10-K: Annual report [Section 13 and 15(d), not S-K Item 405]
Published on March 27, 2003
Page 1 of 110
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 1-10899
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Kimco Realty Corporation
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(Exact name of registrant as specified in its charter)
Maryland 13-2744380
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(State of incorporation) (I.R.S. Employer Identification No.)
3333 New Hyde Park Road, New Hyde Park, NY 11042-0020
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (516)869-9000 Securities
registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, par value $.01 per share. New York Stock Exchange
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Depositary Shares, each representing one-
tenth of a share of 7-3/4% Class A
Cumulative Redeemable Preferred Stock,
par value $1.00 per share. New York Stock Exchange
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Depositary Shares, each representing one-
tenth of a share of 8-1/2% Class B
Cumulative Redeemable Preferred Stock,
par value $1.00 per share. New York Stock Exchange
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Depositary Shares, each representing one-
tenth of a share of 8-3/8% Class C
Cumulative Redeemable Preferred Stock,
par value $1.00 per share. New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the Registrant (i) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X
----
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in rule 12b-2 of the Act.) Yes X No
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The aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $2.8 billion based upon the
closing price on the New York Stock Exchange for such stock on January 31, 2003.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest practicable date.
104,651,866 shares as of January 31, 2003.
1
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference to the Registrant's
definitive proxy statement to be filed with respect to the Annual Meeting of
Stockholders expected to be held on May 15, 2003.
Index to Exhibits begins on page 48.
2
TABLE OF CONTENTS
3
PART I
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, together with other statements and information
publicly disseminated by Kimco Realty Corporation (the "Company" or "Kimco")
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 and
include this statement for purposes of complying with these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe the Company's future plans, strategies and expectations, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. You should not rely
on forward-looking statements since they involve known and unknown risks,
uncertainties and other factors which are, in some cases, beyond the Company's
control and which could materially affect actual results, performances or
achievements. Factors which may cause actual results to differ materially from
current expectations include, but are not limited to, (i) general economic and
local real estate conditions, (ii) the inability of major tenants to continue
paying their rent obligations due to bankruptcy, insolvency or general downturn
in their business, (iii) financing risks, such as the inability to obtain equity
or debt financing on favorable terms, (iv) changes in governmental laws and
regulations, (v) the level and volatility of interest rates (vi) the
availability of suitable acquisition opportunities and (vii) increases in
operating costs. Accordingly, there is no assurance that the Company's
expectations will be realized.
SHARE SPLIT
As of December 21, 2001, the Company effected a three-for-two split (the "Stock
Split") of the Company's common stock in the form of a stock dividend paid to
stockholders of record on December 10, 2001. All common share and per common
share data included in this annual report on Form 10-K and the accompanying
Consolidated Financial Statements and Notes thereto have been adjusted to
reflect this Stock Split.
Item 1. Business
General Kimco Realty Corporation, a Maryland corporation, is one of the nation's
largest owners and operators of neighborhood and community shopping centers. The
Company is a self-administered real estate investment trust ("REIT") and manages
its properties through present management, which has owned and operated
neighborhood and community shopping centers for over 35 years. The Company has
not engaged, nor does it expect to retain, any REIT advisors in connection with
the operation of its properties. As of February 7, 2003, the Company's portfolio
was comprised of 607 property interests including 538 neighborhood and community
shopping center properties, two regional malls, 41 retail store leases, 22
ground-up development projects and four parcels of undeveloped land totaling
approximately 90 million square feet of leasable space located in 41 states,
Canada and Mexico. The Company's ownership interests in real estate consist of
its consolidated portfolio and in portfolios where the Company owns an economic
interest, such as; Kimco Income REIT ("KIR"), the RioCan Venture ("RioCan
Venture"), Kimco Retail Opportunity Portfolio ("KROP") and other properties or
portfolios where the Company also retains management (See Recent Developments -
Operating Real Estate Joint Venture Investments and Note 6 of the Notes to
Consolidated Financial Statements included in this annual report on Form 10-K).
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 REIT.
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.
Our Web site is located at http://www.Kimcorealty.com. On our Web site you can
obtain, free of charge, a copy of our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act of 1934, as amended, as soon as reasonably practicable after we file such
material electronically with, or furnish it to, the Securities and Exchange
Commission (the "SEC").
4
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
commencing with its taxable year which began January 1, 1992, elected to qualify
as a REIT in accordance with Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the "Code"). In 1994, the Company reorganized as a
Maryland corporation.
The Company's growth through its first 15 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 operating shopping centers added to the
Company's portfolio since 1981 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").
Prior to the merger, Price REIT was a self-administered and self-managed equity
REIT that was primarily 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. 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.
Also, 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 of
December 31, 2002, 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 (See Recent Developments - Operating Real Estate Joint Venture
Investments and Note 6 of the Notes to Consolidated Financial Statements
included in this annual report on Form 10-K).
In connection with the Tax Relief Extension Act of 1999 (the "RMA") which became
effective January 1, 2001, the Company is now permitted to participate in
activities which it was precluded from previously in order to maintain its
qualification as a REIT, so long as these activities are conducted in entities
which elect to be treated as taxable subsidiaries under the Code, subject to
certain limitations. As such, the Company, through its taxable REIT
subsidiaries, is engaged in various retail real estate related opportunities,
including (i) merchant building through its wholly owned taxable REIT
subsidiary, Kimco Developers, Inc. ("KDI"), which is primarily engaged in the
ground-up development of neighborhood and community shopping centers and
subsequent sale thereof upon completion (see Recent Developments - Kimco
Developers, Inc. ("KDI")), (ii) retail real estate advisory and disposition
services which primarily focus on leasing and disposition strategies for real
estate property interests of both healthy and distressed retailers and (iii)
acting as an agent or principal in connection with tax deferred exchange
transactions. The Company will consider other investments through taxable REIT
subsidiaries should suitable opportunities arise.
During October 2001, the Company continued its geographical expansion by forming
the RioCan Venture with RioCan Real Estate Investment Trust ("RioCan", Canada's
largest publicly traded REIT measured by GLA) in which the Company has a
non-controlling 50% interest, to acquire retail properties and development
projects in Canada. The Company has committed a total equity investment of up to
$250.0 million Canadian dollars ("CAD") and accounts for this investment under
the equity method of accounting (see Recent Developments - Operating Real Estate
Joint Venture Investments and Note 6 of the Notes to Consolidated Financial
Statements included in this annual report on Form 10-K).
In addition, the Company continues to capitalize on its established expertise in
retail real estate by establishing other ventures in which the Company owns a
smaller equity interest and provides management, leasing and operational support
for those properties, including KROP.
5
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 and (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 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/or other indebtedness. Financing or
other indebtedness may be incurred simultaneously or subsequently in connection
with 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.
In addition to property or equity ownership, the Company provides property
management services for fees relating to the management, leasing, operation,
supervision and maintenance of real estate properties.
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 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, 2002, the Company's single largest
neighborhood and community shopping center, accounted for only 1.2% of the
Company's annualized base rental revenues and only 0.8% of the Company's total
shopping center GLA. At December 31, 2002, the Company's five largest tenants,
include Kmart Corporation (see Recent Developments - Kmart Bankruptcy), The Home
Depot, Kohl's, TJX Companies and Wal-Mart, which represent approximately 4.5%,
2.8%, 2.7%, 2.5% and 1.9%, respectively, of the Company's annualized base rental
revenues, including the proportionate share of base rental revenues from
properties in which the Company has less than a 100% economic interest.
In connection with the RMA, which became effective January 1, 2001, the Company
has expanded its investment and operating strategy to include new retail real
estate related opportunities which the Company was precluded from previously in
order to maintain its qualification as a REIT. As such, the Company, has
established a merchant building business through its KDI subsidiary. KDI makes
selective acquisitions of land parcels for the ground-up development of
neighborhood and community shopping centers and subsequent sale thereof upon
completion. Additionally, the Company has developed a retail property solutions
business which specializes in real estate advisory and disposition services of
real estate controlled by both healthy and distressed and/or bankrupt retailers.
These services may include assistance with inventory and fixture liquidation in
connection with going-out-of-business sales. The Company may participate with
other entities in providing these advisory services through partnerships, joint
ventures or other co-ownership arrangements. The Company, as a regular part of
its investment strategy, will continue to actively seek investments for its
taxable REIT subsidiaries.
The Company emphasizes equity real estate investments including preferred equity
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 provides mortgage financing to retailers with
significant real estate assets, in the form of lease-hold interests or fee
owned properties, where the Company believes the underlying value of the real
estate collateral is in excess of its loan balance. In addition, the Company
will acquire debt instruments at a discount in the secondary market where the
Company believes the real estate value of the enterprise is substantially
greater than the current value.
6
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 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 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.
Capital Strategy and Resources The Company intends to operate with and maintain
a conservative capital structure with a level of debt to total market
capitalization of approximately 50% or less. As of December 31, 2002, the
Company's level of debt to total market capitalization was 31%. In addition, the
Company intends to maintain strong debt service coverage and fixed charge
coverage ratios as part of its commitment to maintaining its investment-grade
debt ratings.
Since the completion of the Company's IPO in 1991, the Company has utilized the
public debt and equity markets as its principal source of capital for its
expansion needs. Since the IPO, the Company has completed additional offerings
of its public unsecured debt and equity, raising in the aggregate over $2.7
billion for the purposes of, among other things, repaying indebtedness,
acquiring interests in neighborhood and community shopping centers, funding
ground-up development projects, expanding and improving properties in the
portfolio and other investments.
The Company has a $250.0 million, unsecured revolving credit facility, which is
scheduled to expire in August 2003. This credit facility has made available
funds to both finance the purchase of properties and meet any short-term working
capital requirements. As of December 31, 2002, there was $40.0 million
outstanding under this unsecured revolving credit facility. The Company intends
to renew this revolving credit facility prior to the maturity date.
The Company also has a $200.0 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. As of December 31, 2002, $98.0 million was available
for issuance under the MTN program. (See Note 10 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, 2002, the Company had over 380 unencumbered
property interests in its portfolio representing over 89% of the Company's net
operating income.
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 and other capital alternatives in a
manner consistent with its intention to operate with a conservative debt
capitalization policy.
During May 2001, the Company filed a shelf registration on Form S-3 for up to
$750.0 million of debt securities, preferred stock, depositary shares, common
stock and common stock warrants. As of January 31, 2003, the Company had
approximately $288.7 million available for issuance under this shelf
registration statement.
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, free cash flow generated by the operating
business, 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 was $278.9
million for the year ended December 31, 2002, as compared to $287.4 million for
the year ended December 31, 2001.
7
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 regional
and local commercial developers, real estate companies, financial institutions
and other investors who compete with the Company for the acquisition of
properties and in seeking tenants who will lease space in the Company's
properties.
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 reimburse the Company for their 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 fluctuations in foreign currency
exchange rates and will, from time to time, enter into interest rate protection
agreements and foreign currency hedge agreements which mitigate, but do not
eliminate, the effect of changes in interest rates on its floating-rate debt and
changes in foreign currency exchange rates.
Risk Factors Set forth below are the material risks associated with the purchase
and ownership of the securities of the Company. As an owner of real estate, the
Company is subject to certain business risks arising in connection with the
underlying real estate, including, among other factors, (i)defaults of major
tenants due to bankruptcy, insolvency and/or general downturn in their business
which could reduce the Company's cash flow, (ii) major tenants not renewing
their leases as they expire or renew at lower rental rates which could reduce
the Company's cash flow, (iii) changes in retailing trends which could reduce
the need for shopping centers, (iv) potential liability for future or unknown
environmental issues, (v) changes in real estate and zoning laws and competition
from other real estate owners which could make it difficult to lease or develop
properties, and (vi) the inability to acquire capital, either in the form of
debt or equity, on satisfactory terms to fund the Company's cash requirements.
The success of the Company also depends upon trends in the economy, including,
but not limited to, interest rates, income tax laws, governmental regulations
and legislation and population trends. Additionally, the Company is subject to
complex regulations related to its status as a REIT and would be adversely
affected if it failed to maintain its qualification as a REIT.
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 and accordingly, the Company maintains regional
offices in Hartford, Connecticut; Margate, Orlando and Tampa, Florida; Albany,
New York; Philadelphia, Pennsylvania; Dallas, Texas; Dayton and Cleveland, Ohio;
Lisle and Chicago, Illinois; Charlotte and Cary, North Carolina; Phoenix,
Arizona; Jonesboro, Georgia; Woodbridge, Virginia; Los Angeles, San Francisco
and Sacramento, California and Baltimore, Maryland. A total of 324 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 51 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 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.
8
Qualification as a REIT The Company has elected, commencing with its taxable
year which began January 1, 1992, to qualify as a REIT under 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.
