Item 1. Business - -----------------
General Kimco Realty Corporation is one of the nation's largest owners and operators of neighborhood and community shopping centers. As of March 1, 2000, the Company's portfolio was comprised of 473 property interests including 405 neighborhood and community shopping center properties, two regional malls, 55 retail store leases, five parcels of undeveloped land, one distribution center and five projects under development comprising a total of approximately 62.0 million square feet of leasable space located in 41 states. The Company's portfolio includes 29 shopping center properties comprising 5.4 million square feet (the "KIR Portfolio") relating to the Kimco Income REIT ("KIR"), a joint venture arrangement with institutional investors established for the purpose of investing in high quality retail properties financed primarily with individual non-recourse mortgage debt (See Recent Developments - Investment in Kimco Income REIT ("KIR")). The Company believes its portfolio of neighborhood and community shopping center properties is the largest (measured by gross leasable area, "GLA") currently held by any publicly-traded real estate investment trust ("REIT"). The Company is a self-administered REIT and manages its properties through present management, which has owned and operated neighborhood and community shopping centers for more than 30 years. The Company has not engaged, nor does it expect to retain, any REIT advisors in connection with the operation of its properties.
The Company's executive offices are located at 3333 New Hyde Park Road, New Hyde Park, New York 11042-0020 and its telephone number is (516)869-9000. Unless the context indicates otherwise, the term the "Company" as used herein is intended to include subsidiaries of the Company.
History The Company began operations through its predecessor, The Kimco Corporation, which was organized in 1966 upon the contribution of several shopping center properties owned by its principal stockholders. In 1973, these principals formed the Company as a Delaware corporation, and in 1985, the operations of The Kimco Corporation were merged into the Company. The Company completed its initial public stock offering (the "IPO") in November 1991, and reorganized as a Maryland corporation during 1994.
The Company's growth through its first fifteen years resulted primarily from the ground-up development and construction of its shopping centers. By 1981, the Company had assembled a portfolio of 77 properties that provided an established source of income and positioned the Company for an expansion of its asset base. At that time, the Company revised its growth strategy to focus on the acquisition of existing shopping centers and creating value through the redevelopment and re-tenanting of those properties. As a result of this strategy, substantially all of the shopping centers added to the Company's portfolio from 1981 through 1998 have been through the acquisition of existing shopping centers.
During 1998, the Company, through a merger transaction, completed the acquisition of The Price REIT, Inc., a Maryland corporation (the "Price REIT")(See Note 3 of the Notes to Consolidated Financial Statements included in this annual report on Form 10-K). Prior to the merger, Price REIT was a self-administered and self-managed equity REIT that was focused on the acquisition, development, management and redevelopment of large retail community shopping center properties concentrated in the western part of the United States. In connection with the Merger, the Company acquired interests in 43 properties, located in 17 states, consisting of 39 retail community centers, one stand-alone retail warehouse, one project under development and two undeveloped land parcels, containing approximately 8.0 million square feet of GLA. The overall occupancy rate of the retail community centers was approximately 98%. With the completion of the Price REIT merger, the Company expanded its presence in certain western states including California, Arizona and Washington. In addition, Price REIT had strong ground-up development capabilities. These development capabilities, coupled with the Company's own construction management expertise, provides the Company, on a selective basis, the ability to pursue ground-up development opportunities.
During 1998 and 1999, the Company has capitalized on its enhanced ground-up development capabilities and has commenced ground-up development projects located in Bridgewater, NJ, Houston, TX, Cedar Hill, TX, San Antonio, TX, Chandler, AZ, Miamisburg, OH and Dover, DE. During 1999, the Company completed the Bridgewater, NJ development.
During 1998, the Company formed KIR, an entity in which the Company held a 99.99% limited partnership interest. KIR was established for the purpose of investing in high quality properties financed primarily with individual non-recourse mortgages. The Company believes that these properties are appropriate for financing with greater leverage than the Company traditionally uses. At the time of formation, the Company contributed 19 properties to KIR, each encumbered by an individual non-recourse mortgage. During 1999, KIR sold a significant interest in the partnership to institutional investors. As a result, the Company holds, as of December 31, 1999, a 43.3% non-controlling limited partnership interest in KIR and accounts for its investment in KIR under the equity method of accounting (See Recent Developments - Investment in Kimco Income REIT ("KIR") and Note 4 of the Notes to Consolidated Financial Statements included in this annual report on form 10-K).
Investment and Operating Strategy The Company's investment objective has been to increase cash flow, current income and, consequently, the value of its existing portfolio of properties, and to seek continued growth through (i) the strategic re-tenanting, renovation and expansion of its existing centers, (ii) the selective acquisition of established income-producing real estate properties and properties requiring significant re-tenanting and redevelopment, primarily in neighborhood and community shopping centers and (iii)the selective acquisition of land parcels for the ground-up development of neighborhood and community shopping centers in geographic regions in which the Company presently operates. The Company will consider investments in other real estate sectors and in geographic markets where it does not presently operate should suitable opportunities arise.
The Company's neighborhood and community shopping center properties are designed to attract local area customers and typically are anchored by a discount department store, a supermarket or drugstore tenant offering day-to-day necessities rather than high-priced luxury items. The Company may either purchase or lease income-producing properties in the future, and may also participate with other entities in property ownership through partnerships, joint ventures or similar types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness may be incurred in connection with acquiring such investments. Any such financing or indebtedness will have priority over the Company's equity interest in such property. The Company may make loans to joint ventures in which it may or may not participate in the future.
While the Company has historically held its properties for long-term investment, and accordingly has placed strong emphasis on its ongoing program of regular maintenance, periodic renovation and capital improvement, it is possible that properties in the portfolio may be sold, in whole or in part, as circumstances warrant, subject to REIT qualification rules.
The Company emphasizes equity real estate investments, but may, at its discretion, invest in mortgages, other real estate interests and other investments. The mortgages in which the Company may invest may be either first mortgages, junior mortgages or other mortgage-related securities.
The Company may legally invest in the securities of other issuers, for the purpose, among others, of exercising control over such entities, subject to the gross income and asset tests necessary for REIT qualification. The Company may, on a selective basis, acquire all or substantially all securities or assets of other REITs or similar entities where such investments would be consistent with the Company's investment policies. In any event, the Company does not intend that its investments in securities will require it to register as an "investment company" under the Investment Company Act of 1940.
The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its properties and a large tenant base. At December 31, 1999, the Company's single largest neighborhood and community shopping center, excluding the KIR Portfolio, accounted for only 1.4% of the Company's annualized base rental revenues and only 1.0% of the Company's total shopping center GLA. At December 31, 1999, the Company's five largest tenants, excluding the KIR Portfolio, include Kmart Corporation, Kohl's, Ames, The Home Depot and TJX Companies, which represent approximately 13.8%, 2.8%, 2.5%, 2.4% and 1.8%, respectively, of the Company's annualized base rental revenues.
The Company intends to maintain a conservative debt capitalization with a ratio of debt to total market capitalization of approximately 50% or less. As of December 31, 1999, the Company had a debt to total market capitalization ratio of approximately 34%.
The Company has authority to offer shares of capital stock or other senior securities in exchange for property and to repurchase or otherwise reacquire its common stock or any other securities and may engage in such activities in the future. At all times, the Company intends to make investments in such a manner as to be consistent with the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), to qualify as a REIT unless, because of circumstances or changes in the Code (or in Treasury Regulations), the Board of Directors determines that it is no longer in the best interests of the Company to qualify as a REIT.
The Company's policies with respect to the aforementioned activities may be reviewed and modified from time to time by the Company's Board of Directors without the vote of the Company's stockholders.
Competition As one of the original participants in the growth of the shopping center industry and one of the nation's largest owners and operators of neighborhood and community shopping centers, the Company has established close relationships with a large number of major national and regional retailers and maintains a broad network of industry contacts. Management is associated with and/or actively participates in many shopping center and REIT industry organizations. Notwithstanding these relationships, there are numerous commercial developers, real estate companies, financial institutions and other investors that compete with the Company in seeking properties for acquisition and tenants who will lease space in these properties.
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 $2.0 billion for the purposes of repaying indebtedness, acquiring interests in neighborhood and community shopping centers and for expanding and improving properties in the portfolio.
During August 1998, the Company established a $215 million, unsecured revolving credit facility, which is scheduled to expire in August 2001. This credit facility, which replaced both the Company's $100 million unsecured revolving credit facility and $150 million interim credit facility, has made available funds to both finance the purchase of properties and meet any short-term working capital requirements. As of December 31, 1999 there were no borrowings outstanding under the Company's unsecured revolving credit facility.
During November 1999, the Company established a $52 million unsecured term loan facility, which is scheduled to expire in November 2000. This credit facility was established to finance the purchase of properties and for general corporate purposes.
The Company has also implemented a $200 million medium-term notes program (the "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. (See Note 8 of the Notes to Consolidated Financial Statements included in this annual report on Form 10-K.)
In addition to the public debt and equity markets as capital sources, the Company may, from time to time, obtain mortgage financing on selected properties. As of December 31, 1999, the Company had over 350 unencumbered property interests in its portfolio.
During August 1998, the Company filed a shelf registration on Form S-3 for up to $750 million of debt securities, preferred stock, depositary shares, common stock and common stock warrants. As of March 1, 2000, the Company had approximately $393.2 million available for issuance under this shelf registration statement.
It is management's intention that the Company continually have 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 flow from operations increased to $237.2 million for the year ended December 31, 1999, as compared to $158.7 million for the year ended December 31, 1998.
Inflation and Other Business Issues 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 predetermined thresholds ("Percentage Rents"), which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses include increases 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 upon renewal to market rates. 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.
As an owner of real estate, the Company is subject to risks arising in connection with the underlying real estate, including, among other factors, defaults or nonrenewal of tenant leases, the financial condition and stability of tenants, retailing trends, environmental matters and changes in real estate and zoning laws. The success of the Company also depends upon trends in the economy, including, but not limited to, interest rates, the availability of capital, either in the form of debt or equity, on satisfactory terms, income tax laws, governmental regulations and legislation and population trends.
Operating Practices Nearly all operating functions, including leasing, legal, construction, data processing, maintenance, finance and accounting, are administered by the Company from its executive offices in New Hyde Park, New York. The Company believes it is critical to have a management presence in its principal areas of operation; accordingly, the Company also maintains regional offices in Margate, Orlando and Tampa, Florida; Philadelphia, Pennsylvania; Dallas, Texas; Dayton and Cleveland, Ohio; Lisle and Chicago, Illinois; Charlotte, North Carolina; Phoenix and Tucson, Arizona and Los Angeles, California. A total of 222 persons are employed at the Company's executive and regional offices.
The Company's regional offices are generally staffed by a manager and the support personnel necessary to both function as local representatives for leasing and promotional purposes and to complement the corporate office efforts to ensure that property inspection and maintenance objectives are achieved. The regional offices are important in reducing the time necessary to respond to the needs of the Company's tenants. Leasing and maintenance personnel from the corporate office also conduct regular inspections of each shopping center.
The Company also employs a total of 59 persons at several of its larger properties in order to more effectively administer its maintenance and security responsibilities.
Management Information Systems Virtually all operating activities are supported by a sophisticated computer software system designed to provide management with operating data necessary to make informed business decisions on a timely basis. These proprietary
systems are continually expanded and enhanced by the Company and reflect a commitment to quality management and tenant relations. The Company has integrated an advanced mid-range computer with personal computer technology, creating a management information system that facilitates the development of property cash flow budgets, forecasts and related management information.
Qualification as a REIT The Company has elected, commencing with its taxable year which began January 1, 1992, to qualify as a REIT under Sections 856 through 860 of the Code. If, as the Company believes, it is organized and operates in such a manner so as to qualify and remain qualified as a REIT under the Code, 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.
Recent Developments
Investment in Kimco Income REIT ("KIR") -
During 1998, the Company formed KIR, an entity in which the Company held a 99.99% limited partnership interest. KIR was established for the purpose of investing in real estate that it believes would be more appropriately financed through greater leverage than the Company traditionally uses. These properties include, but are not limited to, fully developed properties with strong, stable cash flows from credit-worthy retailers with long-term leases that have limited near-term potential for growth through redevelopment or re-tenanting. The Company initially identified and contributed 19 property interests to KIR which met this criteria. Each of these properties was encumbered by an individual non-recourse mortgage. On April 28, 1999, the Company entered into an agreement whereby an institutional investor purchased a significant interest in KIR. Under the terms of the agreement, the agreed equity value for the 19 shopping centers previously contributed by the Company to KIR was approximately $107 million and the Company agreed to contribute an additional $10 million for a total investment of approximately $117 million. The institutional investor has subscribed for up to $117 million of equity in KIR, of which approximately $107 million has been contributed as of December 31, 1999. During August 1999, KIR admitted three additional limited partners. Each new partner entered into a subscription agreement whereby they subscribed for an aggregate $35 million of equity in KIR. At December 31, 1999 approximately $32 million of such subscriptions had been contributed. As of December 31, 1999, KIR has subscription agreements totaling approximately $269 million, of which approximately $246 million has been contributed. As a result of these transactions, 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.
