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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, 2002
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
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(Exact name of registrant as specified in its charter)
Maryland 13-2744380
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3333 New Hyde Park Road, New Hyde Park, NY 11042
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(Address of principal executive offices - Zip Code)
(516) 869-9000
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(Registrant's telephone number, including area code)
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(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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APPLICABLE ONLY TO CORPORATE ISSUERS:
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
104,563,142 shares outstanding as of October 31, 2002
1 of 33
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Financial Statements -
Condensed Consolidated Balance Sheets as of September 30, 2002 and December
31, 2001.
Condensed Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2002 and 2001.
Condensed Consolidated Statements of Comprehensive Income for the Three and
Nine Months Ended September 30, 2002 and 2001.
Condensed Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 2002 and 2001.
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 $2.2 million or 2.0% to $111.1
million for the three months ended September 30, 2002, as compared with $113.3
million for the corresponding quarter ended September 30, 2001. Similarly,
revenues from rental property decreased $9.7 million or 2.8% to $340.6 million
for the nine months ended September 30, 2002, as compared with $350.3 million
for the corresponding nine month period ended September 30, 2001. These net
decreases resulted primarily from the combined effect of (i) an overall decrease
in shopping center portfolio occupancy to 85.9% at September 30, 2002 as
compared to 92.0% at September 30, 2001 due primarily to the bankruptcy filing
of Kmart Corporation ("Kmart") and Ames Department Stores, Inc. ("Ames") and
subsequent rejection of leases resulting in a decrease of revenues of
approximately $10.1 million and $21.6 million as compared to the corresponding
three and nine month periods in 2001, respectively, and (ii) sales of certain
shopping center properties throughout 2001 and during the nine months ended
September 30, 2002, resulting in a decrease of revenues of approximately $0.1
million and $5.7 million for the three and nine months ended September 30, 2002,
respectively, as compared to the corresponding three and nine month periods in
2001, offset by (iii) the acquisition of six operating properties during 2002
and three operating properties throughout calendar year 2001 providing
incremental revenues of $1.7 million and $3.8 million for the three and nine
month periods ended September 30, 2002, respectively, and (iv) the completion of
certain development and redevelopment projects, tenant buyouts and new leasing
within the portfolio providing incremental revenues of approximately $6.3
million and $13.8 million as compared to the corresponding three and nine months
ended September 30, 2001, respectively.
2
Rental property expenses, including depreciation and amortization,
increased approximately $3.7 million or 5.5% to $71.5 million for the three
months ended September 30, 2002, as compared with $67.8 million for the
corresponding quarter ended September 30, 2001. Rental property expenses,
including depreciation and amortization, increased $5.8 million or 2.8% to
$215.8 million for the nine months ended September 30, 2002, as compared with
$210.0 million for the corresponding period in the preceding year. The rental
property expense component of real estate taxes increased approximately $2.0
million and $6.5 million for the three and nine months ended September 30, 2002,
respectively, as compared with the corresponding three and nine month periods in
the preceding year. These increases relate primarily to the payment of real
estate taxes by the Company on certain Kmart anchored locations where Kmart
previously paid the real estate taxes directly to the taxing authorities. The
rental property expense component of operating and maintenance increased
approximately $1.1 million for the three months ended September 30, 2002 as
compared to the corresponding period in 2001. This increase is primarily due to
property acquisitions during 2002 and 2001, renovations within the portfolio and
higher professional fees relating to tenant bankruptcies. Operating and
maintenance decreased approximately $1.0 million for the nine months ended
September 30, 2002 as compared to the corresponding period in 2001. This
decrease is primarily due to lower snow removal costs in 2002 offset by
increased costs related to property acquisitions, renovations within the
portfolio and higher professional fees relating to tenant bankruptcies.
The Company has interests in various retail store leases relating to
the anchor stores premises in neighborhood and community shopping centers. These
premises have been sublet to retailers which lease the stores pursuant to net
lease agreements. Income from the investment in retail store leases decreased
approximately $0.7 million and $2.0 million for the three and nine months ended
September 30, 2002, respectively, as compared to the corresponding periods in
2001. These decreases are primarily due to the Ames bankruptcy filing and
subsequent rejection of certain leases causing the occupancy to decrease to
85.3% at September 30, 2002 as compared to 91.2% at September 30, 2001 for the
retail store lease portfolio.
The Company has a 43.3% non-controlling limited partnership interest in
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. Equity in income of KIR
increased $0.6 million to $3.8 million for the three months ended September 30,
2002, as compared with $3.2 million for the corresponding period in 2001.
Similarly, equity in income of KIR increased $2.5 million to $11.6 million for
the nine months ended September 30, 2002, as compared with $9.1 million for the
corresponding period in 2001. 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 2001 and
during the nine months ended September 30, 2002.
3
Equity in income of other real estate joint ventures, net decreased
$13.9 million to $8.9 million for the three months ended September 30, 2002, as
compared to $22.8 million for the corresponding period in 2001. Similarly,
equity in income of other real estate joint ventures, net decreased $3.1 million
to $23.0 million for the nine months ended September 30, 2002, as compared with
$26.1 million for the corresponding period in 2001. These decreases are
primarily due to the decrease in income from the Montgomery Ward asset
designation rights transaction, partially offset by income from the RioCan joint
venture investment and the KROP joint venture investment as described below.