In connection with the RMA, which became effective January 1, 2001, the Company
is now permitted to participate in activities which the Company was precluded
from previously in order to maintain its qualification as a REIT, so long as
these activities are conducted in entities which elect to be treated as taxable
subsidiaries under the Code, subject to certain limitations. The primary
activities conducted by the Company in its taxable REIT subsidiaries during 2002
include, but are not limited to, (i) the ground-up development of shopping
center properties and subsequent sale thereof upon completion (see Recent
Developments - Kimco Developers, Inc. ("KDI")) and (ii) real estate advisory and
disposition services provided in connection with asset designation rights and
assistance with inventory and furniture liquidations in connection with
going-out-of-business sales by certain bankrupt retailers. As such, the Company
was subject to federal and state income taxes on the income from these
activities.
Recent Developments
Kmart Bankruptcy -
On January 22, 2002, Kmart Corporation ("Kmart") filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. As of the filing date, Kmart occupied 69
locations (excluding the KIR portfolio which included six Kmart locations),
representing 12.6% of the Company's annualized base rental revenues and 13.3% of
the Company's total shopping center GLA as of the filing date. During 2002,
Kmart rejected its leases at 31 locations, representing approximately $30.8
million of annualized base rental revenues and approximately 3.2 million square
feet of GLA. As of December 31, 2002, Kmart represented 4.5% of annualized base
rents and 6.9% of leased GLA.
During December 2002, the Company disposed of, in separate transactions, seven
former Kmart sites, comprised of approximately 1.0 million square feet of GLA,
for an aggregate sales price of approximately $40.8 million.
The Company has currently leased or is under agreement to lease 11 of the
rejected locations, has terminated four ground lease locations and has received
offers to purchase three of these sites. The Company is reviewing the offers
received and is actively marketing the remaining six locations to prospective
tenants, however, no assurances can be provided that these locations will be
leased in the near term or at comparable rents previously paid by Kmart.
The Company had previously encumbered seven of these rejected locations with
individual non-recourse mortgage loans totaling approximately $70.8 million.
Annualized interest expense on these loans was approximately $5.6 million.
During July 2002, the Company suspended debt service payments on these loans and
was actively negotiating with the respective lenders. During December 2002, the
Company reached agreement with certain lenders in connection with four of these
locations. The Company paid approximately $24.2 million in full satisfaction of
the loans encumbering these properties which aggregated $46.5 million. As a
result of these transactions, the Company recognized a gain on early
extinguishment of debt of approximately $22.3 million. Also, during December
2002, the Company re-tenanted one location and brought the mortgage loan
encumbering this property current.
Additionally, during February 2003, the Company reached agreement with the
lender in connection with the two remaining encumbered locations. The Company
paid approximately $8.3 million in full satisfaction of these loans which
aggregated approximately $14.7 million. As a result of this transaction, the
Company will recognize a gain on early extinguishment of debt of approximately
$6.2 million during the first quarter of 2003.
On January 14, 2003, Kmart announced it would be closing an additional 326
locations of which nine of these locations (excluding the KIR portfolio which
includes three additional locations and Kimsouth (as defined below) which
includes two additional locations) are leased from the Company. The annualized
base rental revenues from these nine locations are approximately $4.3 million.
The Company had previously encumbered one of these properties with an individual
non-recourse mortgage loan. The annualized interest expense for the one
encumbered property is approximately $0.8 million. As of the date of this filing
of this annual report on Form 10-K, the Company has not been notified directly
by Kmart as to the timing of these store closings or whether the leases will be
assigned or rejected. Until such time as the leases are rejected in accordance
with the bankruptcy proceedings, Kmart remains obligated for payments of rent
and operating expenses at these locations and all other remaining locations.
9
Effective May 1, 2003, the Company has agreed to a five-year rent reduction at
six Kmart locations, consisting of approximately 0.6 million square feet of GLA.
The average rent was reduced from $8.01 per square foot to $5.57 per square
foot, or approximately $1.5 million of annualized base rent.
The Company generally will have the right to file claims in connection with
rejected leases for lost rent equal to three years of rental obligations as well
as other amounts related to obligations under the leases. Actual amounts to be
received in satisfaction of these claims will be subject to Kmart's final plan
of reorganization and the availability of funds to pay creditors such as the
Company.
Operating Properties -
Acquisitions -
During the year ended December 31, 2002, the Company acquired 13 wholly owned
operating properties located in seven states and Mexico, comprising
approximately 1.8 million square feet of GLA for an aggregate purchase price of
approximately $258.7 million including the issuance of approximately 2.4 million
downREIT units valued at $80.0 million in connection with the acquisition of one
of the properties and the assumption of approximately $3.5 million in mortgage
debt encumbering one of the properties. Details of these transactions are as
follows:
During April 2002, the Company acquired three operating properties located in
Columbia, MD, comprising approximately 0.2 million square feet of GLA, for an
aggregate purchase price of approximately $15.4 million.
During May 2002, the Company acquired a property located in Springfield, MO for
an aggregate purchase price of approximately $4.3 million including the
assumption of approximately $3.5 million in mortgage debt.
During July 2002, the Company acquired a property located in East Windsor, NJ
comprising approximately 0.2 million square feet of GLA, for an aggregate
purchase price of approximately $26.5 million. During November 2002, the Company
sold this property for a purchase price, which approximated net book value. The
Company retained a minor interest in the property, which allows for the
participation of Net Cash Flows, as defined. Effective with the sale, the
Company entered into a property management agreement with the purchaser to
provide services relating to the management, leasing, operation, supervision and
maintenance of the property.
During October 2002, the Company acquired an interest in a shopping center
property, comprising approximately 0.6 million square feet of GLA, located in
Daly City, CA. The property was valued at a purchase price of approximately
$80.0 million and was acquired by issuing approximately 2.4 million downREIT
units which are convertible at a ratio of 1:1 into the Company's common stock
(see Note 16 of the Notes to Consolidated Financial Statements included in this
annual report on Form 10-K).
During October 2002, the Company, in separate transactions, purchased two
properties located in Monterrey, Mexico comprising approximately 0.3 million
square feet of GLA for an aggregate purchase price of approximately $368.5
million pesos ("MXN")(USD $35.7 million). One of these sites consists of a
portion under development of approximately 0.1 million square feet of GLA with
total development costs budgeted at approximately MXN $29.3 million (USD $5.8
million). The scheduled completion of this project is during the fourth quarter
of 2003. The Company has entered into several foreign currency hedge
transactions to reduce its exposure to fluctuations in foreign currency exchange
rates.
During December 2002, the Company acquired four operating properties, in
separate transactions, comprising approximately 0.6 million square feet of GLA
located in three states for an aggregate purchase price of approximately $96.3
million.
10
Dispositions -
During 2002, the Company, (i) disposed of, in separate transactions, 12
operating properties for an aggregate sales price of approximately $74.5
million, including the assignment/repayment of approximately $22.6 million of
mortgage debt encumbering three of the properties and (ii) terminated five
leasehold positions in locations where a tenant in bankruptcy had rejected its
lease. These transactions resulted in net gains of approximately $12.8 million.
Details of these transactions are as follows:
During April 2002, the Company disposed of an operating property located in
Massapequa, NY for a sales price of approximately $4.1 million, including the
assignment of approximately $2.7 million of mortgage debt. Cash proceeds from
this disposition were used to acquire an exchange shopping center property
located in Springfield, MO during May 2002.
During July 2002, the Company disposed of an operating property located in
Columbus, OH for a sales price of approximately $1.4 million.
During September 2002, the Company disposed of an operating property located in
Corsicana, TX for a sales price of approximately $11.5 million including the
assignment of approximately $8.4 million of mortgage debt.
During October 2002, the Company, in separate transactions, disposed of two
operating properties for an aggregate sales price of approximately $6.3 million.
Cash proceeds from one of these dispositions was used to acquire an exchange
shopping center property in December 2002.
During November 2002, the Company disposed of an operating property located in
Chicago, IL. Net proceeds from this sale of approximately $8.0 million were
accepted by a lender in full satisfaction of an outstanding mortgage loan of
approximately $11.5 million. The Company recognized a gain on early
extinguishment of debt of approximately $3.2 million.
During December 2002, the Company, in separate transactions, disposed of six
operating properties for an aggregate sales price of approximately $39.7
million. Proceeds from two of these sales will be used to purchase exchange
shopping center properties.
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 2002,
the Company substantially completed the redevelopment and re-tenanting of
various operating properties. The Company expended approximately $44.4 million
in connection with these major redevelopments and re-tenanting projects during
2002. The Company is currently involved in redeveloping several other shopping
centers in the existing portfolio. The Company anticipates its capital
commitment toward these and other redevelopment projects will be approximately
$30.0 million to $50.0 million during 2003.
Kimco Developers, Inc. ("KDI") -
Effective January 1, 2001, the Company elected taxable REIT subsidiary status
for its wholly-owned subsidiary, KDI. KDI is primarily engaged in the ground-up
development of neighborhood and community shopping centers and the subsequent
sale thereof upon completion. As of December 31, 2002, KDI had in progress 19
ground-up development projects located in eight states. These projects had
substantial pre-leasing prior to the commencement of construction. During 2002,
KDI expended approximately $148.6 million in connection with the purchase of
land and construction costs related to these projects. These projects are
currently proceeding on schedule and in line with the Company's budgeted costs.
The Company anticipates its capital commitment toward these and other
development projects will be approximately $160.0 million to $200.0 million
during 2003. The proceeds from the sales of the completed ground-up development
projects during 2003 and proceeds from construction loans are expected to be
sufficient to fund these anticipated capital requirements.
KDI Acquisitions -
During the year ended December 31, 2002, KDI acquired five land parcels, in
separate transactions, for the ground-up development of shopping centers and
subsequent sales thereof upon completion for an aggregate purchase price of
approximately $21.3 million, as follows:
During January 2002, KDI acquired two land parcels, in separate transactions,
for an aggregate purchase price of approximately $6.2 million.
11
During April 2002, KDI acquired a land parcel located in Beaumont, TX for an
aggregate purchase price of approximately $2.2 million.
During May 2002, KDI acquired a land parcel located in Panama City, FL for an
aggregate purchase price of approximately $2.0 million.
During December 2002, KDI acquired a land parcel located in Woodlands, TX for an
aggregate purchase price of approximately $10.9 million.
The estimated project costs for these newly acquired parcels is approximately
$131.2 million with completion dates ranging from March 2003 to June 2005.
During 2002, the Company obtained individual construction loans on eight
ground-up development properties. Total loan commitments aggregate $119.8
million of which approximately $38.9 million has been funded as of December 31,
2002. These loans have maturities ranging from 18 to 36 months and bear interest
at rates averaging 4.38% at December 31, 2002.
KDI Dispositions -
During the year ended December 31, 2002, KDI sold four of its recently completed
projects and eight out-parcels for approximately $128.7 million, including the
assignment of approximately $17.7 million in mortgage debt encumbering one of
the properties. These sales resulted in pre-tax gains of approximately $15.9
million. Details are as follows:
During January 2002, KDI disposed of, in separate transactions, Mallwoods
Center, a completed ground-up development project located in Miamisburg, OH and
an out-parcel located in Hillsborough, NJ for an aggregate sales price of
approximately $12.6 million.
During August 2002, KDI disposed of Wakefield Crossing, a completed ground-up
development project located in Raleigh, NC, for a sales price of approximately
$10.7 million.
During September 2002, KDI disposed of Cedar Hill Crossing, a completed
ground-up development project located in Cedar Hills, TX, for a sales price of
approximately $23.7 million including the assignment of approximately $17.7
million of mortgage debt. Effective with the sale, the Company entered into a
property management agreement with the purchaser of this property. In addition
to a property management fee, the Company is entitled to certain fees which are
based on Net Cash Flows and Capital Transactions, as defined.
During December 2002, KDI disposed of an out-parcel located in Henderson, NV for
approximately $1.3 million. The property was owned through a joint venture in
which KDI has a 50% interest.
During 2002, KDI disposed of two out-parcels, located in Chandler, AZ for an
aggregate sales price of approximately $1.6 million.
During 2002, KDI disposed of, in separate transactions, Phase I and four
out-parcels of Forum at Olympia, a ground-up development project located in San
Antonio, TX, for an aggregate sales price of approximately $78.8 million.
Operating Real Estate Joint Venture Investments -
Kimco Income REIT ("KIR") -
During 1998, the Company formed KIR, an entity that was established for the
purpose of investing in high quality real estate properties financed primarily
with individual non-recourse mortgages. These properties include, but are not
limited to, fully developed properties with strong, stable cash flows from
credit-worthy retailers with long-term leases. The Company originally held a
99.99% limited partnership interest in KIR. Subsequent to KIR's formation, the
Company sold a significant portion of its original interest to an institutional
investor and admitted three other limited partners. As of December 31, 2002, KIR
has received total capital commitments of $569.0 million, of which the Company
subscribed for $247.0 million and the four limited partners subscribed for
$322.0 million. The Company has a 43.3% non-controlling limited partnership
interest in KIR and accounts for its investment under the equity method of
accounting.
During 2002, the limited partners in KIR contributed $55.0 million towards their
respective capital commitments, including $23.8 million by the Company. As of
December 31, 2002, KIR had unfunded capital commitments of $129.0 million,
including $55.9 million from the Company.
12
During 2002, KIR purchased five shopping center properties, in separate
transactions, aggregating approximately 1.8 million square feet of GLA for
approximately $213.5 million, including the assumption of approximately $63.1
million of mortgage debt encumbering two of the properties.