During the period April 28, 1999 to December 31, 1999, KIR purchased ten shopping center properties, in separate transactions, aggregating 2.2 million square feet of GLA for approximately $218.3 million including the assumption of approximately $36.1 million of mortgage debt. Four of these properties were purchased from the Company for an aggregate purchase price of $70.1 million. As of December 31, 1999, the KIR Portfolio is comprised of 29 shopping center properties totaling 5.4 million square feet of GLA.
During May 1999, KIR obtained individual non-recourse, non-cross collateralized ten-year fixed-rate first mortgages aggregating $52.6 million on four of its properties. These mortgages bear interest at rates ranging from 7.57% to 7.72% per annum. The net proceeds were used to finance the acquisition of various shopping center properties.
Shopping Center Acquisitions -
During the year ended December 31, 1999, the Company and its affiliates acquired interests in 35 shopping center properties located in 14 states (two of which were subsequently sold to KIR in April 1999), comprising approximately 4.1 million square feet of GLA for an aggregate purchase price of approximately $248.5 million, including the assumption of approximately $55.7 million of mortgage debt encumbering the properties as follows:
In January 1999, the Company acquired Riverwalk Plaza located in South Charleston, WV for a purchase price of approximately $13.5 million, including the assumption of approximately $8.5 million of mortgage debt encumbering the property. This shopping center is anchored by Kroger and TJ Maxx and contains approximately 138,000 square feet of GLA.
Also in January 1999, the Company acquired, in separate transactions, Palm Plaza and Magnolia Square shopping centers located in Temecula and San Ramon, CA, respectively, for an aggregate purchase price of approximately $45.1 million. Palm Plaza, consisting of approximately 340,000 square feet of GLA is anchored by K-Mart and Food 4 Less. Magnolia Square, anchored by Super Crown Books, has approximately 42,000 square feet of GLA. These two properties were subsequently sold to KIR in April 1999.
In February 1999, the Company acquired two properties, in separate transactions, for an aggregate purchase price of approximately $20.4 million. Located in Downers Grove, IL, Downers Park Plaza is comprised of approximately 137,000 square feet of GLA and is anchored by Dominick's Market and Coomers Crafts. Sharpstown Court, anchored by Office Depot contains approximately 84,000 square feet of GLA, and is located in Houston, TX.
In March 1999 the Company acquired Southdale Shopping Center located in Des Moines, IA for a purchase price of approximately $8.6 million including the assumption of approximately $5.7 million in mortgage debt encumbering the property. Southdale is anchored by Best Buy and Office Max and contains approximately 143,000 square feet of GLA.
In April 1999, the Company, through its Kimco Select Investments affiliate, acquired a Duane Reade shopping center located in Massapequa, NY containing approximately 22,000 square feet of GLA for a purchase price of approximately $3.6 million (See Recent Developments - Kimco Select Investments).
In May 1999, the Company acquired Acadiana Square for a purchase price of approximately $7.8 million. This shopping center, located in Lafayette, LA, is anchored by Linens n' Things and Petsmart and contains approximately 71,000 square feet of GLA.
On July 1, 1999, the Company exercised its option to acquire 13 shopping center properties comprising 1.6 million square feet of GLA from KC Holdings, Inc. ("KC Holdings"), an entity formed in connection with the Company's initial public stock offering in November 1991. The properties were acquired for an aggregate option price of approximately $39.8 million, paid $15.7 million in shares of the Company's common stock (401,646 common shares issued at $39.00 per share) and $24.1 million through the assumption of mortgage debt encumbering the properties. Such mortgage debt was repaid during September 1999. The members of the Company's Board of Directors who are not also shareholders of KC Holdings, unanimously approved the Company's purchase of these 13 shopping center properties (See Note 15 of the Notes to Consolidated Financial Statements included in this annual report on Form 10-K).
During September 1999, Landmark Station, a shopping center anchored by Waccamaw was purchased for approximately $6.0 million. This property is located in Greensboro, SC and contains approximately 101,000 square feet of GLA.
In October 1999, the Company acquired a shopping center located in Houma, LA for a purchase price of approximately $9.9 million. This shopping center has approximately 99,000 square feet of GLA and is anchored by Old Navy and Office Max.
In November 1999, the Company acquired The Center located in Stockton, CA for a purchase price of approximately $16.9 million including the assumption of approximately $8.4 million of mortgage debt encumbering the property. This shopping center is anchored by Homebase and Office Club and contains approximately 146,000 square feet of GLA. Also during November 1999, the Company purchased Highland Ridge Plaza, a shopping center anchored by Biggs Foods for a purchase price of approximately $7.7 million. This center is located in Cincinnati, OH and contains approximately 169,000 square feet of GLA.
In November 1999, the Company acquired, in a series of transactions, nine property interests, for an aggregate purchase price of approximately $57.1 million in connection with the Hechinger Stores bankruptcy process. The properties are located in four states, containing an aggregate 0.8 million square feet of GLA.
During December 1999, Regency Plaza, a shopping center located in Jacksonville, FL was acquired for a purchase price of approximately $12.1 million including the assumption of $9.0 million of mortgage debt encumbering the property. This property contains approximately 204,000 square feet of GLA and is anchored by Burlington Coat Factory, TJ Maxx and Office Max.
The Company, as a regular part of its business operations, will continue to actively seek properties for acquisition, which have below market-rate leases or other cash flow growth potential.
Property Developments and Redevelopments -
The Company has an ongoing program to reformat and re-tenant its properties to maintain or enhance its competitive position in the marketplace. During 1999, the Company substantially completed the redevelopment and re-tenanting of various shopping center properties. The Company expended approximately $24 million in connection with these major redevelopments and re-tenanting projects during 1999. The Company is currently involved in redeveloping several other shopping centers. The Company anticipates its capital commitment toward these and other redevelopment projects will be approximately $30 million during 2000.
During the year ended December 31, 1999, the Company acquired one land parcel and, through separate partnership investments, interests in two additional land parcels for the ground-up development of shopping centers for an aggregate purchase price of approximately $17.3 million.
During 1999, the Company was in progress on ground-up development projects located in Bridgewater, NJ, Houston, TX, Cedar Hill, TX, San Antonio, TX, Chandler, AZ, Miamisburg, OH and Dover, DE. These projects had substantial pre-leasing prior to the commencement of construction. During 1999, the Company expended approximately $80 million in connection with the purchase of land and construction costs related to these projects. During 1999, the Company completed the development of Bridgewater, NJ. The Company anticipates its capital commitment toward these and other development projects will be approximately $100 million during 2000.
Each development and redevelopment project represents an opportunity for the Company to capitalize on its leasing, site planning, design and construction expertise. These projects, which are currently proceeding on schedule and in line with the Company's budgeted costs, are expected to contribute to growth in the Company's funds from operations in the future.
Property Dispositions -
During the year ended December 31, 1999, the Company disposed of six shopping center properties and a land parcel. Cash proceeds from four of these dispositions aggregated approximately $6.1, million which approximated their aggregate net book value.
During July 1999, the Company disposed of a shopping center property in New Port Richey, FL. Cash proceeds from the disposition totaling $.5 million, together with an additional $5.5 million cash investment, were used to acquire an exchange shopping center property located in Greensboro, NC during September 1999. The sale of this property resulted in a gain of approximately $.3 million.
During October 1999, the Company, in separate transactions, disposed of a shopping center property and a land parcel for an aggregate sale price of approximately $4.5 million, which resulted in a gain of approximately $1.3 million.
Kimco Select Investments -
Kimco Select Investments, a New York general partnership ("Kimco Select"), was formed in 1997 to provide the Company, through its 90% ownership interest, the opportunity to make investments outside of its core neighborhood and community shopping center business. Kimco Select is managed by David M. Samber, formerly President and Chief Operating Officer of the Company, who owns the remaining 10% ownership interest in Kimco Select.
Although potential investments may be largely retail-focused, Kimco Select may invest in other asset categories. Kimco Select will focus on investments where the intrinsic value in the underlying assets may provide potentially superior returns relative to the inherent risk. These investments may be in the form of direct ownership of real estate, mortgage loans, public and private debt and equity securities that Kimco Select believes are undervalued, unoccupied properties, properties leased to troubled or bankrupt tenants and other assets.
During 1999, Kimco Select (i) invested $17.3 million in a joint venture which acquired a participation interest in a first and second mortgage collateralized by 24 properties owned by a national retailer who has filed for bankruptcy protection, (ii) acquired fee title to a property in Massapequa, NY anchored by Duane Reade for a purchase price of approximately $3.6 million, (iii) acquired two first mortgage participation interests collateralized by various convenience stores for $6.7 million, (iv) invested $.7 million in a joint venture which owns an office building and (v) invested $5.7 million in a joint venture which acquired a parcel of land for the development of a shopping center in Henderson, NV.
Kimco Select also has investments in (i) certain public bonds, (ii) joint venture interests in two entities which own three office buildings in Miami, FL, (iii) three retail properties in the Chicago, IL market and (iv) three properties which are anchored by ambulatory care facilities with complementary retail space. The aggregate net investment related to these various investments is approximately $30 million.
Other Transactions -
During December 1998, the Company acquired a first mortgage interest on a shopping center in Manhasset, NY for approximately $21 million. During April 1999, the Company acquired fee title to this property.
During October 1999, the Company invested approximately $4.9 million in a partnership which is developing an office and retail center in Dover, DE. The Company has a 50% interest in this partnership.
In October and December 1999, the Company acquired certain asset designation rights from the bankrupt estate of Hechinger Stores, Inc. These rights, which enabled the Company to direct the ultimate disposition of the fee or leasehold positions held by the bankrupt estate, were utilized to facilitate the acquisition of those positions by various national retailers. The Company was awarded designation rights to 63 former Hechinger and Builders Square locations, of which 57 have been designated to various retailers to date.
Financings -
Unsecured Debt. During February 1999, the Company issued $130 million of 6-7/8% fixed-rate Senior Notes due 2009 (the "Notes"). Interest on the Notes is payable semi-annually in arrears. The Notes were sold at 99.85% of par value. Net proceeds from the issuance totaling approximately $128.9 million, after related transaction costs of approximately $.9 million, were used, in part, to repay $100 million floating-rate senior notes that matured during February 1999 and for general corporate purposes.
During October and December 1999, the Company issued an aggregate $100 million of fixed-rate unsecured medium-term notes (the "October and December MTNs") under its MTN program. The October and December MTNs mature in October 2004 and December 2007, respectively, and bear interest at 7.62% and 7.90% per annum, respectively. The proceeds were used to finance the acquisition of various shopping center properties and for general corporate purposes.
During November 1999, the Company entered into an unsecured term loan for an aggregate $52 million. The term loan bears interest at Libor plus .70% per annum and matures in November 2000. The proceeds were used to finance the acquisition of various shopping center properties and for general corporate purposes.
Mortgage Debt. During 1999, the Company obtained non-recourse, non-cross collateralized fixed rate first mortgage financing aggregating approximately $28.7 million on five of its properties. The mortgages bear interest at rates ranging from 7.00% to 8.25% per annum.
Credit Facility. On August 21, 1998, the Company established a $215 million unsecured revolving credit facility (the "Credit Facility") with a group of banks. The Credit Facility is scheduled to expire in August 2001. Under the terms of the Credit Facility, funds may be borrowed for general corporate purposes, including (i) funding property acquisitions and (ii) development and redevelopment costs. Interest on borrowings under the Credit Facility accrues at a spread (currently .50%) to LIBOR, which fluctuates in accordance with changes in the Company's senior debt ratings. This Credit Facility replaced the Company's (i) $100 million unsecured revolving credit facility and (ii) $150 million interim credit facility.
Equity. During 1999, the Company issued 401,646 shares of common stock at $39.00 per share in connection with its exercise of its option to acquire 13 shopping center properties from KC Holdings (See Note 15 of the Notes to Consolidated Financial Statements included in this annual report on Form 10-K).
During December 1999, the Company purchased and retired 160,000 shares of its common stock at a price of $31.75 per share, totaling approximately $5.1 million. The Company does not have a share repurchase program but acquired the shares when it received an unsolicited offer to buy them from an institutional investor.
KC Holdings, Inc.
To facilitate the Company's November 1991 IPO, 46 shopping center properties and certain other assets, together with indebtedness related thereto, were transferred to subsidiaries of KC Holdings. The Company, although having no ownership interest in KC Holdings or its subsidiary companies, was granted ten-year, fixed-price acquisition options which expire in November 2001 to reacquire the real estate assets owned by KC Holdings' subsidiaries, subject to any liabilities outstanding with respect to such assets at the time of an option exercise. As of December 31, 1999, KC Holdings' subsidiaries had conveyed 27
shopping center properties back to the Company and had disposed of ten additional centers in transactions with third parties. The members of the Company's Board of Directors who are not also shareholders of KC Holdings unanimously approved the purchase of each of the 27 shopping centers that have been reacquired by the Company from KC Holdings. (See Notes 11 and 15 of the Notes to Consolidated Financial Statements included in this annual report on Form 10-K.) The Company manages five of KC Holdings' remaining nine shopping center properties pursuant to a management agreement. KC Holdings' other four shopping center properties are managed by unaffiliated joint venture partners.