During March 2001, the Company, through a taxable REIT subsidiary,
formed a real estate joint venture (the "Ward Venture") in which the Company has
a 50% interest, for purposes of acquiring asset designation rights for
substantially all of the real estate property interests of the bankrupt estate
of Montgomery Ward LLC and its affiliates. These asset designation rights have
provided the Ward Venture the ability to direct the ultimate disposition of the
315 fee and leasehold interests held by the bankrupt estate, of which 302
transactions have been completed to date. During the nine months ended September
30, 2002, the Ward Venture completed transactions on 31 properties. The pre-tax
profits from the Ward Venture for the three and nine months ended September 30,
2002 of approximately $3.6 million and $11.2 million, respectively, and $21.8
million for the three and nine months ended September 30, 2001, are included in
the Condensed Consolidated Statements of Income in the caption Equity in income
of other real estate joint ventures, net.
During October 2001, the Company formed a joint venture (the "RioCan
Venture") with RioCan Real Estate Investment Trust ("RioCan", Canada's largest
publicly traded REIT measured by gross leasable area ("GLA")), in which the
Company has a 50% interest, to acquire retail properties and development
projects in Canada. As of September 30, 2002, the RioCan Venture consisted of 26
shopping center properties and two development projects with approximately 6.8
million square feet of GLA. For the three and nine months ended September 30,
2002, the Company recognized equity in income of the RioCan Venture of
approximately $3.0 million and $5.6 million, respectively.
4
During October 2001, the Company formed the Kimco Retail Opportunity
Fund ("KROP"), a joint venture with GE Capital Real Estate ("GECRE") which the
Company manages and has a 20% interest. The purpose of this venture is to
acquire established, high-growth potential retail properties in the United
States. As of September 30, 2002, KROP consisted of 13 shopping center
properties with approximately 1.3 million square feet of GLA. During the three
and nine months ended September 30, 2002, the Company recognized equity in
income of KROP of approximately $0.3 million and $0.5 million, respectively.
Management and other fee income increased approximately $1.4 million
and $4.7 million for the three and nine months ended September 30, 2002,
respectively, as compared to the corresponding periods in 2001. These increases
are primarily due to (i) increased management fees from KIR resulting from the
growth of the KIR portfolio and (ii) management and acquisition fees relating to
the KROP joint venture activities during the nine months ended September 30,
2002.
Interest, dividends and other investment income increased approximately
$5.5 million and $13.9 million for the three and nine month periods ended
September 30, 2002, respectively, as compared to the corresponding periods in
2001. These increases are primarily due to higher realized gains on the sale of
certain marketable equity and debt securities and increased interest income
related to certain real estate lending activities during the nine months ended
September 30, 2002.
Other income/(loss), net increased approximately $2.7 million and $5.7
million for the three and nine month periods ended September 30, 2002,
respectively, as compared to the same periods in 2001. These increases are
primarily due to pre-tax profits earned from the Company's participation in
ventures established to provide inventory liquidation services to regional
retailers in bankruptcy.
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
three months ended September 30, 2002, KDI sold two projects and three
out-parcels, in separate transactions, for approximately $38.5 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 $4.9 million. Similarly, for the nine months ended September 30,
2002, KDI has sold a total of 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,
providing pre-tax gains of approximately $9.2 million.
During the nine months ended September 30, 2001, KDI sold one of its
completed projects and four out-parcels, in separate transactions, for
approximately $36.9 million, which resulted in pre-tax gains of approximately
$6.8 million.
5
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. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets ("FASB No. 144"), the operations and net gain on
disposition of these properties have been included in the caption Discontinued
operations on the Condensed Consolidated Statements of Income.
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 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 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.
Net income for the three and nine months ended September 30, 2002 was
$60.8 million and $182.7 million, respectively. Net income for the three and
nine months ended September 30, 2001 was $59.3 million and $174.7 million,
respectively. For the three months ended September 30, 2002, on a diluted per
share basis, after adjusting for the gain on disposition of operating properties
included in discontinued operations in 2002, net income decreased $0.02 as
compared with the same period in 2001. This decrease reflects the combined
effect of lower income resulting from tenant bankruptcies and subsequent
rejection of leases and decrease in profits from the Ward Venture, partially
offset by increased contributions from the investments in KIR, KROP, the RioCan
Venture, and other financing investments. For the nine months ended September
30, 2002, on a diluted per share basis, after adjusting for the gain on sale of
an operating property in 2001 and for the gain on disposition of operating
properties included in discontinued operations in 2002, net income increased
$0.02 as compared with the same period in 2001. This improved performance
reflects the combined effect of increased contributions from the investments in
KIR, KROP, the RioCan Venture and other financing investments, partially offset
by the impact of tenant bankruptcies and subsequent rejection of leases and the
decrease in profits from the Ward Venture.
6
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, 2002, the Company's five largest tenants were Kmart Corporation,
The Home Depot, Kohl's, TJX Companies and Royal Ahold, which represented
approximately 5.6%, 3.0%, 3.0%, 2.7% and 1.8%, respectively, of the Company's
annualized base rental revenues.