During July 2002, KIR disposed of a shopping center property in Aurora, IL for
an aggregate sales price of approximately $2.4 million, which represented the
approximate book value of the property.
As of December 31, 2002, the KIR portfolio was comprised of 68 shopping center
properties aggregating approximately 14.0 million square feet of GLA located in
21 states.
During 2002, KIR obtained individual non-recourse, non-cross collateralized
fixed-rate ten year mortgages aggregating approximately $170.3 million on seven
of its previously unencumbered properties with rates ranging from 5.95% to 7.38%
per annum. The net proceeds were used to finance the acquisition of various
shopping center properties.
KIR maintains a secured revolving credit facility with a syndicate of banks,
which is scheduled to expire in November 2003. This facility is collateralized
by the unfunded subscriptions of certain partners, including those of the
Company. The facility has an aggregate availability of up to $100.0 million
based upon the amount of unfunded subscription commitments of certain partners.
During January 2003, the aggregate availability under the credit facility was
reduced to $90.0 million. Under the terms of the facility, funds may be borrowed
for general corporate purposes including the acquisition of institutional
quality properties. Borrowings under the facility accrue interest at LIBOR plus
0.80%. As of December 31, 2002, there was $15.0 million outstanding under this
facility.
RioCan Investments -
During October 2001, the Company formed the RioCan Venture in which the Company
has a 50% non-controlling interest, to acquire retail properties and development
projects in Canada. The acquisition and development projects are to be sourced
and managed by RioCan and are subject to review and approval by a joint
oversight committee consisting of RioCan management and the Company's management
personnel. During 2002, the RioCan venture acquired 24 shopping center
properties and four development properties, in separate transactions, comprising
approximately 5.7 million square feet of GLA for an aggregate purchase price of
approximately CAD $683.7 million (approximately USD $435.8 million) including
the assumption of approximately CAD $321.5 million (approximately USD $203.1
million) in mortgage debt encumbering 13 of the properties. The Company has
committed a total equity investment of up to CAD $250.0 million for the
acquisition of retail properties and development projects. Capital contributions
will only be required as suitable opportunities arise and are agreed to by the
Company and RioCan. As of December 31, 2002, the RioCan Venture was comprised of
28 operating properties and four development properties, consisting of
approximately 6.7 million square feet of GLA.
Kimco / G.E. Joint Venture -
During 2001, the Company formed a joint venture (the "Kimco Retail Opportunity
Portfolio" or "KROP") with GE Capital Real Estate ("GECRE"), in which the
Company has a 20% non-controlling interest and manages the portfolio. The
purpose of this joint venture is to acquire established, high-growth potential
retail properties in the United States. Total capital commitments to KROP from
GECRE and the Company are for $200.0 million and $50.0 million, respectively,
and such commitments are funded proportionately as suitable opportunities arise
and are agreed to by GECRE and the Company. The Company accounts for its
investment in KROP under the equity method of accounting.
During 2002, GECRE and the Company contributed approximately $39.0 million and
$9.8 million, respectively, towards their capital commitments. Additionally,
GECRE and the Company provided short-term interim financing for all acquisitions
made by KROP without a mortgage in place at the time of acquisition. All such
financing bears interest at rates ranging from LIBOR plus 4.0% to 4.25% and have
maturities of less than one year. As of December 31, 2002, KROP had outstanding
short-term interim financing to GECRE and the Company totaling $17.3 million
each.
During 2002, KROP purchased 16 shopping centers aggregating 1.6 million square
feet of GLA for approximately $177.8 million, including the assumption of
approximately $29.5 million of mortgage debt encumbering three of the
properties.
During October 2002, KROP disposed of a shopping center in Columbia, MD for an
aggregate sales price of approximately $2.9 million, which resulted in a gain of
approximately $0.7 million.
13
During 2002, KROP obtained a cross-collateralized mortgage with a five-year term
aggregating $73.0 million on eight properties with an interest rate of LIBOR
plus 1.8%. Upon the sale of one of the collateralized properties during 2002,
$1.9 million was repaid. In order to mitigate the risks of interest rate
fluctuations associated with this variable rate obligation, KROP entered into an
interest rate cap agreement for the notional value of this mortgage.
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 2002, the Company acquired seven former Service Merchandise locations, in
separate transactions, through a venture in which the Company has a 42.5%
non-controlling interest. These properties were purchased for an aggregate
purchase price of approximately $20.9 million. In November 2002, the joint
venture obtained mortgages on two of these locations for approximately $7.0
million. The venture has signed leases for six of these locations and is
actively negotiating with other retailers to lease the remaining location.
During July 2002, the Company acquired a property located in Kalamazoo, MI,
through a joint venture in which the Company has a 50% non-controlling interest.
The property was purchased for an aggregate purchase price of approximately $6.0
million.
During December 2002, the Company acquired an out-parcel of an existing property
located in Tampa, FL, through a joint venture in which the Company has a 50%
interest. The property was purchased for an aggregate purchase price of
approximately $4.9 million.
Other Real Estate Investments -
Montgomery Ward Asset Designation Rights -
During March 2001, the Company, through a taxable REIT subsidiary, formed a
joint venture (the "Ward Venture") in which the Company has a 50% interest, for
purposes of acquiring asset designation rights for substantially all of the real
estate property interests of the bankrupt estate of Montgomery Ward LLC and its
affiliates. These asset designation rights have provided the Ward Venture the
ability to direct the ultimate disposition of the 315 fee and leasehold
interests held by the bankrupt estate. The asset designation rights expired in
August 2002 for the leasehold positions and are scheduled to expire in December
2004 for the fee owned locations. During the marketing period, the Ward Venture
will be responsible for all carrying costs associated with the properties until
the property is designated to a user.
For the year ended December 31, 2002, the Ward Venture has completed
transactions on 32 properties and the Company has recognized pre-tax profits of
approximately $11.3 million. As of December 31, 2002, there were 12 properties
which continue to be marketed.
Leveraged Lease -
During June 2002, the Company acquired a 90% equity participation interest in an
existing leveraged lease of 30 properties. The properties are leased under a
long-term bond-type net lease whose primary term expires in 2016, with the
lessee having certain renewal option rights. The Company's cash equity
investment was approximately $4.0 million. This equity investment is reported as
a net investment in leveraged lease in accordance with the Financial Accounting
Standards Board's ("FASB") issue of statement of Financial Accounting Standard
("SFAS") No. 13 (as amended). The net investment in leveraged lease reflects the
original cash investment adjusted by remaining net rentals, estimated
unguaranteed residual value, unearned and deferred income, and deferred taxes
relating to the investment.
During 2002, four of these properties were sold whereby the proceeds from the
sales were used to reduce the mortgage debt by approximately $9.6 million. As of
December 31, 2002, the remaining 26 properties were encumbered by third party
non-recourse debt of approximately $86.0 million that is scheduled to fully
amortize during the primary term of the lease from a portion of the periodic net
rents receivable under the net lease. As an equity participant in the leveraged
lease, the Company has no general obligation for principal or interest payments
on the debt, which is collateralized by a first mortgage lien on the properties
and a collateral assignment of the lease. Accordingly, this obligation has been
offset against the related net rental receivable under the lease.
14
Kmart Venture -
During July 2002, the Company, through a taxable REIT subsidiary, formed a
venture (the "Kmart Venture") in which the Company has a 60% controlling
participation for purposes of acquiring asset designation rights for 54 former
Kmart locations. The total commitment to Kmart by the Kmart Venture, prior to
the profit sharing arrangement commencing, is approximately $43.0 million. As of
December 31, 2002, the Kmart Venture has completed transactions on 35 properties
and has funded the total commitment of approximately $43.0 million to Kmart.
Kimsouth -
During November 2002, the Company, through its taxable REIT subsidiary, together
with Prometheus Southeast Retail Trust, completed the merger and privatization
of Konover Property Trust, which has been renamed Kimsouth Realty, Inc.,
("Kimsouth"). The Company acquired 44.5% of the common stock of Kimsouth, which
consisted primarily of 38 retail shopping center properties comprising
approximately 17.4 million square feet of GLA. Total acquisition value was
approximately $280.9 million including approximately $216.2 million in mortgage
debt. The Company's investment strategy with respect to Kimsouth includes
re-tenanting, repositioning and disposition of the properties. During December
2002, Kimsouth sold its joint venture interest in one property to its joint
venture partner for net proceeds of approximately $4.6 million and disposed of a
single property for net proceeds of approximately $2.9 million.
Preferred Equity Capital -
During 2002, the Company established a preferred equity program, which provides
capital to developers and owners of shopping centers. During 2002, the Company
provided, in separate transactions, an aggregate of approximately $25.6 million
in investment capital to developers and owners of nine shopping centers.
Mortgages and Other Financing Receivables -
During August 2001, the Company, through a joint venture in which the Company
had a 50% interest, provided $27.5 million of debtor-in-possession financing
(the "Ames Loan") to Ames Department Stores, Inc. ("Ames"), a retailer in
bankruptcy. This loan which was collateralized by all of Ames' real estate
interests, bore interest at prime plus 6.0%, and was scheduled to mature in
August 2003.
During September 2002, the Ames Loan was restructured as a two-year $100 million
secured revolving loan of which the Company has a 40.0% interest. This revolving
loan is collateralized by all of Ames' real estate interests. The loan bears
interest at 8.5% per annum and provides for contingent interest upon the
successful disposition of the Ames properties. The outstanding balance on the
revolving loan at December 31, 2002 was approximately $4.1 million.
During March 2002, the Company provided a $15.0 million three-year loan to
Gottchalks, Inc., at an interest rate of 12.0% per annum collateralized by
three properties. The Company receives interest and principal payments on a
monthly basis. As of December 31, 2002, the outstanding loan balance was
approximately $14.3 million.
During March 2002, the Company provided a $50.0 million ten-year loan to Shopko
Stores, Inc., at an interest rate of 11.0% per annum collateralized by 15
properties. The Company receives principal and interest payments on a monthly
basis. As of December 31, 2002, the outstanding loan balance was approximately
$49.8 million.
During May 2002, the Company provided a $15.0 million three-year loan to Frank's
Nursery & Crafts, Inc. ("Frank's"), at an interest rate of 10.25% per annum
collateralized by 40 real estate interests. Interest is payable quarterly in
arrears. An additional $7.5 million revolving loan at an interest rate of 10.25%
per annum was also established. As of December 31, 2002, there were no
borrowings outstanding on the additional revolving loan. As an inducement to
make these loans, Frank's issued the Company approximately 4.4 million warrants
with an exercise price of $1.15 per share.
Financing Transactions -
Unsecured Debt -
During July 2002, the Company issued an aggregate $102.0 million of unsecured
debt under its medium-term notes ("MTN") program. These issuances consisted of
(i) an $85.0 million floating-rate MTN which matures in August 2004 and bears
interest at LIBOR plus 0.50% per annum and (ii) a $17.0 million fixed-rate MTN
which matures in July 2012 and bears interest at 5.98% per annum. The proceeds
from these MTN issuances were used toward the repayment of a $110.0 million
floating-rate MTN which matured in August 2002. In addition, the Company entered
into an interest rate swap agreement on the $85.0 million floating-rate MTN
which effectively fixed the interest rate at 2.3725% per annum until November
2003.
15
During November 2002, the Company issued $35 million of 4.961% fixed-rate Senior
Notes due 2007 (the "2007 Notes"). Interest on the 2007 Notes is payable
semi-annually in arrears. Net proceeds from the issuance totaling approximately
$34.9 million, after related transaction costs of approximately $0.1 million,
were primarily used to repay outstanding borrowings on the Company's unsecured
credit facilities.
Additionally, during November 2002, the Company issued $200 million of 6.0%
fixed-rate Senior Notes due 2012 (the "2012 Notes"). Interest on the 2012 Notes
is payable semi-annually in arrears. The 2012 Notes were sold at 99.79% of par
value. Net proceeds from the issuance totaling approximately $198.3 million,
after related transaction costs of approximately $1.3 million, were primarily
used to repay outstanding borrowings on the Company's unsecured credit
facilities.
Construction Loans -
During 2002, the Company obtained construction financing on eight ground-up
development projects for an aggregate loan amount of up to $119.8 million, of
which approximately $38.9 million has been funded as of December 31, 2002. These
loans have maturities ranging from 18 to 36 months and a weighted average
interest rate of 4.38% at December 31, 2002.
Early Extinguishment of Non-Recourse Mortgages -
As part of the Company's strategy to reduce its exposure to Kmart Corporation,
the Company had previously encumbered seven Kmart sites with individual
non-recourse mortgages aggregating approximately $70.8 million. As a result of
the Kmart bankruptcy filing in January 2002 and the subsequent rejection of
leases including leases at these encumbered sites, the Company, during July
2002, had suspended debt service payments on these loans and began active
negotiations with the respective lenders.
During December 2002, the Company reached agreement with certain lenders in
connection with four of these locations. The Company paid approximately $24.2
million in full satisfaction of these loans which aggregated $46.5 million. The
Company recognized a gain on the early extinguishment of debt of approximately
$22.3 million.