At December 31, 1999, the Company holds 10-year acquisition options which expire in November 2001 to reacquire interests in the remaining nine shopping center properties owned by KC Holdings' subsidiaries. The option exercise prices are fixed and payable in shares of the Company's common stock or, in the event payment in the form of common stock could jeopardize the Company's status as a REIT, an equivalent value in cash. If the Company exercises its options to acquire all the remaining shopping center properties, the maximum aggregate amount payable to KC Holdings would be approximately $5.3 million, or approximately 157,000 shares of the Company's common stock (assuming shares valued at the closing price on the NYSE of $33.875 per share as of December 31, 1999). The Company would acquire the properties subject to any existing mortgage indebtedness and other liabilities on the properties. The acquisition options enable the Company to obtain any appreciation in the value of these properties over the option exercise prices, while eliminating the Company's interim exposure to leverage and operating risks.
The option exercise prices for the shopping center properties are generally equal to 10% of KC Holdings' share of the mortgage debt which was outstanding on the properties at the date of the IPO. If, however, the market value of the Company's common stock at the time an option is exercised is less than $13.33 per share (the IPO price), then the option exercise price will decline proportionately (subject to maximum reduction of 50%).
The nine shopping center properties subject to the acquisition options are held in seven subsidiaries of KC Holdings. Four of the properties, which are owned in two separate joint ventures and managed by unaffiliated joint venture partners, are held by two subsidiaries, and the remaining five shopping center properties are each held by separate subsidiaries. The Company may exercise its acquisition options separately with respect to each subsidiary.
The acquisition options may be exercised by either (i) a majority of the Company's directors who are not also stockholders of KC Holdings, provided that the pro forma annualized net cash flows of the properties to be acquired exceed the dividend yield on the shares issued to exercise each option, or (ii) a majority of the Company's stockholders who are not also stockholders of KC Holdings.
KC Holdings' subsidiaries may sell any of the properties subject to the acquisition options to any third party unaffiliated with KC Holdings or its stockholders, provided that KC Holdings provides the Company with a 30-day right of first refusal notice with regard to such sale. KC Holdings may cause such a selling subsidiary to distribute any sale proceeds to KC Holdings or its stockholders, provided that the option exercise price with respect to such subsidiary is reduced by the amount that is distributed, and further provided that no amount may be distributed so as to cause the option exercise price for any subsidiary to be reduced to less than $1.
Each of KC Holdings' subsidiaries may pay dividends to KC Holdings to the extent of net operating cash flow. In addition, any KC Holdings subsidiary may make distributions to KC Holdings in excess of net operating cash flow, provided that the option exercise price with respect to such subsidiary is reduced by the amount of such distribution, and further provided that no amount may be distributed so as to cause the option exercise price for any subsidiary to be reduced to less than $1. KC Holdings may increase the indebtedness in its subsidiaries for the purpose of improving, maintaining, refinancing or operating the related shopping center properties. Such indebtedness may include borrowings from the stockholders of KC Holdings.
In the event of a complete casualty or a condemnation of a property held by any of KC Holdings' subsidiaries, the acquisition option will terminate with respect to such property and the option shall continue to be effective with respect to any other properties held by such subsidiary.
Each of KC Holdings' subsidiaries has agreed with the Company that it will engage in no activities other than in connection with the ownership, maintenance and improvement of the properties that it owns and only to the extent that the Company could engage in such activities without receiving or earning non-qualifying income (in excess of certain limits) under the REIT provisions of the Code or without otherwise impairing the Company's status as a REIT. In addition, KC Holdings has covenanted not to engage in any other real
estate activity. The Company has agreed not to make loans to KC Holdings or its subsidiaries.
Exchange Listings
The Company's common stock, Class A Depositary Shares, Class B Depositary Shares, Class C Depositary Shares and Class D Depositary Shares are traded on the NYSE under the trading symbols "KIM", "KIMprA", "KIMprB", "KIMprC" and "KIMprD", respectively.
Item 2.
Item 2. Properties
Real Estate Portfolio As of January 1, 2000 the Company's real estate portfolio was comprised of approximately 62.0 million square feet of GLA in 404 neighborhood and community shopping center properties, two regional malls, 58 retail store leases, five parcels of undeveloped land, one distribution center and five projects under development, located in 41 states. The Company's portfolio includes 29 shopping center properties comprising approximately 5.4 million square feet of GLA relating to the KIR Portfolio. Neighborhood and community shopping centers comprise the primary focus of the Company's current portfolio, representing approximately 98% of the Company's total shopping center GLA. As of January 1, 2000, approximately 92.1% of the Company's neighborhood and community shopping center space (excluding the KIR Portfolio) was leased, and the average annualized base rent per leased square foot of the neighborhood and community shopping center portfolio (excluding the KIR Portfolio) was $7.87. As of January 1, 2000, the KIR Portfolio was 98% leased with an average annualized base rent per leased square foot of $10.48.
The Company's neighborhood and community shopping center properties, generally owned and operated through subsidiaries or joint ventures, had an average size of approximately 138,000 square feet as of January 1, 2000. The Company retains its shopping centers for long-term investment and consequently pursues a program of regular physical maintenance together with major renovations and refurbishing to preserve and increase the value of its properties. These projects usually include renovating existing facades, installing uniform signage, resurfacing parking lots and enhancing parking lot lighting. During 1999, the Company capitalized approximately $6.3 million in connection with these property improvements.
The Company's neighborhood and community shopping centers (including the KIR Portfolio) are usually "anchored" by a national or regional discount department store, supermarket or drugstore. As one of the original participants in the growth of the shopping center industry and one of the nation's largest owners and operators of shopping centers, the Company has established close relationships with a large number of major national and regional retailers. National and regional companies that are tenants in the Company's shopping center properties include Kmart Corporation, Kohl's, Ames, The Home Depot, WalMart, TJX Companies, Toys/Kids R' Us, Shopko, A & P and Costco.
A substantial portion of the Company's income consists of rent received under long-term leases. Most of the leases provide for the payment of fixed base rentals monthly in advance and for the payment by tenants of an allocable share of the real estate taxes, insurance, utilities and common area maintenance expenses incurred in operating the shopping centers. Although a majority of the leases require the Company to make roof and structural repairs as needed, a number of tenant leases place that responsibility on the tenant, and the Company's standard small store lease provides for roof repairs to be reimbursed by the tenant as part of common area maintenance. The Company's management places a strong emphasis on sound construction and safety at its properties.
Approximately 1,800 of the Company's 4,538 leases also contain provisions requiring the payment of additional rent calculated as a percentage of tenants' gross sales above predetermined thresholds. Percentage Rents accounted for approximately 2% of the Company's revenues from rental property for the year ended December 31, 1999.
Minimum base rental revenues and operating expense reimbursements accounted for approximately 98% of the Company's total revenues from rental property for the year ended December 31, 1999. The Company's management believes that the average base rent per square foot for many of the Company's existing leases is generally lower than the prevailing market-rate base rents in the geographic regions where the Company operates, reflecting the potential for future growth.
The Company has been able to capitalize on the below market-rate leases in its existing shopping center portfolio to obtain increases in rental revenues through the renewal of leases or strategic re-tenanting of space. For the period January 1, 1999 to December 31, 1999 excluding the effects of (i) the transfer of 21 properties to the KIR Portfolio at $10.25 per leased square foot in April 1999 and (ii) 1999 acquisitions at $7.46 per leased square foot, the Company increased the average base rent per leased square foot on its portfolio of neighborhood and community shopping centers (excluding the KIR Portfolio) from $7.81 to $7.90, an increase of $.09 per square foot, which was attributed to general leasing activity within the existing portfolio. The effect of 1999 acquisitions decreased the overal rent per leased square foot by $.03, thus bringing the average rent per leased square foot to $7.87 as of December 31, 1999. The average annual base rent per leased square foot for new leases (excluding the KIR Portfolio) executed in 1999 was $8.42.
The Company seeks to reduce its operating and leasing risks through geographic and tenant diversity. No single neighborhood and community shopping center (excluding the KIR Portfolio) accounted for more than 1.0% of the Company's total shopping center GLA or more than 1.4% of total annualized base rental revenues as of December 31, 1999. The Company's five largest tenants (excluding the KIR Portfolio) include Kmart Corporation, Kohl's, Ames, The Home Depot and TJX Companies, which represent approximately 13.8%, 2.8%, 2.5%, 2.4% and 1.8%, respectively, of the annualized base rental revenues at December 31, 1999. The Company maintains an active leasing and capital improvement program that, combined with the high quality of the locations, has made, in management's opinion, the Company's properties attractive to tenants.
The Company's management believes its experience in the real estate industry and its relationships with numerous national and regional tenants gives it an advantage in an industry where ownership is fragmented among a large number of property owners.
Retail Store Leases In addition to neighborhood and community shopping centers, as of January 1, 2000, the Company's had interests in retail store leases totaling approximately 5.2 million square feet of anchor stores in 58 neighborhood and community shopping centers located in 24 states. As of January 1, 2000, approximately 94.0% of the space in these anchor stores had been sublet to retailers that lease the stores under net lease agreements providing for average annualized base rental payments to us of $4.15 per square foot. Our average annualized base rental payments under our retail store leases to the land owners of such subleased stores is approximately $2.77 per square foot. The average remaining primary term of our retail store leases (and, similarly, the remaining primary terms of our sublease agreements with the tenants currently leasing such space) is approximately 4 years, excluding options to renew the leases for terms which generally range from 5 to 25 years.
Ground-Leased Properties The Company has 55 shopping center properties that are subject to long-term ground leases where a third party owns and has leased the underlying land to the Company (or an affiliated joint venture) to construct and/or operate a shopping center. The Company or the joint venture pays rent for the use of the land and generally is responsible for all costs and expenses associated with the building and improvements. At the end of these long-term leases, unless extended, the land together with all improvements revert to the land owner.
Undeveloped Land The Company owns certain unimproved land tracts that it intends to develop as new shopping centers (See Recent Developments - Property Developments and Redevelopments) and owns parcels of land adjacent to certain of its existing shopping centers that are held for possible expansion. At times, should circumstances warrant, the Company may develop or dispose of these parcels.
The table on pages 15 to 23 sets forth more specific information with respect to each of the Company's shopping center properties.
Item 3.
Item 3. 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 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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(1) PERCENT LEASED INFORMATION AS OF DECEMBER 31, 1999 OR DATE OF ACQUISITION IF ACQUIRED SUBSEQUENT TO DECEMBER 31, 1999.
(2) THE TERM "JOINT VENTURE" INDICATES THAT THE COMPANY OWNS THE PROPERTY IN CONJUNCTION WITH ONE OR MORE JOINT VENTURE PARTNERS. THE DATE INDICATED IS THE EXPIRATION DATE OF ANY GROUND LEASE AFTER GIVING AFFECT TO ALL RENEWAL PERIODS.
(3) DENOTES REDEVELOPMENT PROJECT.
(4) DENOTES GROUND-UP DEVELOPMENT PROJECT.
(5) DENOTES UNDEVELOPED LAND.
(6) SOLD OR TERMINATED SUBSEQUENT TO DECEMBER 31, 1999.
(7) THE COMPANY HOLDS INTEREST IN VARIOUS RETAIL STORE LEASES RELATED TO THE ANCHOR STORE PREMISES IN NEIGHBORHOOD AND COMMUNITY SHOPPING CENTERS.
(8) DENOTES A KIMCO INCOME REIT ("KIR") PROPERTY.
Executive Officers of the Registrant
The following table sets forth information with respect to the nine executive officers of the Company as of March 1, 2000.
Name Age Position Since ---- --- -------- -----
Milton Cooper 71 Chairman of the Board of 1991 Directors and Chief Executive Officer
Michael J. Flynn 64 Vice Chairman of the 1996 Board of Directors and President and Chief 1997 Operating Officer
Joseph K. Kornwasser 52 Director and 1998 Senior Executive Vice President
Glenn G. Cohen 36 Treasurer 1997
Joseph V. Denis 48 Vice President - 1993 Construction
Jerald Friedman 55 Executive Vice President 1998
Bruce M. Kauderer 53 Vice President - Legal 1995 General Counsel and 1997 Secretary
Michael V. Pappagallo 41 Vice President - 1997 Chief Financial Officer
Alex Weiss 42 Vice President - 1988 Management Information Systems
Michael J. Flynn has been President and Chief Operating Officer since January 2, 1997, Vice Chairman of the Board of Directors since January 2, 1996 and a Director of the Company since December 1, 1991. Mr. Flynn was Chairman of the Board and President of Slattery Associates, Inc. for more than five years prior to joining the Company.