On January 22, 2002, Kmart filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. As of the filing date, Kmart occupied 69 locations
(excluding the KIR portfolio which includes six Kmart locations), representing
12.6% of the Company's annualized base rental revenues and 13.3% of the
Company's total shopping center GLA. As of September 30, 2002, Kmart rejected
its leases at 27 locations, representing approximately $29.5 million of
annualized base rental revenues and approximately 2.8 million square feet of
GLA. As of September 30, 2002, Kmart represented 5.6% of annualized base rents
and 8.3% of leased GLA. The Company previously encumbered seven of these
rejected locations with individual non-recourse mortgage loans totaling
approximately $60.8 million. Annualized interest expense on these loans is
approximately $5.6 million. As of July 2002, the Company has suspended debt
service payments on these loans and is actively negotiating with the respective
lenders. The Company continues to maintain the properties, including the payment
of utilities, common area maintenance costs and insurance, as it works toward
maximizing the value of the lenders collateral.
The Company has currently leased or is under agreement to lease 11 of
these rejected locations, has terminated four ground lease locations and has
received offers to purchase nine of these sites. The Company is reviewing the
offers received and is actively marketing the remaining locations to prospective
tenants, however, no assurances can be provided that these locations will be
leased in the near term or at comparable rents previously paid by Kmart.
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 and the availability of funds to pay
creditors such as the Company.
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, 2002, the Company's level of debt to total market
capitalization was 31%. 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.
7
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
$2.4 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.
The Company has a $250.0 million unsecured revolving credit facility,
which is scheduled to expire in August 2003. This credit facility has made
available funds to both finance the purchase of properties and meet any
short-term working capital requirements. During July 2002, the Company further
enhanced its liquidity position by establishing an additional $150.0 million
unsecured revolving credit facility, which is scheduled to expire in January
2003. Under the terms of this credit facility, funds may be borrowed for general
corporate purposes. As of September 30, 2002, there was $229.0 million
outstanding under these credit facilities.
The Company 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.
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, 2002, the Company had over 380 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,
2002, the Company had $523.7 million available for issuance under this shelf
registration statement.
In connection with its intention to continue to qualify as a REIT for
federal income tax purposes, the Company expects to continue paying regular
dividends to its stockholders. These dividends will be paid from operating cash
flows which are expected to increase due to 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.
8
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
facilities, issuance of equity and public debt, as well as other debt and equity
alternatives, will provide the necessary capital required by the Company. Cash
flows from operations were $230.8 million for the nine months ended September
30, 2002, as compared to $253.7 million for the corresponding period ended
September 30, 2001.
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 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
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, Goodwill and Other
Intangible Assets ("FASB No. 142"). This statement addresses financial
accounting and reporting for intangible assets acquired, goodwill and other
intangible assets after their acquisition. This statement requires that goodwill
and intangible assets that have indefinite useful lives will not be amortized
but rather will be tested at least annually for impairment. In addition, FASB
No. 142 requires disclosures about the carrying amount of and changes in
goodwill from period to period. Goodwill and intangible assets acquired after
June 30, 2001 will be subject immediately to the provisions of this statement.
The provisions are effective for fiscal years beginning after December 15, 2001.
The impact of adopting this statement did not have a material adverse impact on
the Company's financial position or results of operations.
9
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No. 121. FASB
No. 144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less cost to sell. FASB No.
144 retains the requirements of SFAS No. 121 regarding impairment loss
recognition and measurement. In addition, it requires that one accounting model
be used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal transactions.
FASB No. 144 is effective for fiscal years beginning after December 15, 2001.
The impact of adopting this statement did not have a material adverse impact on
the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB No. 4,
44, and 64, Amendment of FASB No. 13 and Technical Corrections ("FASB No. 145").
This statement eliminates the requirement to report gains and losses from
extinguishment of debt as extraordinary unless they meet the criteria of APB
Opinion 30. Debt extinguishments that were classified as extraordinary in prior
periods presented that do not meet the criteria of APB Opinion 30 shall be
reclassified. FASB No. 145 is effective for fiscal years beginning after May 15,
2002. The impact of the adoption of FASB No. 145 is not expected to have a
material adverse impact on the Company's financial position or results of
operations.
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, 2002, the Company had approximately $444.4 million
of floating-rate debt outstanding, including $229.0 million on its unsecured
revolving credit facility. The interest rate risk on $185.0 million of such debt
has been mitigated through the use of interest rate swap agreements (the
"Swaps") with major financial institutions. The Company is exposed to credit
risk in the event of non-performance by the counter-party to the Swaps. The
Company believes it mitigates its credit risk by entering into these Swaps with
major financial institutions. The Company believes the interest rate risk
represented by the remaining $259.4 million of floating-rate debt is not
material to the Company or its overall capitalization.
As of September 30, 2002, the Company had Canadian investments in
marketable securities in the amount of $31.2 million Canadian dollars ("CAD")
(approximately USD $19.8 million) and in real estate in the amount of CAD $177.8
million (approximately USD $112.6 million). The foreign currency exchange risk
has been mitigated through the use of foreign currency forward contracts (the
"Forward Contracts") 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. The Company believes it mitigates its credit risk by entering
into the Forward Contracts 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,
2002, the Company had no other material exposure to market risks.
Item 4. Controls and Procedures
(i) Within the 90 days prior to the date of this report, the
Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and
procedures are effective in providing timely reporting of
material information regarding required disclosure and ensure
that such information is recorded, processed, summarized and
reported within the required time periods and included in the
Company's periodic filings with the SEC.
11
(ii) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the
Company's internal controls subsequent to the date the Company
carried out this evaluation.