Additionally, during December 2002, the Company re-tenanted one location and has
brought the mortgage loan encumbering this property current.
During February 2003, the Company reached agreement with the lender in
connection with the two remaining encumbered locations. The Company paid
approximately $8.3 million in full satisfaction of these loans which aggregated
approximately $14.7 million. The Company will recognize a gain on early
extinguishment of debt of approximately $6.2 million in the first quarter of
2003.
Credit Facilities -
The Company maintains a $250.0 million unsecured revolving credit facility (the
"Credit Facility") with a group of banks. The Credit Facility is scheduled to
mature in August 2003. The Company intends to renew this facility prior to
maturity. Under the terms of the Credit Facility, funds may be borrowed for
general corporate purposes, including (i) funding property acquisitions, (ii)
funding development and redevelopment costs and (iii) funding any short-term
working capital requirements. Interest on borrowings under the Credit Facility
accrues at a spread (currently 0.65%) to LIBOR, which fluctuates in accordance
with changes in the Company's senior debt ratings. The Company's senior debt
ratings are currently A-/stable from Standard & Poors and Baa1/stable from
Moody's Investor Services. As part of the Credit Facility, the Company has a
competitive bid option where the Company may auction up to $100.0 million of its
requested borrowings to the bank group. This competitive bid option provides the
Company the opportunity to obtain pricing below the currently stated spread to
LIBOR of 0.65%. As of December 31, 2002, there was $40.0 million outstanding
under the Credit Facility.
During July 2002, the Company further enhanced its liquidity position by
establishing an additional $150.0 million unsecured revolving credit facility.
During December 2002, the Company repaid the outstanding balance and terminated
this facility.
16
Equity -
During November 2001, the Company announced the redemption of all outstanding
depositary shares of the Company's 7-1/2% Class D Cumulative Convertible
Preferred Stock (the "Class D Preferred Stock") in exchange for shares of the
Company's common stock. The Board of Directors set January 3, 2002 as the
mandatory redemption date on which all outstanding depositary shares of Class D
Preferred Stock were redeemed. Holders of the Class D Preferred Stock on the
redemption date received 0.93168 shares of the Company's common stock, as
adjusted for the Company's three-for-two common stock split, for each depositary
share redeemed. During 2001, 3,258,642 depositary shares of the Class D
Preferred Stock were voluntarily converted to common stock by the holders. On
January 3, 2002, the remaining 923,900 depositary shares of the Class D
Preferred Stock were redeemed for common stock by the Company and a final
dividend payment of 43.4680 cents per Class D Depositary share was paid on
January 15, 2002.
During 2002, the Company issued approximately 0.4 million shares of common stock
in connection with the exercise of common stock options by employees and through
the Company's dividend reinvestment plan.
During October 2002, the Company acquired an interest in a shopping center
property located in Daly City, CA valued at $80.0 million through the issuance
of approximately 2.4 million downREIT units (the "Units") which are convertible
at a ratio of 1:1 into the Company's common stock. The downREIT unit holder has
the right to convert the Units at anytime after one year. In addition, the
Company has the right to mandatorily require a conversion after ten years. If at
the time of conversion the common stock price for the 20 previous trading days
is less than $33.57 per share the unit holder would be entitled to additional
shares, however, the maximum number of additional shares is limited to 251,966
based upon a floor common stock price of $30.36. The Company has the option to
settle the conversion in cash. Dividends on the Units are paid quarterly at the
rate of the Company's common stock dividend multiplied by 1.1057.
Hedging Activities -
During 2002, the Company entered into two interest rate swap agreements on its
(i) $100.0 million remarketed reset notes, which fixed the interest rate at
3.03% from November 17, 2002 through August 17, 2003, and (ii) $85.0 million
floating-rate notes, which fixed the interest rate at 2.3725% from November 2,
2002 through November 2, 2003.
Additionally, during 2002, the Company entered into various foreign currency
forward contracts and a cross currency swap aggregating approximately CAD $210.7
million and MXN $383.7 million in connection with the Company's Canadian and
Mexican real estate investments and investment in stock of RioCan. (See Note 15
of the Notes to Consolidated Financial Statements included in this annual report
on Form 10-K.)
Exchange Listings
The Company's common stock, Class A Depositary Shares, Class B Depositary Shares
and Class C Depositary Shares are traded on the NYSE under the trading symbols
"KIM", "KIMprA", "KIMprB", and "KIMprC", respectively. Trading of the Class D
Depositary Shares ceased on January 3, 2002 in connection with the Company's
mandatory redemption of such shares.
Item 2. Properties
Real Estate Portfolio As of January 1, 2003, the Company's real estate portfolio
was comprised of interests in approximately 86.5 million square feet of GLA in
530 neighborhood and community shopping center properties, two regional malls,
41 retail store leases, four parcels of undeveloped land and 22 projects under
development, located in 41 states, Canada and Mexico. The Company's portfolio
includes a 43.3% interest in 68 shopping center properties comprising
approximately 14.0 million square feet of GLA relating to KIR, a 50% interest in
28 shopping center properties comprising approximately 6.7 million square feet
of GLA relating to the RioCan Venture and a 20% interest in 15 shopping center
properties comprising approximately 1.5 million square feet of GLA relating to
KROP. 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, 2003, approximately 87.8% of the
Company's neighborhood and community shopping center space (excluding the KIR
and KROP portfolios) was leased, and the average annualized base rent per leased
square foot of the neighborhood and community shopping center portfolio
(excluding the KIR and KROP portfolios) was $8.31. As of January 1, 2003, the
KIR and KROP portfolios were 97.7% and 97.4% leased, respectively, with an
average annualized base rent per leased square foot of $11.64 and $12.78,
respectively.
17
The Company's neighborhood and community shopping center properties, generally
owned and operated through subsidiaries or joint ventures, had an average size
of approximately 149,000 square feet as of January 1, 2003. The Company
generally 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 2002, the Company capitalized approximately $7.0 million in
connection with these property improvements and expensed to operations
approximately $15.4 million.
The Company's neighborhood and community shopping centers 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. Some of the major national and regional
companies that are tenants in the Company's shopping center properties include
Kmart Corporation, The Home Depot, Kohl's, TJX Companies, Wal-Mart, Best Buy,
Toys R' Us, Royal Ahold, Office Max and Petsmart.
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 many 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 1,879 of the Company's 6,375 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 1% of the Company's revenues from rental property for the year
ended December 31, 2002.
Minimum base rental revenues and operating expense reimbursements accounted for
approximately 99% of the Company's total revenues from rental property for the
year ended December 31, 2002. The Company's management believes that the base
rent per leased 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.
For the period January 1, 2002 to December 31, 2002, the Company increased the
average base rent per leased square foot in its portfolio of neighborhood and
community shopping centers (excluding the KIR and KROP portfolios) from $8.08 to
$8.31, an increase of $0.23. This increase primarily consists of a $0.26
increase relating to acquisitions and dispositions and a $0.13 increase relating
to new leases signed partially offset by a decrease of $0.16 relating primarily
to the impact of the Kmart bankruptcy filing and subsequent lease rejections.
The Company seeks to reduce its operating and leasing risks through geographic
and tenant diversity. No single neighborhood and community shopping center
accounted for more than 0.8% of the Company's total shopping center GLA or more
than 1.2% of total annualized base rental revenues as of December 31, 2002. The
Company's five largest tenants, include Kmart Corporation (see Recent
Developments - Kmart Bankruptcy), The Home Depot, Kohl's, TJX Companies and
Wal-Mart, which represent approximately 4.5%, 2.8%, 2.7%, 2.5% and 1.9%,
respectively, of the Company's annualized base rental revenues, including the
proportionate share of base rental revenues from properties in which the Company
has less than a 100% economic interest. 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.
18
Retail Store Leases In addition to neighborhood and community shopping centers,
as of January 1, 2003, the Company had interests in retail store leases totaling
approximately 3.8 million square feet of anchor stores in 41 neighborhood and
community shopping centers located in 22 states. As of January 1, 2003,
approximately 88.0% 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 of $3.99 per square foot. The average annualized
base rental payments under the Company's retail store leases to the land owners
of such subleased stores is approximately $2.64 per square foot. The average
remaining primary term of the retail store leases (and, similarly, the remaining
primary terms of the sublease agreements with the tenants currently leasing such
space) is approximately 5 years, excluding options to renew the leases for terms
which generally range from 5 to 25 years. The Company's investment in retail
store leases are included in the caption Other Real Estate Investments on the
Company's Consolidated Balance Sheets.
Ground-Leased Properties The Company has interests in 60 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.
Ground-Up Development Properties As of January 1, 2003, the Company, through its
wholly-owned taxable REIT subsidiary, KDI, has currently in progress 19
ground-up development projects located in eight states which are held for sale
upon completion. These projects had substantial pre-leasing prior to the
commencement of construction. As of January 1, 2003, the average annual base
rent per leased square foot for the KDI portfolio was $12.68 and the average
annual base rent per leased square foot for new leases executed in 2002 was
$13.76.
Undeveloped Land The Company owns certain unimproved land tracts and 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 20 to 28 sets forth more specific information with respect to
each of the Company's property interests.
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. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
19
20
21
22
23
24
25
26
27
(1) PERCENT LEASED INFORMATION AS OF DECEMBER 31, 2002 OR DATE OF ACQUISITION
IF ACQUIRED SUBSEQUENT TO DECEMBER 31, 2002.
(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. THE SQUARE FOOTAGE SHOWN REPRESENTS
THE COMPLETED LEASEABLE AREA.
(5) DENOTES UNDEVELOPED LAND.
(6) SOLD OR TERMINATED SUBSEQUENT TO DECEMBER 31, 2002.
(7) DENOTES PROPERTY INTEREST IN KIMCO INCOME REIT ("KIR").
(8) DENOTES PROPERTY INTEREST IN KIMCO RETAIL OPPORTUNITY PORTFOLIO ("KROP").
(9) DENOTES PROPERTY INTEREST IN KIMSOUTH REALTY, INC.
(10) THE COMPANY HOLDS INTERESTS IN VARIOUS RETAIL STORE LEASES RELATED TO THE
ANCHOR STORE PREMISES IN NEIGHBORHOOD AND COMMUNITY SHOPPING CENTERS.
28
Executive Officers of the Registrant
The following table sets forth information with respect to the executive
officers of the Company as of January 31, 2003.
Name Age Position Since
---- --- -------- -----
Milton Cooper 74 Chairman of the Board of 1991
Directors and Chief
Executive Officer
Michael J. Flynn 67 Vice Chairman of the 1996
Board of Directors and
President and Chief 1997
Operating Officer
David B. Henry 54 Vice Chairman of the 2001
Board of Directors and
Chief Investment Officer
Thomas A. Caputo 56 Executive Vice President 2000
Glenn G. Cohen 39 Vice President - 2000
Treasurer 1997
Raymond Edwards 40 Vice President - 2001
Retail Property Solutions
Jerald Friedman 58 President, KDI and 2000
Executive Vice President 1998
Bruce M. Kauderer 56 Vice President - Legal 1995
General Counsel and 1997
Secretary
Michael V. Pappagallo 44 Vice President - 1997
Chief Financial Officer
David M. Samber 53 Chief Executive Officer -
Kimco Select Investments 1997
and Vice President 2001
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.
David B. Henry has been Chief Investment Officer since April 2001 and Vice
Chairman of the Board of Directors since May 2001. Mr. Henry served as the Chief
Investment Officer and Senior Vice President of General Electric's GE Capital
Real Estate business and Chairman of GE Capital Investment Advisors for more
than five years prior to joining the Company.
Thomas A. Caputo has been Executive Vice President of the Company since December
2000. Mr. Caputo was a principal with H & R Retail from January 2000 to December
2000. Mr. Caputo was a principal with the RREEF Funds, a pension advisor, for
more than five years prior to January 2000.
Glenn G. Cohen has been a Vice President of the Company since May 2000 and
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.
Raymond Edwards has been Vice President - Retail Property Solutions since July
2001. Prior to joining the Company in July 2001, Mr. Edwards was Senior Vice
President, Managing Director of SBC Group from 1998 to July 2001. SBC Group is a
privately held company that acquires and invests in assets of retail companies.
Previously, Mr. Edwards worked for 13 years at Keen Realty Consultants Inc.
handling the marketing and disposition of real estate for retail operators
including Caldor, Bonwit Teller, Alexander's and others.
29
Jerald Friedman has been President of the Company's KDI subsidiary since April
2000 and 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 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.
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.
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.
David M. Samber has been Chief Executive Officer of Kimco Select Investments
since January 1997 and a Vice President of the Company since January 2001. Mr.
Samber was President and Chief Operating Officer of the Company from November
1991 through 1996 and held various other positions in the Company for more than
five years prior to 1991.
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.
30
PART II
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, 2002.
The Company's common stock was sold for cash at the following offering prices
per share.