Joseph K. Kornwasser has been a Director and Senior Executive Vice President of the Company since June 1998. Mr. Kornwasser was President, Chief Executive Officer and a director of The Price REIT, Inc. from August 1993 to June 1998. From 1984 until 1994, Mr. Kornwasser was Managing General Partner of Kornwasser and Friedman Shopping Center Properties, a commercial real estate development company.
Glenn G. Cohen has been Treasurer of the Company since June 1997. Mr. Cohen served as Director of Accounting and Taxation of the Company from June 1995 to June 1997. Prior to joining the Company in June 1995, Mr. Cohen served as Chief Operating Officer and Chief Financial Officer for U.S. Balloon Manufacturing Co., Inc. from August 1993 to June 1995.
Jerald Friedman has been Executive Vice President of the Company since June 1998. Mr. Friedman was Senior Executive Vice President and Chief Operating Officer of The Price REIT, Inc. from January 1, 1997 to June 1998. From 1994 through 1996, Mr. Friedman was the Chairman and Chief Executive Officer of K & F Development Company, an affiliate of The Price REIT, Inc. From 1984 until 1994, Mr. Friedman was a General Partner of Kornwasser and Friedman Shopping Center Properties, a commercial real estate development company.
Bruce M. Kauderer has been a Vice President of the Company since June 1995 and since December 15, 1997, General Counsel and Secretary of the Company. Mr. Kauderer was a founder of and partner with Kauderer & Pack P.C. from 1992 to June 1995 and a Partner with Fink Weinberger, P.C. for more than five years prior to 1992.
Michael V. Pappagallo has been a Vice President and Chief Financial Officer of the Company since May 27, 1997. Mr. Pappagallo was Chief Financial Officer of GE Capital's Commercial Real Estate Financial and Services business from September 1994 to May 1997 and held various other positions within GE Capital for more than five years prior to joining the Company.
The executive officers of the Company serve in their respective capacities for approximate one-year terms and are subject to re-election by the Board of Directors, generally at the time of the Annual Meeting of the Board of Directors following the Annual Meeting of Stockholders.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters
Market Information The following table sets forth the common stock offerings completed by the Company during the three year period ended December 31, 1999. The Company's common stock was sold for cash at the following offering prices per share.
Offering Date Offering Price(s) ------------- -----------------
September 1997 $35.50 April 1998 (4 Offerings) $36.0625, $36.025, $36.25 and $36.625, respectively May 1998 $38.4375 July 1998 (3 Offerings) $38.2575, $38.56 and $39.4375, respectively September 1998 $38.75 November 1998 (4 Offerings) $39.00, $39.00, $39.6875 and $39.6875, respectively December 1998 (3 Offerings) $38.25 for each offering
The table below sets forth, for the quarterly periods indicated, the high and low sales prices per share reported on the NYSE Composite Tape for the Company's common stock. The Company's common stock is traded under the trading symbol "KIM".
Stock Price Period High Low ------ ---- ---
1998: First Quarter $35.94 $33.44 Second Quarter $41.00 $34.88 Third Quarter $41.63 $34.75 Fourth Quarter $40.25 $33.75
1999: First Quarter $39.81 $36.44 Second Quarter $40.63 $35.56 Third Quarter $39.00 $34.31 Fourth Quarter $35.31 $30.88
Holders The approximate number of holders of record of the Company's common stock, par value $.01 per share, was 1,541 as of March 1, 2000.
Dividends Since the IPO, the Company has paid regular quarterly dividends to its stockholders.
Quarterly dividends at the rate of $.48 per share were declared and paid on December 1, 1997 and January 15, 1998 and March 16, 1998 and April 15, 1998, respectively. On May 21, 1998 and June 22, 1998 the Company declared a dividend of $.42 per share and $.06 per share, respectively. These dividends were paid on July 2, 1998 and July 15, 1998, respectively. The dividends for this quarter were paid in two installments in order to provide Kimco shareholders the full $.48 per share dividend as well as provide the Price REIT shareholders a pro-rated dividend for the period following the effective date of the Merger. The Company declared and paid a dividend of $.48 per share on September 15, 1998 and October 15, 1998, respectively. In addition, the Company declared and paid a special $.05 per share dividend on October 29, 1998 and December 1, 1998, respectively. Also on October 29, 1998, the Company declared its dividend payable during the first quarter of 1999 at the increased rate of $.57 per share payable January 15, 1999 to shareholders of record January 4, 1999. On March 15, 1999 and April 15, 1999 and June 15, 1999 and July 15, 1999 and September 15, 1999 and October 15, 1999, the Company declared and paid quarterly dividends at an increased rate of $.60 per share. On December 7, 1999, the Company declared its dividend payable during the first quarter of 2000 at the increased rate of $.66 per share payable on January 18, 2000 to shareholders of record January 3, 2000. This $.66 per share dividend, if annualized, would equal $2.64 per share or an annual yield of approximately 7.8% based on the closing price of $34.00 of the Company's common stock on the NYSE as of March 1, 2000.
The Company has determined that 100% of the dividends paid during 1999 and 1998 totaling $2.37 and $1.97 per share, respectively, represented ordinary dividend income to its stockholders.
While the Company intends to continue paying regular quarterly dividends, future dividend declarations will be at the discretion of the Board of Directors and will depend on the actual cash flow of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. The actual cash flow available to pay dividends will be affected by a number of factors, including the revenues received from rental properties, the operating expenses of the Company, the interest expense on its borrowings, the ability of lessees to meet their obligations to the Company and any unanticipated capital expenditures.
In addition to its common stock offerings, the Company has capitalized the growth in its business through the issuance of unsecured fixed and floating-rate medium-term notes, underwritten bonds, mortgage debt, convertible preferred stock and perpetual preferred stock. Borrowings under the Company's revolving credit facility have also been an interim source of funds to both finance the purchase of properties and meet any short-term working capital requirements. The various instruments governing the Company's issuance of its unsecured public debt, bank debt, mortgage debt and preferred stock impose certain restrictions on the Company with regard to dividends, voting, liquidation and other preferential rights available to the holders of such instruments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 8 and 13 of the Notes to Consolidated Financial Statements included in this annual report on Form 10-K.
The Company does not believe that the preferential rights available to the holders of its Class A, Class B, Class C and Class D Preferred Stock, the financial covenants contained in its public bond Indenture, as amended, or its revolving credit agreement or term loan agreement will have any adverse impact on the Company's ability to pay dividends in the normal course to its common stockholders or to distribute amounts necessary to maintain its qualification as a REIT.
The Company maintains a dividend reinvestment program pursuant to which common and preferred stockholders may elect to automatically reinvest their dividends to purchase shares of the Company's common stock. The Company may, from time to time, either (i) repurchase shares of its common stock in the open market, or (ii) issue new shares of its common stock, for the purpose of fulfilling its obligations under this dividend reinvestment program.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected, historical consolidated financial data for the Company and should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this annual report on Form 10-K.
The Company believes that the book value of its real estate assets, which reflects the historical costs of such real estate assets less accumulated depreciation, is not indicative of the current market value of its properties. Historical operating results are not necessarily indicative of future operating performance.
(1) Does not include revenues from rental property relating to unconsolidated joint ventures or revenues relating to the investment in retail stores leases.
(2) Most industry analysts and equity REITs, including the Company, generally consider funds from operations ("FFO") to be an appropriate supplemental measure of the performance of an equity REIT. In March 1995, the National Association of Real Estate Investment Trusts ("NAREIT") modified the definition of FFO, among other things, to eliminate adding back amortization of deferred financing costs and depreciation of non-real estate items to net income when computing FFO. The Company adopted this new method as of January 1, 1996. FFO is defined as net income applicable to common shares before depreciation and amortization, extraordinary items, gains or losses on sales of real estate, plus FFO of unconsolidated joint ventures determined on a consistent basis. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and therefore should not be considered an alternative for net income as a measure of results of operations, or for cash flows from operations calculated in accordance with generally accepted accounting principles as a measure of liquidity. In addition, the comparability of the Company's FFO with the FFO reported by other REITs may be affected by the differences that exist regarding certain accounting policies relating to expenditures for repairs and other recurring items.
(3) Includes $1.6 million or $0.03 per share in 1999, $0.9 million or $0.02 per share in 1998, $0.2 million or $0.01 per share in 1997 and $0.8 million or $0.02 per share in 1996 relating to non-recurring gains from the disposition of shopping center properties in each year.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in this annual report on Form 10-K. Historical results and percentage relationships set forth in the Consolidated Statements of Income contained in the Consolidated Financial Statements, including trends which might appear, should not be taken as indicative of future operations.
Results of Operations
Comparison 1999 to 1998
Revenues from rental property increased $95.1 million or 28.1% to $433.9 million for the year ended December 31, 1999, as compared with $338.8 million for the year ended December 31, 1998. This net increase resulted primarily from the combined effect of (i) the acquisition of 35 shopping center properties during 1999 , two of which were subsequently sold to KIR, providing revenues of $13.5 million for the year ended December 31, 1999, (ii) the full year impact related to the 62 shopping center properties and three retail properties acquired in 1998 providing incremental revenues of $37.4 million, (iii) the acquisition of The Price REIT, Inc. as of June 19, 1998 (the "Price REIT Acquisition") providing incremental revenues of $35.6 million and (iv) new leasing, property redevelopments and re-tenanting within the portfolio at improved rental rates providing incremental revenues of $11 million. These increases were reduced as a result of the deconsolidation of 21 shopping center properties as of April 28, 1999 in connection with the sale of a controlling interest in KIR.
Rental property expenses, including depreciation and amortization, increased $55.4 million or 26.7% to $262.9 million for the year ended December 31, 1999, as compared with $207.5 million for the year ended December 31, 1998. The rental property expense components of real estate taxes, operating and maintenance, and depreciation and amortization increased by $10.2 million, $8.8 million and $16.1 million, respectively, for the year ended December 31, 1999 as compared to the year ended December 31, 1998. These rental property expense increases are primarily due to property acquisitions during the year ended December 31, 1999, and the incremental costs associated with the Price REIT Acquisition and the property acquisitions throughout 1998. These increases were reduced as a result of the deconsolidation of 21 shopping center properties as of April 28, 1999 in connection with the sale of a controlling interest in KIR. Interest expense increased $18.7 million for the year ended December 31, 1999, reflecting higher average outstanding borrowings as compared to the preceding year resulting from (i) the issuance of additional unsecured debt during 1999 and 1998 and the assumption of $250 million in connection with the Price REIT Acquisition, (ii) the assumption of mortgage debt during 1999 and 1998 in connection with certain property acquisitions and (iii) mortgage financing obtained on certain properties in 1999 and 1998, offset by the deconsolidation of $252.4 million of mortgage debt on 19 properties as of April 28, 1999 in connection with the sale of a controlling interest in KIR.
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 substantially sublet to retailers which lease the stores pursuant to net lease agreements. Income from the investment in retail store leases during the years ended December 31, 1999 and 1998 was $4.1 million and $3.7 million, respectively.
General and administrative expenses increased approximately $5.2 million for the year ended December 31, 1999, as compared to the preceding calendar year. The increase is due primarily to an increase in senior management and staff levels and other personnel costs in connection with the growth of the Company and the Price REIT Acquisition.
During 1998, the Company formed KIR, a limited partnership established to invest in high quality retail properties financed primarily through the use of individual non-recourse mortgages. At the time of formation, the Company contributed 19 property interests to KIR. On April 28, 1999, KIR sold a significant interest in the partnership to an institutional investor. As a result, 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 period April 28, 1999 to December 31, 1999 was approximately $6.0 million.
During 1999, the Company disposed of six shopping center properties and a land parcel. Cash proceeds from four of these dispositions aggregated approximately $6.1 million, which approximated their aggregate net book value. During July 1999, the Company disposed of an additional shopping center property in New Port Richey, FL. Cash proceeds from the disposition totaling $.5 million, together with an additional $5.5 million cash
investment, were used to acquire an exchange shopping center property located in Greensboro, NC during September 1999. The sale of this property resulted in a gain of approximately $.3 million.
During October 1999, the Company, in separate transactions, disposed of a shopping center and a land parcel for an aggregate sale price of approximately $4.5 million, which resulted in a gain of approximately $1.3 million.
Net income for the year ended December 31, 1999 was $176.8 million as compared to $122.3 million for the year ended December 31, 1998, representing an increase of $54.5 million. After adjusting for the gains on sales of shopping center properties in each year and the extraordinary charge in 1998, net income for 1999 increased $49.0 million, or $.43 per basic share compared to 1998. This improved performance is primarily attributable to the Company's strong acquisition program, internal growth from development and redevelopment projects and increased leasing activity which strengthened operating profitability.
Comparison 1998 to 1997
Revenues from rental property increased approximately $139.9 million, or 70.3% to $338.8 million for the year ended December 31, 1998, as compared with $198.9 million for the year ended December 31, 1997. This increase resulted primarily from the combined effect of (i) the acquisition of 62 shopping center properties and 3 retail properties during 1998 providing revenues from rental property of $35.5 million,(ii) the full year impact related to the 63 property interests acquired in 1997 providing incremental revenues of $42.1 million, (iii) the Price REIT Acquisition providing revenues of $52.9 million and (iv) new leasing, re-tenanting and completion of certain property redevelopments within the portfolio providing improved rental rates.