12
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
September 30, December 31,
2002 2001
------------- -------------
Assets:
Operating real estate, net of accumulated depreciation
of $503,003 and $452,878, respectively $ 2,571,691 $ 2,543,956
Real estate under development 235,687 204,530
Investment and advances in KIR 178,379 170,641
Investments and advances in other real estate joint ventures 249,115 98,527
Mortgages and other financing receivables 142,626 53,611
Investments in retail store leases 8,643 9,885
Cash and cash equivalents 43,495 93,847
Marketable securities 65,268 82,997
Accounts and notes receivable 48,004 48,074
Other assets 145,699 78,711
----------- -----------
$ 3,688,607 $ 3,384,779
=========== ===========
Liabilities:
Notes payable $ 1,256,250 $ 1,035,250
Mortgages payable 278,742 286,929
Construction loans payable 19,201 5,900
Other liabilities, including minority interests in partnerships 226,346 166,616
----------- -----------
1,780,539 1,494,695
----------- -----------
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 0 and 92,390 shares, respectively - 92
Aggregate liquidation preference $0 and $23,098, respectively
Common stock, $.01 par value, authorized 200,000,000 shares
Issued and outstanding 104,559,024 and 103,352,570 shares, respectively 1,046 1,034
Paid-in capital 1,984,086 1,976,442
Cumulative distributions in excess of net income (87,230) (93,131)
----------- -----------
1,898,802 1,885,337
Accumulated other comprehensive income 11,764 7,310
Notes receivable from officer stockholders (2,498) (2,563)
----------- -----------
1,908,068 1,890,084
----------- -----------
$ 3,688,607 $ 3,384,779
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
13
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months ended September 30, 2002 and 2001
(in thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues from rental property $ 111,101 $ 113,330 $ 340,629 $ 350,344
--------- --------- --------- ---------
Rental property expenses:
Rent 2,928 3,097 9,353 9,454
Real estate taxes 16,192 14,194 48,712 42,199
Interest 22,296 22,084 66,337 67,353
Operating and maintenance 11,125 10,072 35,015 35,998
Depreciation and amortization 18,971 18,368 56,371 54,969
--------- --------- --------- ---------
71,512 67,815 215,788 209,973
--------- --------- --------- ---------
Income from rental property 39,589 45,515 124,841 140,371
Income from investment in retail store leases 154 857 671 2,684
--------- --------- --------- ---------
39,743 46,372 125,512 143,055
Equity in income of KIR 3,839 3,200 11,648 9,123
Equity in income of other real estate joint ventures, net 8,895 22,846 23,028 26,069
Minority interests in income of partnerships, net (262) (352) (738) (1,489)
Management and other fee income 3,023 1,608 10,524 5,844
Interest, dividends and other investment income 8,136 2,685 29,516 15,577
Other income/(loss), net 2,371 (279) 6,257 520
General and administrative expenses (7,933) (7,056) (23,123) (21,483)
--------- --------- --------- ---------
Income from continuing operations before
gain on sale of shopping center properties and income taxes 57,812 69,024 182,624 177,216
Gain on sale of operating property - - - 3,040
Gain on sale of development properties 4,894 590 9,174 6,806
--------- --------- --------- ---------
Income from continuing operations before income taxes 62,706 69,614 191,798 187,062
Provision for income taxes (2,591) (10,521) (10,091) (13,138)
--------- --------- --------- ---------
Income from continuing operations 60,115 59,093 181,707 173,924
--------- --------- --------- ---------
Discontinued operations:
Income/(loss) from operating properties disposed (325) 157 (513) 732
Gain on disposition of operating properties, net 966 - 1,512 -
--------- --------- --------- ---------
Income from discontinued operations 641 157 999 732
--------- --------- --------- ---------
Net income 60,756 59,250 182,706 174,656
Preferred stock dividends (4,609) (6,543) (13,828) (19,683)
--------- --------- --------- ---------
Net income applicable to common shares $ 56,147 $ 52,707 $ 168,878 $ 154,973
========= ========= ========= =========
Per common share:
Income from continuing operations
Basic $0.53 $0.55 $1.61 $1.61
===== ===== ===== =====
Diluted $0.53 $0.54 $1.59 $1.59
===== ===== ===== =====
Net Income
Basic $0.54 $0.55 $1.62 $1.62
===== ===== ===== =====
Diluted $0.53 $0.54 $1.60 $1.60
===== ===== ===== =====
The accompanying notes are an integral part of these condensed consolidated
financial statements.