Offering Date Offering Price
------------- ---------------
August 2000 $28.33
November 2001 $32.85
December 2001 $33.57
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
------ ---- ----
2001:
First Quarter $30.08 $27.17
Second Quarter $31.57 $27.33
Third Quarter $33.30 $29.50
Fourth Quarter $34.07 $31.33
2002:
First Quarter $33.50 $29.00
Second Quarter $33.87 $31.00
Third Quarter $33.20 $25.96
Fourth Quarter $32.08 $27.77
Holders The number of holders of record of the Company's common stock, par value
$0.01 per share, was 1,273 as of January 31, 2003.
Dividends Since the IPO, the Company has paid regular quarterly dividends to its
stockholders.
Quarterly dividends at the rate of $0.48 per share were declared and paid on
December 4, 2000 and January 16, 2001, March 15, 2001 and April 16, 2001, June
15, 2001 and July 16, 2001, and September 17, 2001 and October 15, 2001,
respectively. On October 24, 2001, the Company declared its dividend payable
during the first quarter of 2002 at an increased rate of $0.52 per share payable
on January 15, 2002 to shareholders of record as of January 2, 2002. Quarterly
dividends at the rate of $0.52 per share were declared and paid on March 15,
2002 and April 15, 2002, June 17, 2002 and July 15, 2002, September 16, 2002 and
October 15, 2002, respectively. On October 28, 2002, the Company declared its
dividend payable during the first quarter of 2003 at an increased rate of $0.54
per share payable on January 15, 2003 to shareholders of record as of January 2,
2003. This $0.54 per share dividend, if annualized, would equal $2.16 per share
or an annual yield of approximately 6.9% based on the closing price of $31.40 of
the Company's common stock on the NYSE as of January 31, 2003.
The Company has determined that the $2.08 dividend per common share paid during
2002 represented 96% ordinary income and 4% capital gain to its stockholders and
the $1.92 dividend per common share paid during 2001 represented 95% ordinary
income and 5% return of capital 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.
31
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 facilities 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 10 and 16 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 and Class C Preferred Stock, the financial
covenants contained in its public bond Indenture, as amended, or its revolving
credit agreements will have an 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 and direct stock purchase plan
(the "Plan") pursuant to which common and preferred stockholders and other
interested investors may elect to automatically reinvest their dividends to
purchase shares of the Company's common stock or, through optional cash
payments, purchase shares of the Company's common stock. The Company may, from
time to time, either (i) purchase 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 the Plan.
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.
32
(1) Does not include (i) revenues from rental property relating to
unconsolidated joint ventures, (ii) revenues relating to the investment
in retail stores leases and (iii) revenues from properties included in
discontinued operations.
(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. FFO is
defined as net income applicable to common shares before depreciation
and amortization, extraordinary items, gains or losses on sales of
operating real estate, plus the pro-rata amount of depreciation and
amortization of unconsolidated joint ventures determined on a
consistent basis. Given the nature of the Company's business as a real
estate owner and operator, the Company believes that FFO is helpful to
investors as a measure of its operational performance because it
excludes various items included in net income that do not relate to or
are not indicative of our operating performance such as various
non-recurring items, gains and losses on sales of real estate and real
estate related depreciation and amortization, which can make periodic
and peer analyses of operating performance more difficult to compare.
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
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) All years have been adjusted to reflect the impact of operating
properties sold during 2002 and properties classified as held for sale
as of December 31, 2002 which are reflected in discontinued operations
in the Consolidated Statements of Income.
33
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.
Critical Accounting Policies
The Consolidated Financial Statements of the Company include the accounts of the
Company, its wholly-owned subsidiaries and all partnerships in which the Company
has a controlling interest. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying Consolidated Financial
Statements and related notes. In preparing these financial statements,
management has made its best estimates and assumptions that affect the reported
amounts of assets and liabilities. These estimates are based on, but not limited
to, historical results, industry standards and current economic conditions,
giving due consideration to materiality. The most significant assumptions and
estimates relate to revenue recognition and the recoverability of trade accounts
receivable, depreciable lives and valuation of real estate. Application of these
assumptions requires the exercise of judgment as to future uncertainties and, as
a result, actual results could differ from these estimates.
Revenue Recognition and Accounts Receivable
Base rental revenues from rental property are recognized on a straight-line
basis over the terms of the related leases. Certain of these leases also provide
for percentage rents based upon the level of sales achieved by the lessee. These
percentage rents are recorded once the required sales level is achieved. In
addition, leases typically provide for reimbursement to the Company of common
area maintenance, real estate taxes and other operating expenses. Operating
expense reimbursements are recognized as earned. Rental income may also include
payments received in connection with lease termination agreements.
The Company makes estimates of the uncollectability of its accounts receivable
related to base rents, expense reimbursements and other revenues. The Company
analyzes accounts receivable and historical bad debt levels, customer credit
worthiness and current economic trends when evaluating the adequacy of the
allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed
and estimates are made in connection with the expected recovery of pre-petition
and post-petition claims. The Company's reported net income is directly affected
by management's estimate of the collectability of accounts receivable.
The Company believes that its revenue recognition policy is in compliance with
generally accepted accounting principles and in accordance with the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101, Revenue
Recognition.
Real Estate
Land, buildings and fixtures and leasehold improvements are recorded at cost,
less accumulated depreciation and amortization. Expenditures for maintenance and
repairs are charged to operations as incurred. Significant renovations and
replacements, which improve and extend the life of the asset, are capitalized.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the assets, as follows:
Buildings 15 to 39 years
Fixtures and leasehold improvements Terms of leases or useful lives,
whichever is shorter
The Company is required to make subjective assessments as to the useful lives of
its properties for purposes of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have a
direct impact on the Company's net income.
Real estate under development on the Company's Consolidated Balance Sheets
represent ground-up development projects which are held for sale upon
completion. These assets are carried at cost and no depreciation is recorded.
The cost of land and buildings under development include specifically
identifiable costs. The capitalized costs include pre-construction costs
essential to the development of the property, development costs, construction
costs, interest costs, real estate taxes, salaries and related costs and other
costs incurred during the period of development. The Company ceases cost
capitalization when the property is held available for occupancy upon
substantial completion of tenant improvements, but no later than one year from
the completion of major construction activity. If in management's opinion, the
estimated net sales price of these assets is less than the net carrying value,
an adjustment to the carrying value would be recorded to reflect the estimated
fair value of the property. A gain on the sale of these assets is generally
recognized using the full accrual method in accordance with the provisions of
Statement of Financial Accounting Standard No. 66, Accounting for Real Estate
Sales.
34
Long Lived Assets
On a periodic basis, management assesses whether there are any indicators that
the value of the real estate properties may be impaired. A property value is
considered impaired only if management's estimate of current and projected
operating cash flows (undiscounted and without interest charges) of the property
over its remaining useful life is less than the net carrying value of the
property. Such cash flow projections consider factors such as expected future
operating income, trend and prospects, as well as the effects of demand,
competition and other factors. To the extent impairment has occurred, the
carrying value of the property would be adjusted to an amount to reflect the
estimated fair value of the property.
When a real estate asset is identified by management as held for sale the
Company ceases depreciation of the asset and estimates the sales price of such
asset net of selling costs. If, in management's opinion, the net sales price of
the asset is less than the net book value of such asset, an adjustment to the
carrying value would be recorded to reflect the estimated fair value of the
property.
The Company is required to make subjective assessments as to whether there are
impairments in the value of its real estate properties, investments in joint
ventures and other investments. The Company's reported net income is directly
affected by management's estimate of impairments and/or valuation allowances
recognized.
Results of Operations
Comparison 2002 to 2001
Revenues from rental property increased $0.4 million or 0.1% to $450.8 million
for the year ended December 31, 2002, as compared with $450.4 million for the
year ended December 31, 2001. This net increase resulted primarily from the
combined effect of (i) the acquisition of 13 operating properties during 2002,
providing revenues of $5.1 million for the year ended December 31, 2002, (ii)
the full year impact related to the three operating properties acquired in 2001
providing incremental revenues of $2.3 million, and (iii) the completion of
certain development and redevelopment projects, tenant buyouts and new leasing
within the portfolio providing incremental revenues of approximately $20.5
million as compared to the corresponding year ended December 31, 2001, offset by
(iv) an overall decrease in shopping center portfolio occupancy to 87.8% at
December 31, 2002 as compared to 90.4% at December 31, 2001 due primarily to the
bankruptcy filing of Kmart Corporation ("Kmart") and Ames Department Stores,
Inc. ("Ames") and subsequent rejection of leases resulting in a decrease of
revenues of approximately $25.1 million as compared to the preceding year, and
(v) sales of certain shopping center properties throughout 2001 and 2002,
resulting in a decrease of revenues of approximately $2.4 million as compared to
the preceding year.
Rental property expenses, including depreciation and amortization, increased
$11.0 million or 5.9% to $196.8 million for the year ended December 31, 2002 as
compared to $185.8 million for the preceding year. The rental property expense
component of real estate taxes increased approximately $7.3 million or 13.1% for
the year ended December 31, 2002 as compared with the year ended December 31,
2001. This increase relates primarily to the payment of real estate taxes by the
Company on certain Kmart anchored locations where Kmart previously paid the real
estate taxes directly to the taxing authorities. The rental property expense
component of operating and maintenance increased approximately $1.5 million or
3.2% for the year ended December 31, 2002 as compared with the year ended
December 31, 2001. This increase is primarily due to property acquisitions
during 2002 and 2001, renovations within the portfolio and higher professional
fees relating to tenant bankruptcies.
Equity in income of real estate joint ventures, net increased $15.4 million to
$35.6 million for the year ended December 31, 2002, as compared to $20.2 million
for the year ended December 31, 2001. This increase is primarily attributable to
the equity in income from the Kimco Income REIT joint venture investment, the
RioCan joint venture investment, and the KROP joint venture investment as
described below.
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. The Company has a 43.3% non-controlling
limited partnership interest in KIR, which the Company manages, and accounts for
its investment in KIR under the equity method of accounting. Equity in income of
KIR increased $3.1 million to $16.3 million for the year ended December 31,
2002, as compared to $13.2 million for the preceding year. This increase is
primarily due to the Company's increased capital investment in KIR totaling
$23.8 million during 2002 and $30.8 million during 2001. The additional capital
investments received by KIR from the Company and its other institutional
partners were used to purchase additional shopping center properties throughout
calendar year 2002 and 2001.
35
During October 2001, the Company formed a joint venture (the "RioCan Venture")
with RioCan Real Estate Investment Trust ("RioCan", Canada's largest publicly
traded REIT measured by gross leasable area ("GLA")), in which the Company has a
50% non-controlling interest, to acquire retail properties and development
projects in Canada. As of December 31, 2002, the RioCan Venture consisted of 28
shopping center properties and four development projects with approximately 6.7
million square feet of GLA. The Company's equity in income from the RioCan
Venture increased approximately $8.7 million to $9.1 million for the year ended
December 31, 2002, as compared to $0.4 million for the preceding year.
During October 2001, the Company formed the Kimco Retail Opportunity Fund
("KROP"), a joint venture with GE Capital Real Estate ("GECRE") which the
Company manages and has a 20% interest. The purpose of this venture is to
acquire established, high-growth potential retail properties in the United
States. As of December 31, 2002, KROP consisted of 15 shopping center properties
with approximately 1.5 million square feet of GLA. During the year ended
December 31, 2002, the Company's equity in income from KROP was approximately
$0.9 million.
Minority interests in income of partnerships, net increased $0.7 million to $2.4
million as compared to $1.7 million for the preceding year. This increase is
primarily due to the acquisition of a shopping center property acquired through
a newly formed partnership by issuing approximately 2.4 million downREIT units
valued at $80 million. The downREIT units are convertible at a ratio of 1:1 into
the Company's common stock and are entitled to a distribution equal to the
dividend rate on the Company's common stock multiplied by 1.1057.
Income from other real estate investments decreased $22.1 million to $16.0
million as compared to $38.1 million for the preceding year. This decrease is
primarily due to the decrease in income from the Montgomery Ward asset
designation rights transactions described below.
During March 2001, the Company, through a taxable REIT subsidiary, formed a real
estate joint venture (the "Ward Venture") in which the Company has a 50%
interest, for purposes of acquiring asset designation rights for substantially
all of the real estate property interests of the bankrupt estate of Montgomery
Ward LLC and its affiliates. These asset designation rights have provided the
Ward Venture the ability to direct the ultimate disposition of the 315 fee and
leasehold interests held by the bankrupt estate, of which 303 transactions have
been completed to date. During the year ended December 31, 2002 the Ward Venture
completed transactions of 32 properties. The pre-tax profits from the Ward
Venture decreased approximately $23.3 million to $11.3 million for the year
ended December 31, 2002 as compared to $34.6 million for the preceding year.
Mortgage financing income increased $17.1 million to $19.4 million for the year
ended December 31, 2002 as compared to $2.3 million for the year ended December
31, 2001. This increase is primarily due to increased interest income earned
related to certain real estate lending activities during the year ended December
31, 2002.