Rental property expenses, including depreciation and amortization, increased approximately $92.3 million, or 80.1%, to $207.5 million for the year ended December 31, 1998, as compared with $115.2 million for the preceding calendar year. The rental property expense components of rent, real estate taxes and depreciation and amortization increased $7.7 million, $19.1 million and $21.3 million, respectively, for the year ended December 31, 1998 as compared to the preceding year. These rental property expense increases are primarily due to the 62 shopping center properties and 3 retail properties acquired during 1998, the Price REIT Acquisition and the incremental costs related to the 63 property interests acquired during 1997. Interest expense increased approximately $33.2 million between the respective periods reflecting higher average outstanding borrowings during calendar year 1998 resulting from (i) the issuance of an aggregate $290 million unsecured medium-term notes during 1998, (ii) the assumption of approximately $49.2 million of mortgage debt in connection with the acquisition of certain property interests during 1998, as compared to the preceding year, (iii) the aggregate of $281.3 million of mortgage financing obtained in 1998 in connection with 22 property interests and (iv) the assumption of approximately $250 million of unsecured debt and $60 million of mortgage debt in connection with the Price REIT Acquisition. These increased borrowings were offset, in part, by the July 1998 repayment of $50 million medium-term notes which matured and the repayment of approximately $79.2 million of mortgage debt during 1998.
The Company has interests in various retail store leases relating to the anchor store premises in neighborhood and community shopping centers. These premises have been substantially sublet to retailers which lease the stores pursuant to net lease agreements. Income from the investment in retail store leases during the years ended December 31, 1998 and 1997 was $3.7 million and $3.6 million, respectively.
General and administrative expenses increased approximately $6.9 million to $18.6 million for the year ended December 31, 1998, as compared to $11.7 million for the preceding calendar year. The increase during 1998 is due primarily to an increase in senior management and staff levels and other personnel costs in connection with the growth of the Company, including approximately $3.0 million attributable to the Price REIT Acquisition.
During 1998, the Company disposed of a property in Pinellas Park, FL. Cash proceeds from the disposition totaling $2.3 million, together with an additional $7.1 million cash investment, were used to acquire an exchange shopping center property located in Cranston, RI.
Additionally, during December 1998, the Company disposed of a vacant distribution center and adjacent facility located in O'Fallon, Missouri, which were acquired as part of the Venture transactions, for $10 million, which amount approximated their net book value.
During 1998, the Company prepaid certain mortgage loans resulting in extraordinary charges of approximately $4.9 million, or on a per-basic share and diluted share basis, $.10 and $.09, respectively, representing the premiums paid and other costs written-off in connection with the early satisfaction of these mortgage loans.
Net income for the year ended December 31, 1998 of approximately $122.3 million represented a substantial improvement of approximately $36.5 million, as compared with net income of approximately $85.8 million for the preceding calendar year. After adjusting for the gains on sales of shopping center properties during both periods and the extraordinary charge during 1998, net income for 1998 increased by $40.7 million, or $.24 per basic share, compared to 1997. This substantially improved performance was primarily attributable to the Company's strong property acquisition program, the Price REIT Acquisition and internal growth from redevelopments, re-tenanting of the Venture portfolio and increased leasing activity which strengthened operating 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 $2.0 billion for the purposes of repaying indebtedness, acquiring interests in neighborhood and community shopping centers and for expanding and improving properties in the portfolio.
During August 1998, the Company established a $215 million, unsecured revolving credit facility, which is scheduled to expire in August 2001. This Credit Facility, which replaced both the Company's $100 million unsecured revolving credit facility and $150 million interim credit facility, has made available funds to both finance the purchase of properties and meet any short-term working capital requirements. As of December 31, 1999 there were no amounts outstanding under the Credit Facility.
During November 1999, the Company established a $52 million unsecured term loan facility, which is scheduled to expire in November 2000. This credit facility was established to finance the purchase of properties and for general corporate purposes.
The Company has also implemented a $200 million 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(See Note 8 of the Notes to Consolidated Financial Statements included in this annual report on Form 10-K.)
In addition to the public equity and debt markets as capital sources, the Company may, from time to time, obtain mortgage financing on selected properties. As of December 31, 1999, the Company had over 350 unencumbered property interests in its portfolio.
During 1998, the Company filed a shelf registration on Form S-3 for up to $750 million of debt securities, preferred stock, depositary shares, common stock and common stock warrants. As of March 1, 2000, the Company had approximately $393.2 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 rental revenues 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, debt reduction, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as the Board of Directors considers appropriate.
Cash dividends paid increased to $169.7 million in 1999, compared to $113.9 million in 1998 and $82.6 million in 1997. The Company's dividend payout ratio, based on funds from operations on a per-basic common share basis, for 1999, 1998 and 1997 was approximately 64.8%, 64.2% and 65.4%, respectively.
Although the Company receives substantially all of its rental payments on a monthly basis, it generally intends to continue paying dividends quarterly. Amounts accumulated in advance of each quarterly distribution will be invested by the Company in short-term money market or other suitable instruments.
The Company anticipates its capital commitment toward ground-up development and redevelopment projects during 2000 will be approximately $130 million. It is management's intention that the Company continually have 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 all dividend payments in accordance with REIT requirements in both the short-term and long-term. In addition, the Company anticipates that cash on hand, borrowings under its revolving credit 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 as reported in the Consolidated Statements of Cash Flows increased to $237.2 million for 1999 from $158.7 million for 1998 and $125.1 million for 1997.
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 loans.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FASB No. 133"). FASB No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. In June 1999, the FASB delayed the implementation date of FASB No. 133 by one year (January 1, 2001 for the Company). FASB No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FASB No. 133 will not have a significant effect on the Company's consolidated results of operations or its financial position.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 1999, the Company had approximately $230.9 million of floating-rate debt outstanding. The interest rate risk on $212.0 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-parties 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 $18.9 million of floating-rate debt is not material in relation to the total debt outstanding of the Company or its market capitalization.
The Company has not, and does not plan to, enter into any derivative financial instruments for trading or speculative purposes. As of December 31, 1999, the Company had no other material exposure to market risk.
Item 8.
Item 8. Financial Statements and Supplementary Data
The response to this Item 8 is included as a separate section of this annual report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference to the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Stockholders expected to be held on May 18, 2000.
Information with respect to the Executive Officers of the Registrant follows Part I, Item 4 of this annual report on Form 10-K.
Item 11.
Item 11. Executive Compensation
Incorporated herein by reference to the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Stockholders expected to be held on May 18, 2000.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Stockholders expected to be held on May 18, 2000.
Item 13.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Stockholders expected to be held on May 18, 2000.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K -----------------------------------------------------------------
No reports on Form 8-K were filed by the Company for the quarter ended December 31, 1999.
INDEX TO EXHIBITS -----------------
INDEX TO EXHIBITS (continued)
INDEX TO EXHIBITS (continued)
- --------------------------------------- * Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 (Registrant)
By: /s/ Milton Cooper ---------------------- Milton Cooper Chief Executive Officer
Dated: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Martin S. Kimmel Chairman (Emeritus) of March 28, 2000 - --------------------------- the Board of Directors Martin S. Kimmel
/s/ Milton Cooper Chairman of the Board March 28, 2000 - --------------------------- of Directors and Chief Milton Cooper Executive Officer
/s/ Michael J. Flynn Vice Chairman of the March 28, 2000 - --------------------------- Board of Directors, Michael J. Flynn President and Chief Operating Officer
/s/ Joseph K. Kornwasser Director and Senior March 28, 2000 - ---------------------------- Executive Vice President Joseph K. Kornwasser
/s/ Richard G. Dooley Director March 28, 2000 - --------------------------- Richard G. Dooley
/s/ Joe Grills Director March 28, 2000 - --------------------------- Joe Grills
/s/ Frank Lourenso Director March 28, 2000 - --------------------------- Frank Lourenso
/s/ Michael V. Pappagallo Chief Financial Officer March 28, 2000 - --------------------------- Michael V. Pappagallo
/s/ Glenn G. Cohen Treasurer March 28, 2000 - --------------------------- Glenn G. Cohen
/s/ Ruth Mitteldorf Director of Accounting March 28, 2000 - --------------------------- and Taxation Ruth Mitteldorf
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14 (a) (1) and (2)
AND
FINANCIAL STATEMENT SCHEDULES
-------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Kimco Realty Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Kimco Realty Corporation and Subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/S/ PRICEWATERHOUSECOOPERS LLP
New York, New York February 28, 2000
KIMCO REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share information)
KIMCO REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share information)
KIMCO REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands, except per share information)
KIMCO REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Business
Kimco Realty Corporation (the "Company" or "Kimco"), its subsidiaries, affiliates and related real estate joint ventures are engaged principally in the operation of neighborhood and community shopping centers which are anchored generally by discount department stores, supermarkets or drugstores. Additionally, the Company provides management services for shopping centers owned by affiliated entities and various real estate joint ventures.
The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its properties, avoiding dependence on any single property, and a large tenant base. At December 31, 1999, the Company's single largest neighborhood and community shopping center accounted for only 1.4% of the Company's annualized base rental revenues and only 1.0% of the Company's total shopping center gross leasable area ("GLA"). At December 31, 1999, the Company's five largest tenants include Kmart Corporation, Kohl's, Ames, The Home Depot and TJX Companies, which represented approximately 13.8%, 2.8%, 2.5%, 2.4% and 1.8%, respectively, of the Company's annualized base rental revenues.
The above statistics do not include the KIR Portfolio, as defined in Note 4 to the Consolidated Financial Statements.
Principles of Consolidation and Estimates
The accompanying Consolidated Financial Statements include the accounts of the Company, its subsidiaries, all of which are wholly-owned, and all partnerships in which the Company has a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Generally accepted accounting principles require the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. Actual results may differ from such estimates. The most significant assumptions and estimates relate to depreciable lives, valuation of real estate and the recoverability of trade accounts receivable.
Real Estate
Realestate assets are stated at cost, less accumulated depreciation and amortization. If there is an event or a change in circumstances that indicates that the basis of a property may not be recoverable, then management will assess any impairment in value by making a comparison of (i) the current and projected operating cash flows (undiscounted and without interest charges) of the property over its remaining useful life and (ii) the net carrying amount of the property. If the current and projected operating cash flows (undiscounted and without interest charges) are less than the carrying value of its property, the carrying value would be written down to an amount to reflect the fair value of the property.
Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the assets, as follows:
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Buildings 15 to 39 years Fixtures and leasehold improvements Terms of leases or useful lives, whichever is shorter
Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations are capitalized.
Investments in Real Estate Joint Ventures
Investments in real estate joint ventures are accounted for on the equity method.
Deferred Leasing and Financing Costs
Costs incurred in obtaining tenant leases and long-term financing, included in deferred charges and prepaid expenses in the accompanying Consolidated Balance Sheets, are amortized over the terms of the related leases or debt agreements, as applicable.
Revenue Recognition
Minimum revenues from rental property are recognized on a straight-line basis over the terms of the related leases.
Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax return. The Company has made an election to qualify, and believes it is operating so as to qualify, as a 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.
Per Share Data
In 1997 the Financial Accounting Standards Board issued Financial Accounting Standards No. 128 - "Earnings Per Share". Statement 128 replaced the presentation of primary and fully diluted earnings per share ("EPS") pursuant to Accounting Principles Board Opinion No. 15 with the presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares and then shared in the earnings of the Company.
The following table sets forth the reconciliation between basic and diluted weighted average number of shares outstanding for each period:
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The effect of the conversion of the Class D Preferred Stock (as defined in Note 3) would have 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 net income per common share.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FASB No. 133"). FASB No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. In June 1999, the FASB delayed the implementation date of FASB No. 133 by one year (January 1, 2001 for the Company). FASB No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FASB No. 133 will not have a significant effect on the Company's consolidated results of operations or its financial position.
2. Property Acquisitions:
Shopping Centers-
During the years 1999, 1998 and 1997 certain subsidiaries and affiliates of the Company acquired real estate interests, in separate transactions, in various shopping center properties at aggregate costs of approximately $249 million, $303 million and $146 million, respectively.
Venture Stores, Inc. Properties Transactions-
During January 1996, certain subsidiaries of the Company entered into two sale-leaseback transactions with Venture Stores, Inc. ("Venture") pursuant to which it acquired fee title to 16 retail properties for an aggregate purchase price of $40 million.
In August 1997, certain subsidiaries of the Company acquired certain real estate assets from Venture consisting of interests in 49 fee and leasehold properties totaling approximately 5.9 million square feet of leasable area located in seven states. The aggregate price was approximately $130 million, consisting of $70.5 million in cash and the assumption of approximately $59.5 million of existing mortgage debt on certain of these properties. Simultaneously with this transaction, the Company entered into a long-term unitary net lease with Venture covering all premises occupied by Venture on these properties.