14
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months ended September 30, 2002 and 2001
(in thousands)
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net income $ 60,756 $ 59,250 $ 182,706 $ 174,656
--------- --------- --------- ---------
Other comprehensive income/(loss):
Changes in unrealized gain/(loss) on marketable securities (3,637) 157 (2,628) 6,084
Changes in unrealized gain/(loss) on interest rate swaps 964 (872) 3,497 (4,166)
Changes in unrealized gain on foreign currency forward contracts 1,372 - 1,772 -
Changes in unrealized gain on warrants 643 1,406 1,813 1,406
--------- --------- --------- ---------
Other comprehensive income/(loss) (658) 691 4,454 3,324
--------- --------- --------- ---------
Comprehensive income $ 60,098 $ 59,941 $ 187,160 $ 177,980
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
15
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months ended September 30, 2002 and 2001
(in thousands)
2002 2001
--------- ---------
Cash flow provided by operations $ 230,757 $ 253,716
--------- ---------
Cash flow from investing activities:
Acquisition of and improvements to operating real estate (92,659) (50,248)
Acquisition of and improvements to real estate under development (69,707) (91,176)
Investment in marketable securities (34,314) (29,018)
Proceeds from sale of marketable securities 47,171 35,337
Investment in KIR (10,833) (19,500)
Investments and advances to real estate joint ventures (153,257) (32,809)
Reimbursements of advances to real estate joint ventures 9,077 24,824
Redemption of minority interests in real estate partnerships - (5,443)
Investments in joint ventures (11,419) (28,757)
Reimbursement of advances in joint ventures 12,800 -
Investments and advances to affiliated companies - (100)
Investment in mortgage loan receivables (92,232) (4,500)
Collection of mortgage loan receivables 11,883 5,952
Collection of note receivable 400 -
Investment in leveraged lease (3,968) -
Investment in and advances received from designation rights 832 -
Proceeds from sale of operating properties - 46,766
Proceeds from sale of development properties 33,913 35,928
--------- ---------
Net cash flow used for investing activities (352,313) (112,744)
--------- ---------
Cash flow from financing activities:
Principal payments on debt, excluding normal
amortization of rental property debt (7,320) (4,587)
Principal payments on rental property debt (4,497) (3,861)
Repayment of medium term note (110,000) -
Proceeds from issuance of medium term notes 102,000 -
Proceeds from mortgage financings 28,900 51,230
Proceeds from construction loan financings 13,301 -
Borrowings under revolving credit facilities 229,000 10,000
Repayment of borrowings under revolving credit facility - (55,000)
Payment of unsecured obligation (11,300) -
Dividends paid (176,622) (157,039)
Proceeds from issuance of stock 7,742 32,842
--------- ---------
Net cash flow provided by/(used for) financing activities 71,204 (126,415)
--------- ---------
Change in cash and cash equivalents (50,352) 14,557
Cash and cash equivalents, beginning of period 93,847 19,097
--------- ---------
Cash and cash equivalents, end of period $ 43,495 $ 33,654
========= =========
Interest paid during the period $ 55,927 $ 57,025
========= =========
Income taxes paid during the period $ 3,155 $ 24,013
========= =========
Supplemental schedule of noncash investing/financing activities:
Acquisition of real estate interests by assumption of debt $ 3,477 $ 17,220
========= =========
Disposition of real estate interests by assignment of mortgage debt $ 28,748 $ -
========= =========
Proceeds held in escrow from sale of real estate interests $ 4,512 $ -
========= =========
Investment in real estate joint ventures by issuance of stock
and contribution of property $ - $ 3,420
========= =========
Acquisition of designation rights subject to an unsecured obligation $ 33,000 $ -
========= =========
Notes received upon disposition of real estate interests $ - $ 950
========= =========
Notes received upon exercise of stock options $ 555 $ 150
========= =========
Declaration of dividends paid in succeeding period $ 57,527 $ 51,293
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
16
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 2001 amounts have been reclassified to conform to the 2002
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, 2002, the Company's provision for federal and state income taxes
was approximately $10.1 million relating to activities conducted in its taxable
REIT subsidiaries.
17
Earnings Per Share -
On October 24, 2001, the Company's Board of Directors declared a
three-for-two split (the "Stock Split") of the Company's common stock which was
effected in the form of a stock dividend paid on December 21, 2001 to
stockholders of record on December 10, 2001. All share and per share data
included in the accompanying Condensed Consolidated Financial Statements and
Notes thereto have been adjusted to reflect this Stock Split.
The following table sets forth the reconciliation of earnings and the
weighted average number of shares used in the calculation of basic and diluted
earnings per share (amounts presented in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Computation of Basic Earnings Per Share:
Income from continuing operations
applicable to common shares $ 55,506 $ 52,550 $167,879 $154,241
Income from discontinued operations 641 157 999 732
-------- -------- -------- --------
Net income applicable to common shares $ 56,147 $ 52,707 $168,878 $154,973
Weighted average common shares
outstanding 104,539 96,187 104,418 95,615
Basic Earnings Per Share:
Income from continuing operations $ 0.53 $ 0.55 $ 1.61 $ 1.61
Income from discontinued operations 0.01 - 0.01 0.01
-------- -------- -------- --------
Net income $ 0.54 $ 0.55 $ 1.62 $ 1.62
======== ======== ======== ========
18
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Computation of Diluted Earnings Per Share:
Income from continuing operations
applicable to common shares $ 55,506 $ 52,550 $167,879 $154,241
Dividends on Class D Convertible
Preferred Stock - 1,934 - 5,854
-------- -------- -------- --------
Income from continuing operations for
diluted earnings per share 55,506 54,484 167,879 160,095
Income from discontinued operations 641 157 999 732
-------- -------- -------- --------
Net income for diluted earnings per share $ 56,147 $ 54,641 $168,878 $160,827
======== ======== ======== ========
Weighted average common shares
outstanding - Basic 104,539 96,187 104,418 95,615
Effect of dilutive securities:
Stock options 952 1,224 1,041 1,086
Assumed conversion of Class D Preferred
Stock to common stock - 3,865 5 3,888
-------- -------- -------- --------
Shares for diluted earnings per share 105,491 101,276 105,464 100,589
======== ======== ======== ========
Diluted Earnings Per Share:
Income from continuing operations $ 0.53 $ 0.54 $ 1.59 $ 1.59
Income from discontinued operations - - 0.01 0.01
-------- -------- -------- --------
Net income $ 0.53 $ 0.54 $ 1.60 $ 1.60
======== ======== ======== ========
New Accounting Pronouncements -
In July 2001, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, Goodwill and Other
Intangible Assets ("FASB No. 142"). This statement addresses financial
accounting and reporting for intangible assets acquired, goodwill and other
intangible assets after their acquisition. This statement requires that goodwill
and intangible assets that have indefinite useful lives will not be amortized
but rather will be tested at least annually for impairment. In addition, FASB
No. 142 requires disclosures about the carrying amount of and changes in
goodwill from period to period. Goodwill and intangible assets acquired after
June 30, 2001 will be subject immediately to the provisions of this statement.