Effective January 1, 2001, the Company has elected taxable REIT subsidiary
status for its wholly-owned development subsidiary ("KDI"). KDI is primarily
engaged in the ground-up development of neighborhood and community shopping
centers and the subsequent sale thereof upon completion. During the year ended
December 31, 2002, KDI sold four projects and eight out-parcels, in separate
transactions, for approximately $128.7 million, including the assignment of
approximately $17.7 million of mortgage debt encumbering one of the properties.
These sales resulted in pre-tax gains of approximately $15.9 million.
During the year ended December 31, 2001, KDI sold two of its recently completed
projects and five out-parcels, in separate transactions, for approximately $61.3
million, which resulted in pre-tax profits of $13.4 million.
Management and other fee income increased approximately $6.4 million to $14.2
million for the year ended December 31, 2002 as compared to $7.8 million for the
year ended December 31, 2001. This increase is primarily due to (i) a $1.1
million increase in management fees from KIR resulting from the growth of the
KIR portfolio, (ii) $2.3 million of management and acquisition fees relating to
the KROP joint venture activities during the year ended December 31, 2002 and
(iii) increased property management activity providing incremental fee income of
approximately $3.0 million.
36
Other income/(loss), net increased approximately $4.7 million to $2.5 million
for the year ended December 31, 2002 as compared to the preceding calendar year.
This increase is primarily due to pre-tax profits earned from the Company's
participation in ventures established to provide inventory liquidation services
to regional retailers in bankruptcy.
Interest expense decreased $1.7 million or 1.9% to $86.9 million for the year
ended December 31, 2002, as compared with $88.6 million for the year ended
December 31, 2001. This decrease is primarily due to reduced interest costs on
the Company's floating-rate revolving credit facilities and remarketed reset
notes which was partially offset by an increase in borrowings during the year
ended December 31, 2002, as compared to the preceding year.
General and administrative expenses increased approximately $3.2 million for the
year ended December 31, 2002, as compared to the preceding calendar year. This
increase is primarily due to higher costs related to the growth of the Company
including (i) increased senior management and staff levels, (ii) increased
system related costs and (iii) other personnel related costs.
The Company had previously encumbered seven Kmart sites with individual
non-recourse mortgages aggregating approximately $70.8 million as part of its
strategy to reduce its exposure to Kmart Corporation. As a result of the Kmart
bankruptcy filing in January of 2002 and the subsequent rejection of leases
including leases at these encumbered sites, the Company, during July 2002, had
suspended debt services payments on these loans and was actively negotiating
with the respective lenders. During December 2002, the Company reached agreement
with certain lenders in connection with four of these locations. The Company
paid approximately $24.2 million in full satisfaction of these loans which
aggregated approximately $46.5 million. The Company recognized a gain on early
extinguishment of debt of approximately $22.3 million.
During December 2002, the Company identified two operating properties, comprised
of approximately 0.2 million square feet of GLA, as "Held for Sale" in
accordance with FASB No. 144. The book value of these properties, aggregating
approximately $28.4 million, net of accumulated depreciation of approximately
$2.9 million, exceeded their estimated fair value. The Company's determination
of the fair value of these properties, aggregating approximately $7.9 million,
is based upon executed contracts of sale with third parties less estimated
selling costs. As a result, the Company recorded an adjustment of property
carrying values of $20.5 million. This adjustment is included, along with the
related property operations for the current and comparative years, in the
caption Income/(loss) from discontinued operations on the Company's Consolidated
Statements of Income.
As part of the Company's periodic assessment of its real estate properties with
regard to both the extent to which such assets are consistent with the Company's
long-term real estate investment objectives and the performance and prospects of
each asset, the Company determined in the fourth quarter of 2002, that its
investment in four operating properties, comprised of an aggregate 0.4 million
square feet of GLA with an aggregate net book value of approximately $23.8
million, may not be fully recoverable. Based upon management's assessment of
current market conditions and the lack of demand for the properties, the Company
has reduced its potential holding period of these investments. As a result of
the reduction in the anticipated holding period, together with a reassessment of
the projected future operating income of the properties and the effects of
current market conditions, the Company has determined that its investment in
these assets was not fully recoverable and has recorded an adjustment of
property carrying value aggregating approximately $12.5 million.
During 2002, the Company, (i) disposed of, in separate transactions, 12
operating properties for an aggregate sales price of approximately $74.5
million, including the assignment/repayment of approximately $22.6 million of
mortgage debt encumbering three of the properties and, (ii) terminated five
leasehold positions in locations where a tenant in bankruptcy had rejected its
lease. These dispositions resulted in net gains of approximately $12.8 million
for the year ended December 31, 2002. In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("FASB No. 144"),
the operations and net gain on disposition of these properties have been
included in the caption Discontinued operations on the Company's Consolidated
Statements of Income.
During 2001, the Company, in separate transactions, disposed of three operating
properties, including the sale of a property to KIR, and a portion of another
operating property comprising in the aggregate approximately 0.6 million square
feet of GLA. Cash proceeds from these dispositions aggregated approximately
$46.7 million, which resulted in a net gain of approximately $3.0 million. Cash
proceeds from the sale of the operating property in Elyria, OH totaling $5.8
million, together with an additional $7.1 million cash investment, were used to
acquire an exchange shopping center property located in Lakeland, FL during
August 2001.
37
Net income for the year ended December 31, 2002 was $245.7 million as compared
to $236.5 million for the year ended December 31, 2001, representing an increase
of $9.2 million. This increase reflects the combined effect of increased
contributions from the investments in KIR, KROP, the RioCan Venture and other
financing investments, reduced by lower income resulting from tenant
bankruptcies and subsequent rejection of leases and a decrease in profits from
the Ward Venture.
Comparison 2001 to 2000
Revenues from rental property increased $9.1 million or 2.1% to $450.4 million
for the year ended December 31, 2001, as compared with $441.3 million for the
year ended December 31, 2000. This net increase resulted primarily from the
combined effect of (i) the acquisition of three operating properties during
2001, providing revenues of $1.3 million for the year ended December 31, 2001,
(ii) the full year impact related to the 12 operating properties acquired in
2000 providing incremental revenues of $3.5 million, and (iii) the completion of
certain development and redevelopment projects and new leasing within the
portfolio providing incremental revenues of approximately $11.9 million as
compared to the corresponding year ended December 31, 2000, offset by (iv) the
commencement of new redevelopment projects and tenant buyouts causing a
temporary increase in vacancy, sales of certain shopping center properties
throughout 2001 and 2000 and an overall decrease in shopping center portfolio
occupancy to 90.1% at December 31, 2001 as compared to 92.9% at December 31,
2000 due primarily to bankruptcies of tenants and subsequent rejections of
leases resulting in a decrease of revenues of approximately $7.6 million as
compared to the preceding year.
Rental property expenses, including depreciation and amortization, increased
$9.2 million or 5.2% to $185.8 million for the year ended December 31, 2001 as
compared to $176.6 million for the preceding year. The rental property expense
components of real estate taxes and operating and maintenance increased
approximately $1.8 million and $4.4 million, respectively, for the year ended
December 31, 2001 as compared with the year ended December 31, 2000.
Depreciation and amortization increased $2.7 million for the year ended December
31, 2001 as compared to the preceding year. These increases are primarily due to
property acquisitions during 2001 and 2000, renovations within the existing
portfolio, the completion of certain redevelopment and development projects, and
increased snow removal costs during 2001.
Equity in income of real estate joint ventures, net increased $5.6 million to
$20.2 million for the year ended December 31, 2001 as compared to $14.6 million
for the year ended December 31, 2000. This increase is primarily attributable to
the KIR transaction described below.
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 the formation, the Company
contributed 19 property interests to KIR. On April 28, 1999, KIR sold a
significant interest in the partnership to institutional investors. 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. Equity
in income of KIR increased $3.7 million to $13.2 million for the year ended
December 31, 2001, as compared to $9.5 million for the preceding year. This
increase is primarily due to the Company's increased capital investment in KIR
totaling $30.8 million during 2001 and $29.6 million during 2000. The additional
capital investments received by KIR from the Company and its other institutional
partners were used to purchase additional shopping center properties throughout
calendar years 2001 and 2000.
Income from other real estate investments, increased approximately $30.4 million
to $38.1 million for the year ended December 31, 2001 as compared with $7.7
million for the year ended December 31, 2000. This increase is primarily due to
the Montgomery Ward asset designation rights transaction described below.
During March 2001, the Company, through a taxable REIT subsidiary, formed a real
estate joint venture (the "Ward Venture") in which the Company has a 50%
interest, for purposes of acquiring asset designation rights for substantially
all of the real estate property interests of the bankrupt estate of Montgomery
Ward LLC and its affiliates. These asset designation rights have provided the
Ward Venture the ability to direct the ultimate disposition of the 315 fee and
leasehold interests held by the bankrupt estate. The Ward Venture has completed
transactions on 271 properties, and the Company has recognized pre-tax profits
of approximately $34.6 million for the year ended December 31, 2001.
38
Mortgage financing income increased approximately $0.8 million to $2.3 million
for the year ended December 31, 2001 as compared to $1.5 million for the year
ended December 31, 2000. This increase is primarily due to increased interest
income earned related to certain real estate lending activities during the year
ended December 31, 2001.
Effective January 1, 2001, the Company has elected taxable REIT subsidiary
status for its wholly owned development subsidiary, KDI. KDI is primarily
engaged in the ground-up development of neighborhood and community shopping
centers and the subsequent sale thereof upon completion. During the year ended
December 31, 2001, KDI sold two of its recently completed projects and five
out-parcels, in separate transactions, for approximately $61.3 million, which
resulted in pre-tax profits of $13.4 million.
Interest, dividends and other investment income increased approximately $0.9
million to $17.3 million for the year ended December 31, 2001 as compared to
$16.4 million for the year ended December 31, 2000. Interest, dividends and
other investment income is primarily comprised of interest income, dividend
income and realized gains related to the Company's investments and sales of
certain marketable equity and debt securities.
Interest expense decreased $3.3 million or 3.6% to $88.6 million for the year
ended December 31, 2001, as compared with $91.9 million for the year ended
December 31, 2000. This decrease is primarily due to reduced interest costs on
the Company's floating-rate revolving credit facility and remarketed reset notes
during the year ended December 31, 2001, as compared to the preceding year.
General and administrative expenses increased approximately $3.2 million for the
year ended December 31, 2001, as compared to the preceding calendar year. This
increase is primarily due to higher costs related to the growth of the Company
including (i) increased senior management and staff levels, (ii) increased
system related costs and (iii) other personnel related costs. In addition, the
Company issued a stock grant award to a newly appointed executive officer of the
Company valued at approximately $1.1 million during 2001.
During 2001, the Company, in separate transactions, disposed of three operating
properties, including the sale of a property to KIR, and a portion of another
operating property comprising in the aggregate approximately 0.6 million square
feet of GLA. Cash proceeds from these dispositions aggregated approximately
$46.7 million, which resulted in a net gain of approximately $3.0 million. Cash
proceeds from the sale of the operating property in Elyria, OH totaling $5.8
million, together with an additional $7.1 million cash investment, was used to
acquire an exchange shopping center property located in Lakeland, FL during
August 2001.
During 2000, the Company, in separate transactions, disposed of ten shopping
center properties. Sale prices from two of these dispositions aggregated
approximately $4.5 million, which approximated their aggregate net book value.
Sale prices from eight of these dispositions aggregated approximately $29.7
million, which resulted in net gains of approximately $4.0 million.
Net income for the year ended December 31, 2001 was $236.5 million as compared
to $205.0 million for the year ended December 31, 2000, representing an increase
of $31.5 million. This improved performance reflects the combined effect of
internal growth and property acquisitions in the core portfolio, profits from
KDI, income from the investment in KIR and profits from the Ward Venture
investment, which strengthened profitability.
Tenant Concentrations
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, 2002, the Company's five largest tenants, were Kmart Corporation, The Home
Depot, Kohl's, TJX Companies, and Wal-Mart, which represented approximately
4.5%, 2.8%, 2.7%, 2.5% and 1.9%, respectively, of the Company's annualized base
rental revenues, including the proportionate share of base rental revenues from
properties in which the Company has less than a 100% economic interest.
On January 22, 2002, Kmart filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. As of the filing date, Kmart occupied 69 locations (excluding
the KIR portfolio which includes six Kmart locations), representing 12.6% of the
Company's annualized base rental revenues and 13.3% of the Company's total
shopping center GLA. During 2002, Kmart rejected its leases at 31 locations,
representing approximately $30.8 million of annualized base rental revenues and
approximately 3.2 million square feet of GLA. As of December 31, 2002, Kmart
represented 4.5% of annualized base rents and 6.9% of leased GLA.
39
During December 2002, the Company disposed of, in separate transactions, seven
former Kmart sites, comprised of approximately 0.7 million square feet of GLA,
for an aggregate sales price of approximately $40.8 million.
The Company has currently leased or is under agreement to lease 11 of the
rejected locations, has terminated four ground lease locations and has received
offers to purchase three of these sites. The Company is reviewing the offers
received and is actively marketing the remaining six locations to prospective
tenants, however, no assurances can be provided that these locations will be
leased in the near term or at comparable rents previously paid by Kmart.