In January 1998, Venture filed for protection under Chapter 11 of the United States Bankruptcy Code. On April 27, 1998, Venture announced it would discontinue its retail operations and that it had reached an agreement to sell its leasehold position at 89 locations to the Company, including 56 properties pursuant to two unitary leases already in place with the Company, 30 properties pursuant to a master lease with Metropolitan Life Insurance Company ("Metropolitan Life") and three properties leased by Venture from others. The purchase price for the leasehold positions was
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
$95.0 million, less certain closing adjustments, but is subject to upward adjustment based on the Company's success in re-tenanting the properties over a two-year period. On July 17, 1998, the Company purchased the leasehold positions with an initial cash payment to Venture of approximately $53.3 million. During April and December 1999, the Company paid Venture an additional $21.0 million and $5.8 million, respectively.
Additionally, on July 1, 1998, the Company reached an agreement with Metropolitan Life to purchase the 30 fee and leasehold positions which were leased by Metropolitan Life to Venture, for an aggregate purchase price of $167.5 million.
During August 1998, the Company acquired from Venture five additional leasehold positions, including two leases already in place with the Company, for an aggregate purchase price of approximately $2.2 million.
During 1999, the Company substantially completed its re-tenanting effort with regard to the former Venture locations.
Retail Property Acquisitions-
During January 1998, the Company, through a partnership interest, acquired fee interest in three properties from a retailer in the Chicago, IL market comprising approximately 516,000 square feet of GLA for a aggregate purchase price of approximately $23.7 million. These properties include approximately 70,000 square feet of showroom space and adjoining warehouses of approximately 100,000 square feet at each location. Simultaneous with this transaction, the Company leased, to a national furniture retailer, the showroom portion of each property under individual long-term leases. The Company is currently planning the redevelopment of the warehouse portion of each property.
Other Acquisitions-
During December 1998, the Company acquired a first mortgage on a shopping center in Manhasset, New York for approximately $21 million. During April 1999, the Company acquired fee title to this property.
These property acquisitions have been funded principally through the application of proceeds from the Company's public unsecured debt and equity offerings and proceeds from mortgage financings. (see Notes 8, 9 and 13).
3. Price REIT Merger:
On January 13, 1998, the Company, REIT Sub, Inc., a Maryland corporation and a wholly owned subsidiary of the Company ("Merger Sub") and The Price REIT, Inc., a Maryland corporation, ("Price REIT"), signed a definitive Agreement and Plan of Merger dated January 13, 1998, as amended March 5, 1998 and May 14, 1998, (the "Merger Agreement"). On June 19, 1998, upon approval by the shareholders of the Company and the shareholders of Price REIT, Price REIT was merged into Merger Sub, whereupon the separate existence of Price REIT ceased (the "Merger"). For financial reporting purposes, the Merger was accounted for using the purchase method of accounting.
Prior to the Merger, Price REIT was a self-administered and self-managed equity REIT that was focused on the acquisition, development, management and redevelopment of large community shopping center properties concentrated in the western part of the United States . In connection with the Merger, the Company acquired interests in 43 properties,
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
consisting of 39 retail community centers, one stand-alone retail warehouse, one project under development and two undeveloped land parcels, located in 17 states containing approximately 8.0 million square feet of GLA. The overall occupancy rate of the retail community centers was 98%.
In connection with the Merger, holders of Price REIT common stock received one share of Kimco common stock and 0.36 shares of Kimco Class D Depositary Shares (the "Class D Depositary Shares"), each Class D Depositary Share representing a one-tenth fractional interest in a new issue of Kimco 7.5% Cumulative Convertible Preferred Stock, par value $1.00 per share (the "Class D Preferred Stock"), for each share of Price REIT common stock. On June 19, 1998, the Company issued 11,921,992 shares of its common stock and 429,159 shares of Class D Preferred Stock (represented by 4,291,590 Class D Depositary Shares) in connection with the Merger. Additionally, in connection with the Merger, the Company issued 65,000 shares of a new issue of Kimco Class E Floating Rate Cumulative Preferred Stock, par value $1.00 per share ((the "Class E Preferred Stock"), represented by 650,000 Class E Depositary Shares, (the "Class E Depositary Shares")), each Class E Depositary Share representing a one-tenth fractional interest in the Class E Preferred Stock. The Class E Preferred Stock was redeemable at the option of the Company for 150 days after its issuance at a price equal to the liquidation preference of $1,000 per share plus accrued and unpaid dividends. The Company exercised its option in November 1998 to redeem all of the Class E Preferred Stock for $65.065 million representing the liquidation preference of $65 million and approximately $65,000 of accrued dividends (see Note 13).
The total Merger consideration was approximately $960 million, including the assumption of approximately $310 million of debt. Management has allocated the purchase price based on the fair value of assets and liabilities assumed.
4. Investment and Advances in Kimco Income REIT ("KIR"):
During 1998, the Company formed KIR, an entity in which the Company held a 99.99% limited partnership interest. KIR was established for the purpose of investing in real estate that it believes would be more appropriately financed through greater leverage than the Company traditionally uses. These properties include, but are not limited to, fully developed properties with strong, stable cash flows from credit-worthy retailers with long-term leases that have limited near-term potential for growth through redevelopment or re-tenanting. The Company initially identified and contributed 19 property interests to KIR which met this criteria. Each of these properties was encumbered by an individual non-recourse mortgage. On April 28, 1999, the Company entered into an agreement whereby an institutional investor purchased a significant interest in KIR. Under the terms of the agreement, the agreed equity value for the 19 shopping centers previously contributed by the Company to KIR was approximately $107 million and the Company agreed to contribute an additional $10 million for a total investment of approximately $117 million. The institutional investor has subscribed for up to $117 million of equity in KIR, of which approximately $107 million has been contributed as of December 31, 1999. During August 1999, KIR admitted three additional limited partners. Each new partner entered into a subscription agreement whereby they subscribed for an aggregate $35 million of equity in KIR. At December 31, 1999 approximately $32 million of such subscriptions had been contributed. As of December 31, 1999, KIR has subscription agreements totaling
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
approximately $269 million, of which approximately $246 million has been contributed. As a result of these transactions, 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 from KIR for the period April 28, 1999 to December 31, 1999 was approximately $6.0 million.
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 period from April 28, 1999 to December 31, 1999, the Company earned management fees, leasing commissions and was reimbursed for administrative services of approximately $.9 million, $.1 million and $.5 million, respectively.
During the period April 28, 1999 to December 31, 1999, KIR purchased ten shopping center properties, in separate transactions, aggregating 2.2 million square feet of GLA for approximately $218.3 million including the assumption of approximately $36.1 million of mortgage debt. Four of these properties were purchased from the Company for an aggregate purchase price of $70.1 million. As of December 31, 1999, the KIR portfolio included 29 shopping center properties comprising 5.4 million square feet of GLA (the "KIR Portfolio").
During May 1999, KIR obtained individual non-recourse, non-cross collateralized ten-year fixed-rate first mortgages aggregating $52.6 million on four of its properties. These mortgages bear interest at rates ranging from 7.57% to 7.72% per annum. The net proceeds were used to finance the acquisition of various shopping center properties.
Summarized financial information for the recurring operations of KIR is as follows (in millions):
December 31, 1999 ------------------------
Assets: Real estate, net $569.4 Other assets 32.3 -----
$601.7 ======
Liabilities and Partners' Capital: Mortgages payable $338.9 Other liabilities 7.9 Minority interest .3 Partners' capital 254.6 ------
$601.7 ======
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
For period April 28 1999 to December 31, 1999 -----------------
Revenues from rental property $39.9 -----
Operating expenses (8.7) Mortgage interest (14.5) Depreciation and amortization (6.6) Other, net .6 ----- (29.2) -----
Net income $10.7 =====
5. Investments and Advances in Other Real Estate Joint Ventures:
The Company and its subsidiaries have investments in and advances to various other real estate joint ventures. These joint ventures are engaged primarily in the operation of shopping centers which are either owned or held under long-term operating leases.
During 1999, the Company invested approximately $4.9 million in a partnership which is developing an office and retail center in Dover, DE and separately, through a partnership investment, the Company invested approximately $5.7 million in a joint venture which acquired a parcel of land in Henderson, NV. for the development of a retail shopping center. The Company has a 50% interest in each of these partnerships.
During 1998, in connection with the Merger, the Company acquired two additional joint venture interests. The Company also invested approximately $19.0 million in a partnership which has acquired and leased-back 11 automotive dealerships and invested approximately $3.6 million in a partnership which acquired a shopping center for approximately $34 million, including mortgage debt of approximately $27 million. The Company has a 50% interest in each of these partnerships.
Summarized financial information for the recurring operations of these real estate joint ventures is as follows (in millions):
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Year Ended December 31, -----------------------
1999 1998 1997 ---- ---- ----
Revenues from rental property $45.7 $26.8 $14.8 ----- ----- -----
Operating expenses (15.9) (9.7) (3.6) Mortgage interest (10.8) (6.2) (3.1) Depreciation and amortization (5.0) (2.9) (2.2) Other, net .3 .1 (1.8) ------ ------ ------ (31.4) (18.7) (10.7) ------ ------ ------
Net income $14.3 $8.1 $4.1 ====== ====== ======
Other liabilities in the accompanying Consolidated Balance Sheets include accounts with certain real estate joint ventures totaling approximately $5.4 million and $5.0 million at December 31, 1999 and 1998, respectively. The Company and its subsidiaries have varying equity interests in these real estate joint ventures which may differ from their proportionate share of net income or loss recognized in accordance with generally accepted accounting principles.
6. Investment in Retail Store Leases:
The Company has interests in various retail store leases relating to the anchor store premises in neighborhood and community shopping centers. These premises have been substantially sublet to retailers which lease the stores pursuant to net lease agreements. Income from the investment in these retail store leases during the years ended December 31, 1999 and 1998 was approximately $4.1 million and $3.7 million, respectively. These amounts represent sublease revenues during the years ended December 31, 1999 and 1998 of approximately $20.3 million and $20.2 million, respectively, less related expenses of $14.7 million and $14.9 million, respectively, and an amount, which in management's estimate, reasonably provides for the recovery of the investment over a period representing the expected remaining term of the retail store leases. The Company's future minimum revenues under the terms of all noncancellable tenant subleases and future minimum obligations through the remaining terms of its retail store leases, assuming no new or renegotiated leases are executed for such premises, for future years are as follows (in millions): 2000, $18.0 and $12.6; 2001, $16.8 and $11.2; 2002, $14.0 and $8.7; 2003, $10.4 and $5.9 ; 2004, $6.9 and $3.4, thereafter, $13.7 and $2.0, respectively.
7. Cash and Cash Equivalents:
Cash and cash equivalents (demand deposits in banks, commercial paper and certificates of deposit with original maturities of three months or less) includes tenants' security deposits, escrowed funds and other restricted deposits approximating $.1 million at December 31, 1999 and 1998.
Cash and cash equivalent balances may, at a limited number of banks and financial institutions, exceed insurable amounts. The Company believes it mitigates its risks by investing in or through major financial institutions. Recoverability of investments is dependent upon the performance of the issuers.
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
8. Notes Payable:
During February 1999, the Company issued $130 million of 6-7/8% fixed-rate Senior Notes due 2009. Interest on the notes is payable semi-annually in arrears. The notes were sold at 99.85% of par value. Net proceeds from the issuance totaling approximately $128.9 million, after related transaction costs of approximately $.9 million, were used, in part, to repay $100 million floating-rate senior notes that matured during February 1999 and for general corporate purposes.
During November 1999, the Company entered into an unsecured term loan for an aggregate of $52.0 million. The term loan bears interest at Libor plus .70% per annum and matures in November 2000. The proceeds were used to finance the acquisition of various shopping center properties and for general corporate purposes.
The Company has a $200 million unsecured 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.
During October and December 1999, the Company issued an aggregate $100 million of fixed-rate unsecured medium-term notes (the "October and December MTNs") under its MTN program. The October and December MTNs mature in October 2004 and December 2007, respectively, and bear interest at 7.62% and 7.90% per annum, respectively. Interest on these notes is payable semi-annually in arrears.
During June and July 1998, the Company issued an aggregate $130 million of fixed-rate unsecured medium-term notes under its MTN program (the "June and July MTNS"). The June and July MTNs mature in June 2005 and July 2006, respectively, and bear interest at 6.73% and 6.93% per annum, respectively. Interest on these notes is payable semi-annually in arrears.
As of December 31, 1999, a total principal amount of $390.25 million, in fixed-rate senior unsecured MTNs had been issued under the MTN program primarily for the acquisition of neighborhood and community shopping centers and the expansion and improvement of properties in the Company's portfolio. These fixed-rate notes had maturities ranging from five to twelve years at the time of issuance and bear interest at rates ranging from 6.70% to 7.91%. Interest on these fixed-rate senior unsecured notes is payable semi-annually in arrears.