The provisions are effective for fiscal years beginning after December 15, 2001.
The adoption of FASB No. 142 did not have a material adverse impact on the
Company's financial position or results of operations.
19
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FASB No. 144"), which supercedes
SFAS No. 121. FASB No. 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. FASB No. 144 retains the requirements of SFAS No. 121 regarding
impairment loss recognition and measurement. In addition, it requires that one
accounting model be used for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations to include more disposal
transactions. FASB No. 144 is effective for fiscal years beginning after
December 15, 2001. The adoption of FASB No. 144 did not have a material adverse
impact on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB No. 4,
44, and 64, Amendment of FASB No. 13 and Technical Corrections ("FASB No. 145").
This statement eliminates the requirement to report gains and losses from
extinguishment of debt as extraordinary unless they meet the criteria of APB
Opinion 30. Debt extinguishments that were classified as extraordinary in prior
periods presented that do not meet the criteria of APB Opinion 30 shall be
reclassified. FASB No. 145 is effective for fiscal years beginning after May 15,
2002. The impact of the adoption of FASB No. 145 is not expected to have a
material adverse impact on the Company's financial position or results of
operations.
2. Operating Properties Activities
During the nine months ended September 30, 2002, the Company acquired
six operating properties, comprising approximately 0.5 million square feet of
gross leaseable area ("GLA"), for an aggregate purchase price of approximately
$52.9 million, including the assumption of approximately $3.5 million in
mortgage debt encumbering one of the properties.
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. In accordance with FASB No. 144, the operations and net gain on
disposition of these properties have been included in the caption Discontinued
operations on the Condensed Consolidated Statements of Income.
20
3. 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, 2002, KDI acquired four 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
$10.4 million.
During the nine months ended September 30, 2002, KDI sold three of its
recently completed projects and six out-parcels, in separate transactions, for
approximately $51.6 million including the assignment of approximately $17.7 of
mortgage debt encumbering one of the properties. These sales provided pre-tax
gains of approximately $9.2 million.
Additionally, during the nine months ended September 30, 2002, KDI
obtained construction financing on four ground-up development properties for an
aggregate loan amount of up to $63.1 million, of which approximately $13.1
million has been funded to KDI as of September 30, 2002.
4. Investment and Advances in KIR
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, 2002 the KIR portfolio was comprised of 66
properties aggregating 12.9 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, 2002 and 2001 was approximately $11.6 million and $9.1 million,
respectively. During the nine months ended September 30, 2002, 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 fee relating to the
management, operation, supervision and maintenance of the joint venture
properties. For the nine months ended September 30, 2002 and 2001, the Company
earned management fees of approximately $3.2 million and $2.4 million,
respectively.
21
5. Investments and Advances in Other Real Estate Joint Ventures
Ward Venture -
During March 2001, the Company, through a taxable REIT subsidiary,
formed a venture (the "Ward Venture") in which the Company has a 50% interest,
for purposes of acquiring asset designation rights for substantially all of the
real estate property interests of the bankrupt estate of Montgomery Ward LLC and
its affiliates. These asset designation rights have provided the Ward Venture
the ability to direct the ultimate disposition of the 315 fee and leasehold
interests held by the bankrupt estate, of which 302 transactions have been
completed to date. The asset designation rights expired in June 2002 for the
leasehold positions and will expire in December 2004 for the fee owned
locations. During the marketing period, the Ward Venture is responsible for all
carrying costs associated with the properties until the site is designated to a
user. During the nine months ended September 30, 2002, the Ward Venture
completed transactions on 31 properties. For the nine months ended September 30,
2002 and 2001, the Company has recognized pre-tax profits of approximately $11.2
million and $21.8 million, respectively, which are included in the Condensed
Consolidated Statements of Income in the caption Equity in income of other real
estate joint ventures, net.
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% 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. During the nine
months ended September 30, 2002, the RioCan Venture acquired 22 shopping center
properties and two development projects, in separate transactions, for an
aggregate purchase price of approximately $658.7 million Canadian dollars
("CAD") (approximately USD $420.4 million) including the assumption of
approximately CAD $321.5 million (approximately USD $203.1 million) in
non-recourse mortgage debt encumbering 13 of the properties. During the nine
months ended September 30, 2002, the Company recognized equity in income of the
RioCan Venture of approximately $5.6 million.
KROP Venture -
During October 2001, the Company formed the Kimco Retail Opportunity
Fund ("KROP"), a venture with GE Capital Real Estate ("GECRE") which the Company
manages and has a 20% 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.
22
During the nine months ended September 30, 2002, KROP acquired 13
shopping center properties for an aggregate purchase price of approximately
$160.6 million, including the assumption of approximately $20.7 million of
mortgage debt encumbering two of the properties.