The Company previously encumbered seven of these rejected locations with
individual non-recourse mortgage loans totaling approximately $70.8 million.
Annualized interest expense on these loans was approximately $5.6 million.
During July 2002, the Company suspended debt service payments on these loans and
was actively negotiating with the respective lenders. During December 2002, the
Company reached agreements with certain lenders in connection with four of these
locations. The Company paid approximately $24.2 million in full satisfaction of
these loans aggregating approximately $46.5 million and the Company recognized a
gain on early extinguishment of debt of approximately $22.3 million. Also,
during December 2002, the Company re-tenanted one of these sites and has brought
the mortgage loan encumbering this property current.
During February 2003, the Company reached agreement with the lender in
connection with the remaining two encumbered sites. The Company paid
approximately $8.3 million in full satisfaction of these loans which aggregated
approximately $14.7 million and the Company will recognize a gain on early
extinguishment of debt of approximately $6.2 million during the first quarter of
2003.
On January 14, 2003, Kmart announced it would be closing an additional 326
locations of which nine of these locations (excluding the KIR portfolio which
includes three additional locations and Kimsouth which includes two additional
locations) are leased from the Company. The annualized base rental revenues from
these nine locations are approximately $4.3 million. The Company had previously
encumbered one of these properties with an individual non-recourse mortgage
loan. The annualized interest expense for the one encumbered property is
approximately $0.8 million. As of the date of this filing of this annual report
on Form 10-K, the Company has not been notified directly by Kmart as to the
timing of the store closings or whether the leases will be assigned or rejected.
Until such time as the leases are rejected, in accordance with the bankruptcy
proceedings, Kmart remains obligated for payments of rent and operating expenses
at these locations and all other remaining locations.
Effective May 1, 2003, the Company has agreed to a five-year rent reduction at
six Kmart locations, representing approximately 0.6 million square feet of GLA.
The average rent was reduced from $8.01 per square foot to $5.57 per square
foot, or approximately $1.5 million of annualized base rent.
The Company generally will have the right to file claims in connection with
these rejected leases for lost rent equal to three years of rental obligations
as well as other amounts related to obligations under the leases. Actual amounts
to be received in satisfaction of these claims will be subject to Kmart's final
plan of reorganization and the availability of funds to pay creditors such as
the Company.
Liquidity and Capital Resources
It is management's intention that the Company continually have access to the
capital resources necessary to expand and develop its business. As such, the
Company intends to operate with and maintain a conservative capital structure
with a level of debt to total market capitalization of 50% or less. As of
December 31, 2002 the Company's level of debt to total market capitalization was
31%. In addition, the Company intends to maintain strong debt service coverage
and fixed charge coverage ratios as part of its commitment to maintaining its
investment-grade debt ratings. The Company may, from time to time, seek to
obtain funds through additional equity offerings, unsecured debt financings
and/or mortgage financings and other debt and equity alternatives in a manner
consistent with its intention to operate with a conservative debt structure.
Since the completion of the Company's IPO in 1991, the Company has utilized the
public debt and equity markets as its principal source of capital for its
expansion needs. Since the IPO, the Company has completed additional offerings
of its public unsecured debt and equity, raising in the aggregate over $2.7
billion for the purposes of, among other things, repaying indebtedness,
acquiring interests in neighborhood and community shopping centers, funding
ground-up development projects, expanding and improving properties in the
portfolio and other investments.
40
The Company has a $250.0 million, unsecured revolving credit facility, which is
scheduled to expire in August 2003. This credit facility has made available
funds to both finance the purchase of properties and meet any short-term working
capital requirements. As of December 31, 2002 there was $40.0 million
outstanding under this credit facility. The Company intends to renew this
facility prior to the maturity date.
During July 2002, the Company further enhanced its liquidity position by
establishing an additional $150.0 million unsecured revolving credit facility.
During December 2002, the Company paid down the outstanding balance and
terminated this facility.
The Company also has a $200.0 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 10 of the Notes to
Consolidated Financial Statements included in this annual report on Form 10-K.)
As of December 31, 2002, the Company had $98.0 million available for issuance
under the MTN program.
In addition to the public equity and debt markets as capital sources, the
Company may, from time to time, obtain mortgage financing on selected
properties. As of December 31, 2002, the Company had over 380 unencumbered
property interests in its portfolio.
During May 2001, the Company filed a shelf registration statement on Form S-3
for up to $750.0 million of debt securities, preferred stock, depositary shares,
common stock and common stock warrants. As of December 31, 2002, the Company had
$288.7 million available for issuance under this shelf registration statement.
In connection with its intention to continue to qualify as a REIT for federal
income tax purposes, the Company expects to continue paying regular dividends to
its stockholders. These dividends will be paid from operating cash flows which
are expected to increase due to property acquisitions and growth in operating
income in the existing portfolio and from other sources. Since cash used to pay
dividends reduces amounts available for capital investment, the Company
generally intends to maintain a conservative dividend payout ratio, reserving
such amounts as it considers necessary for the expansion and renovation of
shopping centers in its portfolio, debt reduction, the acquisition of interests
in new properties and other investments as suitable opportunities arise, and
such other factors as the Board of Directors considers appropriate.
Cash dividends paid increased to $235.6 million in 2002, compared to $209.8
million in 2001 and $189.9 million in 2000. The Company's dividend payout ratio,
based on funds from operations on a per-basic common share basis, for 2002, 2001
and 2000 was approximately 68.0%, 62.5% and 64.6%, 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 redevelopment projects
during 2003 will be approximately $30.0 million to $50.0 million. Additionally,
the Company anticipates its capital commitment toward ground-up development
during 2003 will be approximately $160.0 million to $200.0 million. The proceeds
from the sales of development properties and proceeds from construction loans in
2003 should be sufficient to fund the ground-up development capital
requirements.
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 facilities,
issuance of equity and public debt, as well as other debt and equity
alternatives, will provide the necessary capital required by the Company. Cash
flows from operations as reported in the Consolidated Statements of Cash Flows
was $278.9 million for 2002, $287.4 million for 2001 and $250.5 million for
2000.
41
Contractual Obligations and Other Commitments
The Company has debt obligations relating to its revolving credit facility,
MTNs, senior notes, mortgages and construction loans with maturities ranging
from one to 22 years. As of December 31, 2002, the Company's total debt had a
weighted average term to maturity of approximately five years. In addition, the
Company has non-cancelable operating leases pertaining to its shopping center
portfolio. As of December 31, 2002, the Company has certain 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 to construct and/or operate a
shopping center. In addition, the Company has non-cancelable operating leases
pertaining to its retail store lease portfolio. The following table summarizes
the Company's debt maturities and obligations under non-cancelable operating
leases as of December 31, 2002 (in millions):
The Company has $100.0 million of unsecured senior notes and $7.3 million of
construction loans maturing in 2003. In addition, the Company's unsecured
revolving credit facility, which is scheduled to mature in August 2003, had
$40.0 million outstanding as of December 2002. The Company anticipates
satisfying these maturities with a combination of operating cash flows, its
unsecured revolving credit facility and new debt financings. The Company intends
to renew its unsecured revolving credit facility prior to the maturity date.
The Company has issued letters of credit in connection with the
collateralization of tax-exempt mortgage bonds, completion guarantees for
certain construction projects, and guaranty of payment related to the Company's
insurance program. These letters of credit aggregate approximately $14.9
million.
Additionally, the RioCan Venture, an entity in which the Company holds a 50%
non-controlling interest, has a CAD $5.0 million (approximately USD $3.2
million) letter of credit facility. This facility is jointly guaranteed by
RioCan and the Company and has approximately CAD $1.0 million (approximately USD
$0.6 million) outstanding as of December 31, 2002 relating to various
development projects.
During 2002, the Company obtained construction financing on eight ground-up
development properties for an aggregate loan amount of up to $119.8 million. As
of December 31, 2002, approximately $38.9 million was outstanding.
Unconsolidated Real Estate Joint Ventures
The Company has investments in a number of unconsolidated real estate joint
ventures with varying structures. These investments include the Company's 43.3%
non-controlling interest in KIR, the Company's 50% non-controlling interest in
the RioCan Venture, the Company's 20% non-controlling interest in KROP, and
varying interests in other real estate joint ventures. These joint ventures
operate either shopping center properties or are established for development
projects. Such arrangements are generally with third party institutional
investors, local developers and individuals. The properties owned by the joint
ventures are primarily financed with individual non-recourse mortgage loans.
Non-recourse mortgage debt is generally defined as debt whereby the lenders'
sole recourse with respect to borrower defaults is limited to the value of the
property collateralized by the mortgage. The lender generally does not have
recourse against any other assets owned by the borrower or any of the
constituent members of the borrower, except for certain specified exceptions
listed in the particular loan documents.
The KIR joint venture was established for the purpose of investing in high
quality real estate 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. As of
December 31, 2002, KIR had interests in 68 properties comprising 14.0 million
square feet of GLA. As of December 31, 2002, KIR had obtained individual
non-recourse mortgage loans on 67 of these properties aggregating approximately
$1,103.7 million. These non-recourse mortgage loans have maturities ranging from
one to 16 years and rates ranging from 5.95% to 8.52%. In addition, KIR
maintains a secured revolving credit facility with a syndicate of banks, which
is scheduled to expire in November 2003. This facility is collateralized by the
unfunded subscriptions of certain partners, including those of the Company. The
facility has an aggregate availability of up to $100.0 million based upon the
amount of unfunded subscription commitments of certain partners. During January
2003, the aggregate availability under the credit facility was reduced to $90.0
million. Under the terms of the facility, funds may be borrowed for general
corporate purposes including the acquisition of institutional quality
properties. Borrowings under the facility accrue interest at Libor plus 0.80%.
As of December 31, 2002, there was $15.0 million outstanding under this
facility. As of December 31, 2002, the Company's pro-rata share of non-recourse
mortgages and other debt obligations relating to the KIR joint venture was
approximately $484.4 million. The Company also has unfunded capital commitments
to KIR in the amount of approximately $55.9 million as of December 31, 2002.
(See Note 6 of the Notes to Consolidated Financial Statements included in this
annual report on Form 10-K.)
42
The RioCan Venture was established with RioCan Real Estate Investment Trust to
acquire properties and development projects in Canada. As of December 31, 2002,
the RioCan Venture consisted of 28 shopping center properties and four
development projects with approximately 6.7 million square feet of GLA. As of
December 31, 2002, the RioCan Venture had obtained individual, non-recourse
mortgage loans on 26 of these properties aggregating approximately CAD $519.1
million (USD $329.3 million). These non-recourse mortgage loans have maturities
ranging from one to 12 years and rates ranging from 5.82% to 10.31%. As of
December 31, 2002 the Company's pro-rata share of non-recourse mortgage loans
relating to the RioCan Venture was approximately CAD $259.6 million (USD $164.6
million). (See Note 6 of the Notes to Consolidated Financial Statements included
in this annual report on Form 10-K.)
The Kimco Retail Opportunity Fund ("KROP"), a joint venture with GE Capital Real
Estate ("GECRE") was established to acquire high-growth potential retail
properties in the United States. As of December 31, 2002, KROP consisted of 15
shopping center properties with approximately 1.5 million square feet of GLA.
During 2002, KROP obtained a cross-collateralized mortgage with a 5-year term
aggregating $73.0 million on eight properties with an interest rate of LIBOR
plus 1.8%. During 2002, $1.9 million of this mortgage was repaid upon the sale
of one of the collateralized properties. The interest on this mortgage is
payable in monthly installments with principal due in full upon maturity.
Additionally, KROP assumed mortgage debt of approximately $29.5 million in
connection with the acquisition of three shopping centers, with fixed interest
rates ranging from 7.38% to 8.64%. Such mortgage debt is collateralized by the
individual shopping center property and is payable in monthly installments of
principal and interest. At December 31, 2002 the weighted average interest rate
for all mortgage debt outstanding was 4.65% per annum. As of December 31, 2002,
the Company's pro-rata share of non-recourse mortgage loans relating to the KROP
joint venture was approximately $20.0 million. Additionally, the Company along
with its joint venture partner have provided interim financing ("Short-term
Notes") for all acquisitions without a mortgage in place at the time of closing.
As of December 31, 2002 KROP has outstanding Short-term Notes of $17.3 million
due each the Company and GECRE. These short-term notes all have maturities of
less than one year with rates ranging from Libor plus 4.0% to 4.25%. (See Note 6
of the Notes to Consolidated Financial Statements included in this annual report
on Form 10-K.)
The Company has various other unconsolidated real estate joint ventures with
ownership interests ranging from 4% to 50%. As of December 31, 2002, these
unconsolidated joint ventures had individual non-recourse mortgage loans
aggregating approximately $187.9 million. The Company's pro-rata share of these
non-recourse mortgages was approximately $78.9 million. (See Note 6 of the Notes
to Consolidated Financial Statements included in this annual report on Form
10-K.)