During August 1998, the Company issued $60 million of floating-rate MTNs which mature in August 2000 and bear interest at LIBOR plus .15% per annum. The interest rate resets quarterly and is payable quarterly in arrears. Concurrent with the issuance of these MTN's, the Company entered into an interest rate swap agreement for the term of these MTNs, which effectively fixed the interest rate at 5.91% per annum. The proceeds from this MTN issuance were used to prepay certain mortgage loans with a principal amount of approximately $57 million bearing interest at 10.54% per annum plus prepayment premiums of approximately $4.9 million (See Note 10).
Also during August 1998, the Company issued $100 million of remarketed reset notes under its MTN program. The remarketed reset notes mature in August 2008 and bore interest initially at a floating rate of LIBOR plus .30% per
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
annum. After an initial period of one year, the interest rate spread applicable to each subsequent period is determined pursuant to a remarketing agreement between the Company and a financial institution. The interest rate resets quarterly and is payable quarterly in arrears. During August 1999, the Company remarketed the notes for a one-year period at Libor plus .65% per annum. The proceeds from the MTN issuance were used, in part, to repay $50 million MTNs that matured in July 1998 and for general corporate purposes.
In connection with the Price REIT Merger, the Company assumed $205 million of fixed-rate unsecured senior notes consisting of: (i) $50 million which mature in June 2004 and bear interest at 7.125%, (ii) $55 million which mature November 2006 and bear interest at 7.5% and (iii) $100 million which mature November 2000 and bear interest at 7.25% (collectively, "the Price REIT Notes"). Interest is payable on the Price REIT Notes semi-annually in arrears.
As of December 31, 1999, the Company had $100 million in 6.5% fixed-rate unsecured Senior Notes due 2003. Interest on these senior unsecured notes is paid semi-annually in arrears.
The scheduled maturities of all unsecured senior notes payable as of December 31, 1999, are approximately as follows (in millions): 2000, $212.0; 2003, $100.0; 2004, $100.0 and thereafter, $625.25.
In accordance with the terms of the Indenture, as amended, pursuant to which the Company's senior, unsecured notes have been issued, the Company is (a) subject to maintaining certain maximum leverage ratios on both unsecured senior corporate and secured debt, minimum debt service coverage ratios and minimum equity levels, and (b) restricted from paying dividends in amounts that exceed by more than $26 million the funds from operations, as defined, generated through the end of the calendar quarter most recently completed prior to the declaration of such dividend; however, this dividend limitation does not apply to any distributions necessary to maintain the Company's qualification as a REIT providing the Company is in compliance with its total leverage limitations.
The Company maintains a $215 million, unsecured revolving credit agreement with a group of banks. Borrowings under this facility are available for general corporate purposes, including the funding of property acquisitions, development and redevelopment costs. Interest on borrowings accrues at a spread (currently .50%) to LIBOR or money-market rates, as applicable, which fluctuates in accordance with changes in the Company's senior debt ratings. A fee approximating .20% per annum is payable on that portion of the facility which remains unused. Pursuant to the terms of the agreement, the Company, among other things, is (a) subject to maintaining certain maximum leverage ratios on both unsecured senior corporate and secured debt, a minimum debt service coverage ratio and minimum unencumbered asset and equity levels, and (b) restricted from paying dividends in amounts that exceed 90% of funds from operations, as defined, plus 10% of the Company's stockholders' equity determined in accordance with generally accepted accounting principles. There were no borrowings outstanding under this facility at December 31, 1999. This revolving credit facility is scheduled to expire in August 2001.
9. Mortgages Payable:
During 1999, the Company obtained non-recourse, non-cross collateralized fixed-rate first mortgage financing aggregating approximately $28.7 million on five of its properties. The mortgages bear interest at rates ranging from 7.00% to 8.25% per annum and mature at various dates through 2009.
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 1998, the Company obtained mortgage financing aggregating approximately $272.3 million on 20 of its properties. These mortgages are non-recourse, non-cross collateralized, ten-year fixed-rate first mortgages, bearing interest at a weighted average rate of 6.585% per annum over the term of the loans. The proceeds from the mortgages were used primarily for the acquisition of neighborhood and community shopping centers. During April 1999, mortgages encumbering 19 of these properties totaling approximately $252.4 million were deconsolidated in connection with the sale of a controlling interest in KIR (See Note 4).
Also during 1998, the Company, through an affiliated entity, obtained mortgage financing of approximately $9.0 million on two other properties. These ten-year fixed-rate mortgages, which are cross-collateralized, bear interest at 7.0% per annum for the term of the loans.
Mortgages payable, collateralized by certain shopping center properties and related tenants' leases, are generally due in monthly installments of principal and/or interest which mature at various dates through 2023. Interest rates range from approximately 6.57% to 10.5% (weighted average interest rate of 8.09% as of December 31, 1999). The scheduled maturities of all mortgages payable as of December 31, 1999, are approximately as follows (in millions):2000, $16.5; 2001, $4.7; 2002, $7.8; 2003, $6.3; 2004, $9.1 and thereafter, $167.9.
Three of the Company's properties are encumbered by approximately $12.6 million in floating-rate, tax-exempt mortgage bond financing. The rates on the bonds are reset annually, at which time bondholders have the right to require the Company to repurchase the bonds. The Company has engaged a remarketing agent for the purpose of offering for resale those bonds that are tendered to the Company. All bonds tendered for redemption in the past have been remarketed and the Company has arrangements, including letters of credit, with banks to both collateralize the principal amount and accrued interest on such bonds and to fund any repurchase obligations.
10. Extraordinary Items:
During 1998, the Company prepaid certain mortgage loans resulting in extraordinary charges of approximately $4.9 million, or, on a per-basic share and diluted share basis, $.10 and $.09, respectively, representing the premiums paid and other costs written-off in connection with the early satisfaction of these mortgage loans.
11. KC Holdings, Inc.:
To facilitate the Company's November 1991 initial public stock offering (the "IPO"), 46 shopping center properties and certain other assets, together with indebtedness related thereto, were transferred to subsidiaries of KC Holdings, Inc. ("KC Holdings"), a newly-formed corporation that is owned by the stockholders of the Company prior to the IPO. The Company was granted ten-year, fixed-price acquisition options to reacquire the real estate assets owned by KC Holdings' subsidiaries, subject to any liabilities outstanding with respect to such assets at the time of an option exercise. As of December 31, 1999, KC Holdings' subsidiaries had conveyed 27 shopping centers back to the Company and had disposed of ten additional centers in transactions with third parties. The members of the Company's Board of Directors who are not also shareholders of KC Holdings unanimously approved the purchase of each of the 27 shopping centers that have been reacquired by the Company from KC Holdings. The Company manages five of KC Holdings nine remaining shopping center properties pursuant to a management agreement.
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Selected financial information for the property interests owned by KC Holdings' subsidiaries as of December 31, 1999 and, for the year ended December 31, 1999, is as follows: Real estate, net of accumulated depreciation and amortization, $19.4 million; Notes and mortgages payable, $33.1 million; Revenues from rental property, $8.4 million; Loss from rental operations, $.6 million, after depreciation and amortization deductions of $1.5 million; Income adjustment for real estate joint ventures, net, $.7 million.
12. Fair Value Disclosure of Financial Instruments:
All financial instruments of the Company are reflected in the accompanying Consolidated Balance Sheets at amounts which, in management's estimation based upon an interpretation of available market information and valuation methodologies (including discounted cash flow analyses with regard to fixed rate debt) considered appropriate, reasonably approximate their fair values. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of the Company's financial instruments.
13. Preferred and Common Stock Transactions:
During 1999, the Company issued 401,646 shares of common stock at $39.00 per share in connection with its exercise of its option to acquire 13 shopping center properties from KC Holdings (See Note 15).
During December 1999, the Company purchased and retired 160,000 shares of its common stock at a price of $31.75 per share, totaling approximately $5.1 million. The Company does not have a share repurchase program but acquired the shares when it received an unsolicited offer to buy them from an institutional investor.
During April and May 1998, the Company completed the sale of an aggregate 3,039,507 shares of common stock in five separate transactions consisting of (i) a primary public stock offering of 460,000 shares of common stock priced at $36.0625 per share, and (ii) four direct placements of 415,945 shares, 546,075 shares, 837,000 shares and 780,487 shares of common stock priced at $36.0625, $36.625, $36.25 and $38.4375 per share, respectively. The shares of common stock sold in the direct placements were deposited in separate unit investment trusts. The net proceeds from these offerings totaled approximately $106.0 million, after related transaction costs of approximately $5.9 million.
During July 1998, the Company completed the sale of an aggregate 1,315,498 shares of common stock in three separate transactions consisting of (i) a primary public stock offering of 510,000 shares of common stock priced at $39.4375 per share and (ii) two direct placements of 375,000 and 430,498 shares of common stock priced at $38.2575 and $38.56 per share, respectively. The net proceeds from these offerings totaled approximately $49.9 million, after related transaction costs of approximately $1.2 million.
During September 1998, the Company completed the sale of an aggregate 750,000 shares of common stock priced at $38.75 per share in a primary public stock offering. In addition, during October 1998, the Company sold an additional 112,500 shares of common stock pursuant to an election by the underwriter to exercise, in full, their over-allotment option. The net proceeds from these sales of common stock totaled approximately $31.6 million, after related transaction costs of approximately $1.8 million.
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During November 1998, the Company completed the sale of an aggregate 1,395,000 shares of common stock in four separate transactions consisting of primary public stock offerings of 650,000 shares, 170,000 shares, 475,000 shares and 100,000 shares of common stock priced at $39.6875, $39.6875, $39.00 and $39.00 per share, respectively. The net proceeds from these sales of common stock totaled approximately $52.4 million after related transaction costs of approximately $2.5 million.
During December 1998, the Company completed the sale of an aggregate 1,005,800 shares of common stock in three direct placements. The transactions were each priced at $38.25 per share and provided net proceeds to the Company of approximately $38.4 million, after related transaction costs of approximately $.1 million.
The net proceeds from these common stock offerings have been used for general corporate purposes, including the acquisition of neighborhood and community shopping centers, the expansion and improvement of certain properties in the Company's portfolio, and the redemption of the Class E Preferred Stock issued in connection with the Merger.
During June 1998, in connection with the Merger, the Company issued 4,291,590 Class D Depositary Shares (each such depositary share representing a one-tenth fractional interest in the Class D Preferred Stock) and 650,000 Class E Depositary Shares (each depositary share representing a one-tenth fractional interest in the Class E Preferred Stock). During November 1998, the Company exercised its option to redeem all of the Class E Preferred Stock (represented by the Class E Depositary Shares). (See Note 3.)
Dividends on the Class D Depositary Shares are cumulative and payable at the rate per depositary share equal to the greater of (i) 7.5% per annum based upon a $25 per share initial value or $1.875 per share or (ii) the cash dividend on the shares of the Company's common stock into which a Class D Depositary Share is convertible plus $0.0275 per quarter. The Class D Depositary Shares are convertible into the Company's common stock at a conversion price of $40.25 per share of common stock at any time by the holder and may be redeemed by the Company at the conversion price in shares of the Company's common stock at any time after June 19, 2001 if, for any 20 trading days within any period of 30 consecutive trading days, including the last day of such period, the average closing price per share of the Company's common stock exceeds 120% of the conversion price or $48.30 per share, subject to certain adjustments.
The dividend rate on the Class E Preferred Stock (represented by the Class E Depositary Shares) was equal to LIBOR plus 2% per annum, adjusted quarterly, and had an initial dividend rate of 7.68% per annum.
The Class D Preferred Stock (represented by the Class D Depositary Shares outstanding) ranks pari passu with the Company's 7-3/4% Class A Cumulative Redeemable Preferred Stock, 8-1/2% Class B Cumulative Redeemable Preferred Stock and the 8-3/8% Class C Cumulative Redeemable Preferred Stock as to voting rights, priority for receiving dividends and liquidation preferences as set forth below.
At December 31, 1999, the Company has outstanding 3,000,000 Depositary Shares (the "Class A Depositary Shares"), each such Class A Depositary Share representing a one-tenth fractional interest of a share of the Company's 7-3/4% Class A Cumulative Redeemable Preferred Stock, par value $1.00 per share(the "Class A Preferred Stock"), 2,000,000 Depositary Shares (the "Class B Depositary Shares"), each such Class B Depositary Share representing a one-tenth fractional interest of a share of the
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Company's 8-1/2% Class B Cumulative Redeemable Preferred Stock, par value $1.00 per share (the "Class B Preferred Stock"), 4,000,000 Depositary Shares ("the Class C Depositary Shares"), each such Class C Depositary Share representing a one-tenth fractional interest of a share of the Company's 8-3/8% Class C Cumulative Redeemable Preferred Stock, par value $1.00 per share (the "Class C Preferred Stock").
