------- ----------------- Other comprehensive income: Unrealized gains on marketable securities 157 -- 6,084 -- Unrealized loss on interest rate swap (872) -- (4,166) -- Unrealized gain on warrants 1,406 -- 1,406 -- --------------- -------------- -------------- ----------------- Other comprehensive income 691 -- 3,324 -- --------------- -------------- -------------- ----------------- Comprehensive income $ 59,941 $ 51,512 $ 177,980 $ 151,167 =============== ============== ============== =================
The accompanying notes are an integral part of these condensed consolidated financial statements. 12 KIMCO REALTY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months ended September 30, 2001 and 2000 (in thousands)
2001 2000 ----------------- ---------------- Cash flow provided by operations $ 253,716 $ 206,661 ----------------- ---------------- Cash flow from investing activities: Acquisition of and improvements to operating real estate (50,248) (117,880) Acquisition of and improvements to real estate under development (91,176) - Investment in marketable securities (29,018) (28,039) Proceeds from sale of marketable securities 35,337 8,744 Investment in KIR (19,500) (10,066) Investments and advances to real estate joint ventures (32,809) (500) Reimbursement of advances to real estate joint ventures 24,824 - Redemption of minority interests in real estate partnerships (5,443) - Investments in joint ventures (28,757) - Investments and advances to affiliated companies (100) (5,266) Investment in mortgage loan receivable (4,500) - Collection of mortgage loans receivable 5,952 2,967 Proceeds from sale of operating properties 46,766 21,196 Proceeds from sale of development properties 35,928 - ----------------- ---------------- Net cash flow used for investing activities (112,744) (128,844) ----------------- ---------------- Cash flow from financing activities: Principal payments on debt, excluding normal amortization of rental property debt (4,587) (17,024) Principal payments on rental property debt (3,861) (3,407) Proceeds from mortgage financings 51,230 44,396 Payment of unsecured obligation -- (18,172) Proceeds from issuance of medium-term notes -- 110,000 Repayment of medium-term notes -- (60,000) Repayment of borrowings under senior term loan -- (52,000) Borrowings under revolving credit facility 10,000 45,000 Repayment of borrowings under revolving credit facility (55,000) (45,000) Dividends paid (157,039) (140,458) Repurchase and retirement of preferred stock -- (2,505) Proceeds from issuance of stock 32,842 77,067 ----------------- ---------------- Net cash flow used for financing activities (126,415) (62,103) ----------------- ---------------- Change in cash and cash equivalents 14,557 15,714 Cash and cash equivalents, beginning of period 19,097 28,076 ----------------- ---------------- Cash and cash equivalents, end of period $ 33,654 $ 43,790 ================= ================ Interest paid during the period $ 57,025 $ 56,499 ================= ================ Supplemental schedule of noncash investing/financing activities: Acquisition of real estate interests by issuance of stock and/or assumption of debt $ 17,220 $ 30,986 ================= ================ Investment in real estate joint ventures by issuance of stock and contribution of property $ 3,420 $ -- ================= ================ Disposition of real estate interest by assignment of mortgage debt $ -- $ 2,633 ================= ================ Notes received upon disposition of real estate interests $ 950 $ -- ================= ================ Notes received upon exercise of stock options $ 150 $ -- ================= ================ Declaration of dividends paid in succeeding period $ 51,293 $ 47,985 ================= ================
The accompanying notes are an integral part of these condensed consolidated financial statements. 13 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 financial statements included in the Company's Annual Report on Form 10-K. Certain 2000 amounts have been reclassified to conform to the 2001 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 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, 2001, the Company's provision for federal and state income taxes was approximately $13.1 million relating to activities conducted in its taxable REIT subsidiaries. 14 Derivative / Financial Instruments - Effective January 1, 2001, the Company adopted Statement of Financial Accounting No. 133, Accounting for Derivative Instruments and Hedging Activities ("FASB No. 133"), as amended. FASB No. 133 establishes accounting and reporting standards for derivative instruments. This accounting standard requires the Company to measure derivative instruments at fair value and to record them in the Condensed Consolidated Balance Sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. In addition, the fair value adjustments will be recorded in either stockholders' equity or earnings in the current period based on the designation of the derivative. The effective portions of changes in fair value of cash flow hedges are reported in Other Comprehensive Income ("OCI"), a component of stockholders' equity, and are subsequently reclassified into earnings when the hedged item affects earnings. The changes in fair value of derivative instruments which are not designated as hedging instruments and the ineffective portions of hedges are recorded in earnings for the current period. The Company utilizes derivative financial instruments to reduce exposure to fluctuations in interest rates, foreign currency exchange rates and market fluctuation on equity securities. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company has not, and does not plan to enter into financial instruments for trading or speculative purposes. Additionally, the Company has a policy of only entering into derivative contracts with major financial institutions. The principal financial instruments used by the Company are interest rate swaps, foreign currency exchange forward contracts and warrant contracts. In accordance with the provisions of FASB No. 133, these derivative instruments were designated and qualified as cash flow hedges. 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, 2001 2000 2001 2000 ---- ---- ---- ---- Computation of Basic Earnings Per share: Net income applicable to common Shares $ 52,707 $ 44,942 $ 154,973 $ 131,409 Weighted average common shares outstanding 64,125 62,307 63,744 61,362 -------- -------- --------- --------- Basic Earnings Per Share $ 0.82 $ 0.72 $ 2.43 $ 2.14 ======== ======== ========= =========
15
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Computation of Diluted Earnings Per Share: Net income applicable to common shares $ 52,707 $44,942 $154,973 $131,409 Dividends on Class D Convertible Preferred Stock 1,934 --(a) 5,854 --(a) -------- -------- -------- -------- Net income for diluted earnings per share $ 54,641 $44,942 $160,827 $131,409 -------- -------- -------- -------- Weighted average common shares outstanding - Basic 64,125 62,307 63,744 61,362 Effect of dilutive securities: Stock options 816 785 724 700 Assumed conversion of Class D Preferred Stock to Common Stock 2,577 --(a) 2,591 --(a) -------- -------- -------- -------- Shares for diluted earnings per share 67,518 63,092 67,059 62,062 -------- -------- -------- -------- Diluted Earnings Per Share $ 0.81 $ 0.71 $ 2.40 $ 2.12 ======== ======== ======== ========
(a) In 2000, the effect of the assumed conversion of the Class D Preferred Stock had an anti-dilutive effect upon the calculation of net income per common share. Accordingly, the impact of such conversion has not been included in the determination of diluted earnings per common share. 2. Property Acquisitions / Other Investments Property Acquisitions - Effective January 1, 2001, the Company has elected taxable REIT subsidiary status for its wholly-owned development subsidiary ("KDI"). During the nine months ended September 30, 2001, KDI acquired seven land parcels, in separate transactions, for the ground-up development of shopping centers and subsequent sales thereof upon completion for an aggregate purchase price of approximately $38.6 million, including the assumption of approximately $5.9 million in debt encumbering one of the properties. 16 On March 1, 2001, the Company exercised its option to acquire a 50% interest in a joint venture from KC Holdings, Inc. ("KC Holdings"), an entity formed in connection with the Company's initial public stock offering in November 1991. This joint venture consists of three shopping center properties located in Buffalo, NY, comprising approximately 0.4 million square feet of gross leasable area ("GLA"). The joint venture was acquired for an aggregate option price of approximately $3.5 million, paid approximately $2.7 million in cash and $0.8 million in shares of the Company's common stock (19,759 shares valued at $41.50 per share). The members of the Company's Board of Directors who are not also shareholders of KC Holdings, unanimously approved the Company's purchase of this joint venture investment. During the nine months ended September 30, 2001, the Company acquired interests in two shopping center properties, in separate transactions, comprising approximately 0.3 million square feet of GLA, in two states for an aggregate purchase price of approximately $19.1 million. Other Investments - During March 2001, the Company, through a taxable REIT subsidiary, formed a joint venture (the "Ward Venture") in which the Company has a 50% interest, for purposes of acquiring asset designation rights for substantially all of the real estate property interests of the bankrupt estate of Montgomery Ward LLC and its affiliates. These asset designation rights have provided the Ward Venture the ability to direct the ultimate disposition of the 315 fee and leasehold interests held by the bankrupt estate. The asset designation rights expire in February 2002 for the leasehold positions and December 2004 for the fee owned locations. During the marketing period, the Ward Venture will be responsible for all carrying costs associated with the properties until the site is designated to a user. The Ward Venture has completed transactions on 258 properties, and the Company has recognized net profits of approximately $12.0 million after provision for income taxes for the nine months ended September 30, 2001. The pre-tax profits from the Ward Venture are included in the Condensed Consolidated Statement of Income in equity in income of other real estate joint ventures, net. 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 to a national retailer. This loan is secured by the real estate and leases owned by the national retailer. 