During June 2002, KROP obtained floating-rate non-recourse mortgage
debt totaling $73.0 million at an interest rate of Libor plus 1.80% for a term
of five years.
For the nine months ended September 30, 2002, the Company recognized
equity in income of KROP of approximately $0.5 million. Additionally, during the
nine months ended September 30, 2002, the Company earned management and
acquisition fees of approximately $1.8 million.
Other -
During the nine months ended September 30, 2002, the Company acquired
seven former Service Merchandise locations, in separate transactions, through a
venture in which the Company has a 42.5% interest. These properties were
purchased for an aggregate purchase price of approximately $20.9 million. The
venture has signed leases for six of these locations and is actively negotiating
with other retailers to lease the remaining location.
During July 2002, the Company acquired a property located in Kalamazoo,
MI, through a joint venture in which the Company has a 50% interest. The
property was purchased for an aggregate purchase price of approximately $6.0
million.
6. Investment in Retail Store Leases
Income from the investment in retail store leases for the nine months
ended September 30, 2002 and 2001 represents sublease revenues of approximately
$10.6 million and $12.9 million, respectively, less related expenses of $8.8
million and $9.1 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.
23
7. Other Investments
Mortgages and other financing receivables -
During the nine months ended September 30, 2002, the Company provided
an aggregate $91.7 million in mortgage financings, in separate transactions, to
various regional retailers. These loans are collateralized with first mortgage
liens on real estate owned by the retailers. The loans bear interest at rates
ranging from 10.25% to 14.0% per annum and have maturities ranging from two to
ten years.
During June 2002, the Company acquired a 90% equity participant
interest in an existing leveraged lease of 30 properties. The properties are
leased under a long-term bond-type net lease whose primary term expires in 2016,
with the lessee having certain renewal option rights. The Company's cash equity
investment was approximately $4.0 million. This equity investment is reported as
a net investment in leveraged lease in accordance with SFAS No. 13 (as amended).
The net investment in leveraged lease reflects the original cash investment
adjusted by remaining net rentals, estimated residual value, unearned and
deferred income, and deferred taxes relating to the investment. This investment
is included in the Condensed Consolidated Balance Sheet in the caption Mortgages
and other financing receivables.
During September 2002, three of these properties were sold whereby the
proceeds from the sales were used to paydown the mortgage debt by approximately
$8.1 million. As of September 30, 2002, the remaining 27 properties were
encumbered by third-party non-recourse debt of approximately $89.2 million that
is scheduled to fully amortize during the primary term of the lease from a
portion of the periodic net rents receivable under the net lease. As an equity
participant in the leveraged lease, the Company has no general obligation for
principal or interest payments on the debt, which is collateralized by a first
mortgage lien on the properties and a collateral assignment of the lease.
Accordingly, this debt has been offset against the related net rental receivable
under the lease.
Kmart Venture -
During July 2002, the Company, through a taxable REIT subsidiary,
formed a venture (the "Kmart Venture") in which the Company has a 60%
participation for purposes of acquiring asset designation rights for 54 former
Kmart locations. The total commitment to Kmart by the Kmart Venture, prior to
the profit sharing arrangement commencing, is approximately $43.0 million. As of
September 30, 2002, the Kmart Venture has completed transactions on eight
properties and has funded approximately $12.0 million to Kmart.
24
8. Debt Financings
During July 2002, the Company further enhanced its liquidity position
by establishing an additional $150.0 million unsecured revolving credit
facility, which is scheduled to expire in January 2003.
During July 2002, the Company issued an aggregate $102.0 million of
unsecured debt under its medium-term notes ("MTN") program. These issuances
consisted of (i) an $85.0 million floating-rate MTN which matures in August 2004
and bears interest at Libor plus 0.50% per annum and (ii) a $17.0 million
fixed-rate MTN which matures in July 2012 and bears interest at 5.98% per annum.
The proceeds from these MTN issuances were used toward the repayment of a $110.0
million MTN which matured in August 2002. In addition, the Company entered into
an interest rate swap agreement on the $85.0 million floating-rate MTN which
effectively fixed the interest rate at 2.3725% per annum until November 2003.
9. 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. 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 interest rate swap agreements on its $85.0 million floating-rate MTN
and on its $100.0 million floating-rate remarketed reset notes, which have been
designated and qualified as cash flow hedges. The Company has determined that
these swap agreements are highly effective in offsetting future variable
interest cash flows related to the Company's debt portfolio. For the nine months
ended September 30, 2002, the change in the fair value of the interest rate
swaps was a gain of approximately $3.5 million which was recorded in Other
Comprehensive Income ("OCI"), a component of stockholders' equity, with a
corresponding liability reduction for the same amount.
As of September 30, 2002, the Company had foreign currency forward
contracts on its Canadian investment in marketable securities in the amount of
approximately CAD $31.2 million (approximately USD $19.8 million). The Company
has designated these foreign currency forward contracts as fair value hedges.
The Company expects these forward contracts to be highly effective in limiting
its exposure to the variability in the fair value of its Canadian investment as
it relates to changes in the exchange rate. The gain or loss on these forward
contracts will be recognized currently in earnings and the gain or loss on the
Canadian investment attributable to changes in the exchange rate will be
recognized currently in earnings and shall adjust the carrying amount of the
hedged investment.