Dividends on the Class A Depositary Shares are cumulative and payable quarterly in arrears at the rate of 7-3/4% per annum based on the $25 per share initial offering price, or $1.9375 per depositary share. The Class A Depositary Shares are redeemable, in whole or in part, for cash on or after September 23, 1998 at the option of the Company, at a redemption price of $25 per depositary share, plus any accrued and unpaid dividends thereon. The Class A Depositary Shares are not convertible or exchangeable for any other property or securities of the Company. The Class A Preferred Stock (represented by the Class A Depositary Shares outstanding) ranks pari passu with the Company's Class B Preferred Stock, Class C Preferred Stock and Class D Preferred Stock as to voting rights, priority for receiving dividends and liquidation preferences as set forth below.
Dividends on the Class B Depositary Shares are cumulative and payable quarterly in arrears at the rate of 8-1/2% per annum based on the $25 per share initial offering price, or $2.125 per depositary share. The Class B Depositary Shares are redeemable, in whole or in part, for cash on or after July 15, 2000 at the option of the Company at a redemption price of $25 per depositary share, plus any accrued and unpaid dividends thereon. The redemption price of the Class B Preferred Stock may be paid solely from the sale proceeds of other capital stock of the Company, which may include other classes or series of preferred stock. The Class B Depositary Shares are not convertible or exchangeable for any other property or securities of the Company. The Class B Preferred Stock (represented by the Class B Depositary Shares outstanding) ranks pari passu with the Company's Class A Preferred Stock, Class C Preferred Stock and Class D Preferred Stock as to voting rights, priority for receiving dividends and liquidation preferences as set forth below.
Dividends on the Class C Depositary Shares are cumulative and payable quarterly in arrears at the rate of 8-3/8% per annum based on the $25 per share initial offering price, or $2.0938 per depositary share. The Class C Depositary Shares are redeemable, in whole or in part, for cash on or after April 15, 2001 at the option of the Company at a redemption price of $25 per depositary share, plus any accrued and unpaid dividends thereon. The redemption price of the Class C Preferred Stock may be paid solely from the sale proceeds of other capital stock of the Company, which may include other classes or series of preferred stock. The Class C Depositary Shares are not convertible or exchangeable for any other property or securities of the Company. The Class C Preferred Stock (represented by the Class C Depositary Shares outstanding) ranks pari passu with the Company's Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock as to voting rights, priority for receiving dividends and liquidation preferences as set forth below.
Voting Rights - As to any matter on which the Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock and Class D Preferred Stock (collectively, the "Preferred Stock") may vote, including any action by written consent, each share of Preferred Stock shall be entitled to 10 votes, each of which 10 votes may be directed separately by the holder thereof. With respect to each share of Preferred Stock, the holder thereof may designate up to 10 proxies, with each such proxy having the right to vote a whole number of votes (totaling 10 votes per share of Preferred Stock). As a result, each Class A, each Class B, each Class C and each Class D Depositary Share is entitled to one vote.
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Liquidation Rights - In the event of any liquidation, dissolution or winding up of the affairs of the Company, the Preferred Stock holders are entitled to be paid, out of the assets of the Company legally available for distribution to its stockholders, a liquidation preference of $250.00 per share ($25 per Class A, Class B, Class C and Class D Depositary Share, respectively), plus an amount equal to any accrued and unpaid dividends to the date of payment, before any distribution of assets is made to holders of the Company's common stock or any other capital stock that ranks junior to the Preferred Stock as to liquidation rights.
14. Dispositions of Real Estate:
During the year ended December 31, 1999, the Company disposed of six shopping center properties and a land parcel. Cash proceeds from four of these dispositions aggregated approximately $6.1, million which approximated their aggregate net book value.
During July 1999, the Company disposed of a shopping center property in New Port Richey, FL. Cash proceeds from the disposition totaling $.5 million, together with an additional $5.5 million cash investment, were used to acquire an exchange shopping center property located in Greensboro, NC during September 1999. The sale of this property resulted in a gain of approximately $.3 million.
During October 1999, the Company, in separate transactions, disposed of a shopping center property and a land parcel for an aggregate sale price of approximately $4.5 million, which resulted in a gain of approximately $1.3 million.
During January 1998, the Company disposed of a property in Pinellas Park, FL. Proceeds from the disposition totaling approximately $2.3 million, together with an additional $7.1 million cash investment, were used to acquire an exchange shopping center property located in Cranston, RI.
During December 1998, the Company disposed of a vacant distribution center and adjacent facility located in O'Fallon, MO, which were acquired as part of the Venture transactions, for $10 million, which amount approximated their net book value.
15. Transactions with Related Parties:
The Company provides management services for shopping centers owned principally by affiliated entities and various real estate joint ventures in which certain stockholders of the Company have economic interests. Such services are performed pursuant to management agreements which provide for fees based upon a percentage of gross revenues from the properties and other direct costs incurred in connection with management of the centers. The Consolidated Statements of Income include management fee income from KC Holdings of approximately $.4 million, $.6 million and $.6 million for the years ended December 31, 1999, 1998, and 1997, respectively.
During July 1999, the Company exercised its option and acquired 13 shopping center properties from KC Holdings. The properties were acquired for an aggregate option price of approximately $39.8 million, paid $15.7 million in shares of the Company's common stock (valued at $39.00 per share at July 1, 1999) and $24.1 million through the assumption of mortgage debt encumbering the properties.
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Reference is made to Notes 4, 5 and 11 for additional information regarding transactions with related parties.
16. Commitments and Contingencies:
The Company and its subsidiaries are engaged in the operation of shopping centers which are either owned or held under long-term leases which expire at various dates through 2087. The Company and its subsidiaries, in turn, lease premises in these centers to tenants pursuant to lease agreements which provide for terms ranging generally from 5 to 25 years and for annual minimum rentals plus incremental rents based on operating expense levels and tenants' sales volumes. Annual minimum rentals plus incremental rents based on operating expense levels comprised approximately 98% of total revenues from rental property for each of the three years ended December 31, 1999, 1998 and 1997.
The future minimum revenues from rental property under the terms of all noncancellable tenant leases, assuming no new or renegotiated leases are executed for such premises, for future years are approximately as follows (in millions): 2000, $345.5; 2001, $331.8; 2002, $307.7; 2003, $280.3; 2004, $252.3 and thereafter, $2,154.0.
Minimum rental payments under the terms of all noncancellable operating leases pertaining to its shopping center portfolio for future years are approximately as follows (in millions): 2000, $13.9; 2001, $13.0; 2002, $12.3; 2003, $11.2; 2004, $10.8 and thereafter, $164.5.
17. Incentive Plans:
The Company maintains a stock option plan (the "Plan") pursuant to which a maximum 6,000,000 shares of the Company's common stock may be issued for qualified and non-qualified options. Options granted under the Plan generally vest ratably over a three-year term, expire ten years from the date of grant and are exercisable at the market price on the date of grant, unless otherwise determined by the Board in its sole discretion. In addition, the Plan provides for the granting of certain options to each of the Company's non-employee directors (the "Independent Directors") and permits such Independent Directors to elect to receive deferred stock awards in lieu of directors' fees.
Information with respect to stock options under the Plan for the years ended December 31, 1999, 1998 and 1997 is as follows:
Weighted Average Exercise Price Shares Per Share ------ ---------
Options outstanding, December 31, 1996 1,604,146 $23.01 Exercised (179,750) $20.94 Granted 470,700 $31.72 ------- Options outstanding, December 31, 1997 1,895,096 $25.37 Exercised (150,766) $20.99 Granted 1,023,500 $37.32 --------- Options outstanding, December 31, 1998 2,767,830 $30.03 Exercised (320,781) $27.54 Granted 799,050 $32.33 ------- Options outstanding, December 31, 1999 3,246,099 $30.84 =========
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Options exercisable - December 31, 1997 1,126,093 $22.39 ========= ====== December 31, 1998 1,326,224 $24.13 ========= ====== December 31, 1999 1,605,886 $27.24 ========= ======
The exercise prices for options outstanding as of December 31, 1999 range from $13.33 to $39.94 per share. The weighted average remaining contractual life for options outstanding as of December 31, 1999 was approximately 7.7 years. Options to purchase 1,507,120, 2,306,170 and 329,673 shares of the Company's common stock were available for issuance under the Plan at December 31, 1999, 1998 and 1997, respectively.
The Company has elected to adopt the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized with regard to options granted under the Plan in the accompanying Consolidated Statements of Income. If stock-based compensation costs had been recognized based on the estimated fair values at the dates of grant for options awarded during 1999, 1998 and 1997 net income and net income per common share for these calendar years would have been reduced by approximately $1.7 million or $.03 per basic share, $1.4 million, or $.03 per basic share and $.7 million, or $.02 per basic share, respectively.
These pro forma adjustments to net income and net income per basic common share assume fair values of each option grant estimated using the Black-Scholes option pricing formula. The more significant assumptions underlying the determination of such fair values for options granted during 1999, 1998 and 1997 include: (i) weighted average risk-free interest rates of 6.30%, 5.07% and 6.18%, respectively; (ii) weighted average expected option lives of 5.4 years, 5.6 years and 8.2 years, respectively; (iii) an expected volatility of 15.91%, 15.76% and 15.65%, respectively, and (iv) an expected dividend yield of 7.30%, 6.40% and 6.44%, respectively. The per share weighted average fair value at the dates of grant for options awarded during 1999, 1998 and 1997 was $2.53, $2.86 and $3.02, respectively.
The Company maintains a 401(k) retirement plan covering substantially all officers and employees which permits participants to defer up to a maximum 10% of their eligible compensation. This deferred compensation, together with Company matching contributions which generally equal employee deferrals up to a maximum of 5%, is fully vested and funded as of December 31, 1999. Company contributions to the plan totaled less than $0.5 million for each of the years ended December 31, 1999, 1998 and 1997.
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
18. Supplemental Financial Information:
The following represents the results of operations, expressed in thousands except per share amounts, for each quarter during years 1999 and 1998.
Interest paid during years 1999, 1998 and 1997 approximated $80.0 million, $60.7 million and $29.9 million, respectively.
Accounts and notes receivable in the accompanying Consolidated Balance Sheets are net of estimated unrecoverable amounts of approximately $3.8 million and $3.2 million, respectively, at December 31, 1999 and 1998.
19. Pro Forma Financial Information (Unaudited):
As discussed in Notes 2 and 14, the Company and certain of its subsidiaries acquired and disposed of interests in shopping center properties during 1999. The pro forma financial information set forth below is based upon the Company's historical Consolidated Statements of Income for the years ended December 31, 1999 and 1998, adjusted to give effect to these transactions as of January 1, 1998.
The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred on January 1, 1998, nor does it purport to represent the results of operations for future periods. (Amounts presented in millions, except per share figures.)
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Years ended December 31, 1999 1998 ---- ----
Revenues from rental property $451.3 $372.1 Income before extraordinary items $178.8 $136.1 Net income $178.8 $131.2
Per common share: Income before extraordinary items:
Basic $2.51 $2.21 Diluted $2.49 $2.18 Net income: Basic $2.51 $2.11 Diluted $2.49 $2.09
KIMCO REALTY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For Years Ended December 31, 1999, 1998 and 1997
KIMCO REALTY CORPORATION AND SUBSIDARIES REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
Depreciation and amortization of the Company's investment in buildings and improvements reflected in the statements of income is calculated over the estimated useful lives of the assets as follows:
Buildings.............15 to 39 years Improvements..........Terms of leases or useful lives, whichever is shorter
The aggregate cost for Federal income tax purposes was approximately $2,850 million at December 31, 1999.
The changes in total real estate assets for the years ended December 31, 1999, 1998 and 1997 are as follows:
Kimco Realty Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends For the Year Ended December 31, 1999
Income before extraordinary items $176,777,537
Add: Interest on indebtedness 81,667,211 Amortization of debt related expenses 2,512,274 Portion of rents representative of the interest factor 6,360,643 ------------ 267,317,665
Adjustment for equity share in partnerships (9,021,568) ------------
Income before extraordinary items, as adjusted $258,296,097 ============
Combined fixed charges and preferred stock dividends- Interest on indebtedness 86,073,607 Preferred stock dividends 26,478,323 Amortization of debt related expenses 2,351,649 Portion of rents representative of the interest factor 6,360,643 ------------
Combined fixed charges and preferred stock dividends $121,264,222 ============
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 2.1 ============
Kimco Realty Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends For the Year Ended December 31, 1999
Funds from Operations, Available to Common Stockholders $221,402,575
Add:
Interest on indebtedness 81,667,211 Preferred stock dividends 26,478,323 Portion of rents representative of the interest factor 6,360,643 ------------- 335,908,752
Adjustment for equity share in partnerships (14,260,933) ------------- Funds from operations, as adjusted $321,647,819 =============
Combined fixed charges and preferred stock dividends- Interest on indebtedness $ 86,073,607 Preferred stock dividends 26,478,323 Portion of rents representative of the interest factor 6,360,643 ------------ Combined fixed charges and preferred stock dividends $118,912,573 ============= Ratio of Funds from Operations to Combined Fixed Charges and Preferred Stock Dividends 2.7 =============
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