17 3. Property Dispositions During the nine months ended September 30, 2001, the Company disposed of four operating properties, in separate transactions, including the sale of a property to KIR, comprising approximately 0.6 million square feet of GLA. Cash proceeds from three of these dispositions aggregated approximately $43.5 million, which approximated their aggregate net book value. During May 2001, the Company realized a gain of approximately $3.0 million from the sale of an operating property in Elyria, OH. Cash proceeds of $5.8 million, together with an additional $7.1 million cash investment, were used to acquire an exchange shopping center property in Lakeland, FL during August 2001. During the nine months ended September 30, 2001, KDI sold one of its recently completed projects and four out-parcels, in separate transactions, for approximately $36.9 million, which resulted in net gains of approximately $4.3 million after provision for income taxes. 4. Investment and Advances in KIR During 1998, the Company formed Kimco Income REIT ("KIR"), a limited partnership established to invest in high quality retail properties financed primarily through the use of individual non-recourse mortgages. The Company holds a 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, 2001 and 2000 was approximately $9.1 million and $6.9 million, respectively. In addition, KIR entered into a master management agreement with the Company, whereby the Company will perform services for fee relating to the management, operation, supervision and maintenance of the joint venture properties. For the nine months ended September 30, 2001 and 2000, the Company earned management fees of approximately $2.4 million and $1.4 million, respectively. During the nine months ended September 30, 2001 the Company contributed $19.5 million in cash and $2.6 million in property to KIR in connection with its subscription agreement. 5. Investment in Retail Store Leases Income from the investment in retail store leases for the nine months ended September 30, 2001 and 2000 represents sublease revenues of approximately $12.9 million and $14.3 million, respectively, less related expenses of $9.1 million and $10.2 million, respectively, and amounts, which in management's estimation, reasonably provide for the recovery of the investment over a period representing the expected remaining term of the retail store leases. 18 6. Debt Financings During the nine months ended September 30, 2001, the Company obtained four individual non-recourse mortgage loans of which three are on Kmart anchored locations, providing aggregate proceeds to the Company of approximately $51.2 million. These ten-year loans mature in 2011 and have effective interest rates ranging from 7.31% to 7.64% per annum. 7. Financial Instruments: Derivatives and Hedging The Company is exposed to the effect of changes in interest rates, foreign currency exchange rate fluctuations and market value fluctuations of equity securities. The Company limits these risks by following established risk management policies and procedures including the use of derivatives. The principal financial instruments currently used by the Company are interest rate swaps, foreign currency exchange forward contracts and warrant contracts. In accordance with the provisions of FASB No. 133, these derivative instruments were designated and qualified as cash flow hedges. The Company (i) utilizes interest rate swaps as they are determined to be highly effective in offsetting the future variable interest cash flows related to the Company's debt portfolio (ii) employs forward contracts in connection with its Canadian ("CAD") investments to reduce exposure to fluctuations in foreign currency exchange rates and (iii) utilizes warrant contracts to reduce exposure to variability in expected future cash outflows related to the future purchase of equity securities. The following table summarizes the notional values and fair values of the Company's derivative financial instruments as of September 30, 2001:
Notional Fair Hedge Type Value Rate Maturity Value ---------- ----- ---- -------- ----- Interest Rate Swap - cash $110.0 million 6.615% 8/2/02 ($4.2) million flow Foreign Currency Forward - CAD $ 26.3 million 1.561 9/6/02 $0.3 million cash flow Warrants - cash flow 2,500,000 CAD $11.02 9/7/06 $1.4 million shares of common stock
As of September 30, 2001, the derivative instruments were reported at their fair value as other liabilities of $4.2 million and other assets of $1.7 million. The Company anticipates a reclassification to earnings from OCI of approximately $3.9 million over the next 12 months. 19 8. Pro Forma Financial Information As discussed in Notes 2 and 3, the Company and certain of its affiliates acquired and disposed of interests in certain operating properties during the nine months ended September 30, 2001. 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, 2001 and 2000, adjusted to give effect to these transactions as of January 1, 2000. 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, 2000, nor does it purport to represent the results of future operations. (Amounts presented in millions, except per share figures). Nine Months Ended September 30, 2001 2000 ---- ---- Revenues from rental property $ 352.0 $ 341.1 Net income $ 172.3 $ 152.1 Net income per common share: Basic $ 2.39 $ 2.16 ======== ======== Diluted $ 2.36 $ 2.13 ======== ======== 20 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. Form 8-K - None. 21 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 8, 2001 /s/ Milton Cooper ---------------- ---------------------------------- (Date) Milton Cooper Chairman of the Board November 8, 2001 /s/ Michael V. Pappagallo ---------------- ---------------------------------- (Date) Michael V. Pappagallo Chief Financial Officer 22