25
During 2001, the Company acquired warrants to purchase the common stock
of a Canadian REIT. The Company has designated the warrants as a cash flow hedge
of the variability in expected future cash outflows upon purchasing the common
stock. The Company has determined the hedged cash outflow is probable and
expected to occur prior to the expiration date of the warrants. The Company has
determined that the warrants are fully effective. For the nine months ended
September 30, 2002, the change in fair value of the warrants was a gain of
approximately $0.6 million which was recorded in OCI with a corresponding asset
for the same amount.
As of September 30, 2002, the Company had foreign currency forward
contracts on its Canadian investments in real estate for an aggregate amount of
approximately CAD $177.8 million (approximately USD $112.6 million). The Company
has designated these foreign currency forward contracts as hedges of the foreign
currency exposure of its net investment in Canadian real estate operations. The
Company believes that these forward contracts are highly effective in reducing
the exposure to fluctuations in the exchange rate. The gains and losses on these
net investment hedges are recorded in OCI with a corresponding asset or
liability for the same amount. Similarly, the foreign currency translation gains
and losses on these Canadian investments attributable to changes in the exchange
rate will also be recorded in OCI.
The following table summarizes the notional values and fair values of
the Company's derivative financial instruments as of September 30, 2002:
Fair Value
Hedge Type Notional Value Rate Maturity (in millions)
---------- -------------- ---- -------- -------------
Interest rate swaps - $185.0 million 1.78% - 8/03 - ($0.4)
cash flow 1.8725% 11/03
Foreign currency forwards CAD $31.2 million 1.5882 - 9/03 - $0.3
- - fair value 1.5918 4/05
Warrants - cash flow 2,500,000 shares of CAD 9/06 $3.0
common stock $11.02
Foreign currency forwards CAD $177.8 million 1.5527 - 1/05 - $2.3
- net investment 1.6194 8/05
As of September 30, 2002, these derivative instruments were reported at
their fair value as other liabilities of $0.4 million and other assets of $5.6
million. During the next 12 months, the Company expects to reclassify to
earnings as expense approximately $0.4 million of the current balance in
accumulated OCI primarily related to the fair value of the interest rate swaps.
26
10. Tenant Concentration
On January 22, 2002, Kmart Corporation ("Kmart") filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. As of the filing date, Kmart
occupied 69 locations (excluding the KIR portfolio which includes six Kmart
locations), representing 12.6% of the Company's annualized base rental revenues
and 13.3% of the Company's total shopping center GLA. As of September 30, 2002,
Kmart rejected its leases at 27 locations representing approximately $29.5
million of annualized base rental revenues and approximately 2.8 million square
feet of GLA. As of September 30, 2002, Kmart represented 5.6% of annualized base
rents and 8.3% of leased GLA. The Company previously encumbered seven of these
rejected locations with individual non-recourse mortgage loans totaling
approximately $60.8 million. Annualized interest expense on these loans is
approximately $5.6 million. As of July 2002, the Company has suspended debt
service payments on these loans and is actively negotiating with the respective
lenders. The Company continues to maintain the properties, including the
payments of utilities, common area maintenance costs and insurance, as it works
toward maximizing the value of the lenders collateral.
The Company has currently leased or is under agreement to lease 11 of
these rejected locations, has terminated four ground lease locations and has
received offers to purchase nine of these sites. The Company is reviewing the
offers received and is actively marketing the remaining locations to prospective
tenants, however, no assurances can be provided that these locations will be
leased in the near term or at comparable rents previously paid by Kmart.
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 and the availability of funds to pay
creditors such as the Company.
11. 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, 2002. 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, 2002 and 2001,
adjusted to give effect to these transactions as of January 1, 2001.
27
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, 2001, nor does it
purport to represent the results of future operations. (Amounts presented in
millions, except per share figures).
Nine Months Ended September 30,
2002 2001
---- ----
Revenues from rental property $ 344.0 $ 355.7
Net income $ 182.8 $ 175.8
Net income per common share:
Basic $ 1.62 $ 1.63
======= =======
Diluted $ 1.60 $ 1.61
======= =======
12. Subsequent Events
During October 2002, the Company acquired an interest in a shopping
center property, comprising approximately 0.6 million square feet of GLA,
located in Daly City, CA. The property was valued at a purchase price of
approximately $80.0 million and was acquired by issuing approximately 2.4
million downREIT units which are convertible at a ratio of 1:1 into the
Company's common stock.
28
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.
29
Form 8-K -
A current report on Form 8-K was filed on July 29, 2002 to announce the
Company's second quarter 2002 operating results.
A current report on Form 8-K was filed on August 13, 2002 furnishing
certifications by the Chief Executive Officer and Chief Financial Officer,
pursuant to Section 906 of the Surbanes-Oxley Act of 2002.
30
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 12, 2002 /s/ Milton Cooper
- ----------------- ----------------------------------
(Date) Milton Cooper
Chairman of the Board
November 12, 2002 /s/ Michael V. Pappagallo
- ----------------- -------------------------
(Date) Michael V. Pappagallo
Chief Financial Officer
31
Kimco Realty Corporation
Certification
I, Milton Cooper, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kimco Realty
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Milton Cooper
-----------------------------------
Milton Cooper
Chief Executive Officer
32
Kimco Realty Corporation
Certification
I, Michael V. Pappagallo, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kimco Realty
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Michael V. Pappagallo
------------------------------------
Michael V. Pappagallo
Chief Financial Officer
33