Other Real Estate Investments
During November 2002, the Company, through its taxable REIT subsidiary, together
with Prometheus Southeast Retail Trust, completed the merger and privatization
of Konover Property Trust, which has been renamed Kimsouth Realty, Inc.,
("Kimsouth"). The Company acquired 44.5% of the common stock of Kimsouth, which
consisted primarily of 38 retail shopping center properties comprising
approximately 17.4 million square feet of GLA. Total acquisition value was
approximately $280.9 million including approximately $216.2 million in mortgage
debt. On December 23, 2002, Kimsouth obtained a cross-collateralized three-year
mortgage, aggregating $21.3 million at a variable rate of Libor plus 3.0% which
replaced (i) a secured line of credit for $8.0 million and (ii) a construction
loan for $17.6 million. All mortgages, which are collateralized by the
individual shopping center properties, are due in monthly installments. The
scheduled maturities of all mortgages payable as of December 31, 2002, are
approximately as follows (in millions): 2003: $74.7; 2004: $2.9; 2005: $30.3;
2006: $3.2; 2007: $45.3 and thereafter, $28.6. At December 31, 2002, the
weighted average interest rate for all mortgage debt outstanding was 7.47% per
annum.
During June 2002, the Company acquired a 90% equity participation interest in an
existing leveraged lease of 30 properties. The properties are leased under a
long-term bond-type net lease whose primary term expires in 2016, with the
lessee having certain renewal option rights. The Company's cash equity
investment was approximately $4.0 million. This equity investment is reported as
a net investment in leveraged lease in accordance with SFAS No. 13 (as amended).
The net investment in leveraged lease reflects the original cash investment
adjusted by remaining net rentals, estimated unguaranteed residual value,
unearned and deferred income, and deferred taxes relating to the investment.
43
As of December 31, 2002, four of these properties were sold whereby the proceeds
from the sales were used to paydown the mortgage debt by approximately $9.6
million. As of December 31, 2002, the remaining 26 properties were encumbered by
third-party non-recourse debt of approximately $86.0 million that is scheduled
to fully amortize during the primary term of the lease from a portion of the
periodic net rents receivable under the net lease. As an equity participant in
the leveraged lease, the Company has no general obligation for principal or
interest payments on the debt, which is collateralized by a first mortgage lien
on the properties and collateral assignment of the lease. Accordingly, this debt
has been offset against the related net rental receivable under the lease.
Effects of Inflation
Many of the Company's leases contain provisions designed to mitigate the adverse
impact of inflation. Such provisions include clauses enabling the Company to
receive payment of additional rent calculated as a percentage of tenants' gross
sales above pre-determined thresholds, which generally increase as prices rise,
and/or escalation clauses, which generally increase rental rates during the
terms of the leases. Such escalation clauses often include increases based upon
changes in the consumer price index or similar inflation indices. In addition,
many of the Company's leases are for terms of less than 10 years, which permits
the Company to seek to increase rents to market rates upon renewal. Most of the
Company's leases require the tenant to pay an allocable share of operating
expenses, including common area maintenance costs, real estate taxes and
insurance, thereby reducing the Company's exposure to increases in costs and
operating expenses resulting from inflation. The Company periodically evaluates
its exposure to short-term interest rates and foreign currency exchange rates
and will, from time to time, enter into interest rate protection agreements
and/or foreign currency hedge agreements which mitigate, but do not eliminate,
the effect of changes in interest rates on its floating-rate debt and
fluctuations in foreign currency exchange rates.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("FASB No. 144"), which supercedes SFAS No. 121.
FASB No. 144 requires that long-lived assets that are to be disposed of by sale
be measured at the lower of book value or fair value less cost to sell. FASB No.
144 retains the requirements of SFAS No. 121 regarding impairment loss
recognition and measurement. In addition, it requires that one accounting model
be used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal transactions.
FASB No. 144 is effective for fiscal years beginning after December 15, 2001.
Effective January 1, 2002, the Company adopted FASB No. 144. The impact of
adoption of FASB No. 144 did not have a material adverse impact on the Company's
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB No. 4, 44, and
64, Amendment of FASB No. 13 and Technical Corrections ("FASB No. 145"). This
statement eliminates the requirement to report gains and losses from
extinguishment of debt as extraordinary unless they meet the criteria of APB
Opinion 30. Debt extinguishments that were classified as extraordinary in prior
periods presented that do not meet the criteria of APB Opinion 30 shall be
reclassified. FASB No. 145 is effective for fiscal years beginning after May 15,
2002. During 2002, the Company elected early adoption of the provisions of FASB
No. 145. The impact of adopting this statement did not have a material adverse
impact on the Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("FASB 146"). This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). For purpose of
this statement, an exit or disposal activity is initiated when management,
having the authority to approve the action, commits to an exit or disposal plan
or otherwise disposes of a long-lived asset (disposal group) and, if the
activity involves the termination of employees, the criteria for a plan of
termination of this statement are met. The provisions of this statement shall be
effective for exit or disposal activities initiated after December 31, 2002. The
impact of the adoption of FASB No. 146 is not expected to have a material
adverse impact on the Company's financial position or results of operations.
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (an interpretation of FASB Statements No.
5, 57 and 107 and rescission of FASB Interpretation No. 34). FIN 45 clarifies
the requirements of FASB Statement No. 5, Accounting for Contingencies. It
requires that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that guarantee
regardless of whether or not the guarantor receives separate identifiable
consideration (i.e., a premium). The Company has adopted the new disclosure
requirements, which are effective beginning with 2002 calendar year-end
financials. FIN 45's provisions for initial recognition and measurement are
effective on a prospective basis to guarantees issued or modified after December
31, 2002. The adoption of FIN 45 is not expected to have a material adverse
impact on the Company's financial position or results of operations.
44
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of FASB Statement No. 123
("FASB No. 148"). This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition and annual disclosure provision of FASB No. 148 shall be applied for
fiscal years ending after December 15, 2002. The new interim disclosure
provisions are effective for the first interim period beginning after December
15, 2002. Effective January 1, 2003, the Company will adopt the prospective
method provisions of FASB No. 148, which will apply the recognition provisions
of FASB No. 123 to all employee awards granted, modified or settled after
January 1, 2003. The adoption is not expected to have a material adverse impact
on the Company's results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when either (i) the equity
investors (if any) do not have a controlling financial interest or (ii) the
equity investment at risk is insufficient to finance that entity's activities
without additional financial support. In addition, FIN 46 requires additional
disclosures. The Company is assessing the impact of this interpretation on its
accounting for its investments in unconsolidated joint ventures (see Note 6 of
the Notes to Consolidated Financial Statements included in this annual report on
Form 10-K).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2002, the Company had approximately $280.0 million of
floating-rate debt outstanding including $40.0 million on its unsecured
revolving credit facility. The interest rate risk on $185.0 million of such debt
has been mitigated through the use of interest rate swap agreements (the
"Swaps") with major financial institutions. The Company is exposed to credit
risk in the event of non-performance by the counter-party to the Swaps. The
Company believes it mitigates its credit risk by entering into these Swaps with
major financial institutions. The Company believes the interest rate risk
represented by the remaining $95.0 million of floating-rate debt is not material
to the Company or its overall capitalization.
As of December 31, 2002, the Company has Canadian investments totaling CAD
$204.5 million (approximately USD $130.2 million) comprised of marketable
securities and a real estate joint venture. In addition, the Company has Mexican
real estate investments of MXN $383.7 million (approximately USD $35.7 million).
The foreign currency exchange risk has been mitigated through the use of foreign
currency forward contracts (the "Forward Contracts") and a cross currency swap
(the "CC Swap") with major financial institutions. The Company is exposed to
credit risk in the event of non-performance by the counter-party to the Forward
Contracts and the CC Swap. The Company believes it mitigates its credit risk by
entering into the Forward Contracts and the CC Swap with major financial
institutions.
The Company has not, and does not plan to, enter into any derivative financial
instruments for trading or speculative purposes. As of December 31, 2002, the
Company had no other material exposure to market risk.
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. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
45
PART III
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 15, 2003.
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. 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 15, 2003.
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 15, 2003.
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 15, 2003.
Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that as of the date of that evaluation the Company's
disclosure controls and procedures are effective in providing timely reporting
of material information regarding required disclosure and ensure that such
information is recorded, processed, summarized and reported within the required
time periods and included in the Company's periodic filings with the SEC.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date the Company carried out this evaluation.
46
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
-----------------------------------------------------------------
(a) 1. Financial Statements - Form 10-K
The following consolidated financial Form 10-K
information is included as a separate Report
section of this annual report on Form 10-K. Page
---------
Report of Independent Accountants 55
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2002 and 2001 56
Consolidated Statements of Income for the years
ended December 31, 2002, 2001 and 2000 57
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2002, 2001 and 2000 58
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2002, 2001 and 2000 59
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 60
Notes to Consolidated Financial Statements 61
2. Financial Statement Schedules -
Schedule II - Valuation and Qualifying Accounts 87
Schedule III - Real Estate and Accumulated Depreciation 88
All other schedules are omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedule.
3. Exhibits
The exhibits listed on the accompanying Index to
Exhibits are filed as part of this report. 48
(b) Reports on Form 8-K
A current report on Form 8-K dated October 28, 2002 was filed under
Items 5 and 7 relating to the announcement of the Company's second
quarter 2002 operating results.
A current report on Form 8-K dated November 12, 2002 was furnished
under Item 9 relating to the certifications of the Company's Chief
Executive Officer and Chief Financial Officer as required by 18 U.S.C.
ss. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
A current report on Form 8-K dated November 15, 2002 was filed under
Item 7 to disclose the U.S. Placement Agency Agreement, dated November
15, 2002, by and among, Banc of America Securities LLC, J.P. Morgan
Securities Inc., Fleet Securities, Inc., HSBC Securities (USA) Inc.,
Wachovia Securities, Inc. and the Company in connection with the
Company's $35.0 million Senior Note offering during November 2002.
A current report on Form 8-K dated November 21, 2002 was filed under
Item 7 to disclose the Underwriting and Terms Agreements, dated
November 18, 2002, by and among, Banc One Capital Markets, Inc., J.P.
Morgan Securities Inc., Banc of America Securities LLC, and the Company
in connection with the Company's $200.0 million Senior Note offering
during November 2002.
47
INDEX TO EXHIBITS
Form 10-K
Exhibits Page
- -------- ----------
2.1 --Form of Plan of Reorganization of Kimco Realty Corporation
[Incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-11
No. 33-42588].
3.1 --Articles of Amendment and Restatement of the
Company, dated August 4, 1994 [Incorporated by
reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994].
3.2 --By-laws of the Company dated February 6, 2002, as amended.
3.3 --Articles Supplementary relating to the 8 1/2% Class
B Cumulative Redeemable Preferred Stock, par value
$1.00 per share, of the Company, dated July 25, 1995.
[Incorporated by reference to Exhibit 3.3 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (file #1-10899) (the "1995
Form 10-K")].
3.4 --Articles Supplementary relating to the 8 3/8% Class
C Cumulative Redeemable Preferred Stock, par value
$1.00 per share, of the Company, dated April 9, 1996
[Incorporated by reference to Exhibit 3.4 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996].
3.5 --Articles Supplementary relating to the 7 1/2% Class
D Cumulative Convertible Preferred Stock, par value
$1.00 per share, of the Company, dated May 14, 1998
[Incorporated by reference to the Company's and The
Price REIT, Inc.'s Joint Proxy/Prospectus on Form S-4
No. 333-52667].
4.1 --Agreement of the Company pursuant to Item 601(b)(4)(iii)(A)
of Regulation S-K [Incorporated by reference to
Exhibit 4.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-11 No. 33-42588].
4.2 --Certificate of Designations [Incorporated by reference to
Exhibit 4(d) to Amendment No. 1 to the Registration
Statement on Form S-3 dated September 10, 1993 (the
"Registration Statement", Commission File No. 33-67552)].
4.3 --Indenture dated September 1, 1993 between Kimco Realty Corporation
and Bank of New York (as successor to IBJ Schroder Bank and
Trust Company) [Incorporated by reference to Exhibit 4(a) to
the Registration Statement].
4.4 --First Supplemental Indenture, dated as of August 4, 1994.
[Incorporated by reference to Exhibit 4.6 to the 1995
Form 10-K.]
4.5 --Second Supplemental Indenture, dated as of April 7,
1995 [Incorporated by reference to Exhibit 4(a) to
the Company's Current Report on Form 8-K dated April
7, 1995 (the "April 1995 8-K")].
48
INDEX TO EXHIBITS (continued)
Form 10-K
Exhibits Page
- -------- ----------
4.6 -- Form of Medium-Term Note (Fixed Rate).
4.7 -- Form of Medium-Term Note (Floating Rate).
4.8 -- Form of Remarketed Reset Note [Incorporated by reference
to Exhibit 4(j) to the Company's Current Report on
Form 8-K dated March 26, 1999].
10.1 -- Form of Acquisition Option Agreement between the Company
and the subsidiary named therein [Incorporated by
reference to Exhibit 10.1 to Amendment No. 3 to the
Company's Registration Statement on Form S-11
No. 33-42588].
10.2 -- Management Agreement between the Company and
KC Holdings, Inc. [Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement
on Form S-11 No. 33-47915].
10.3 -- Amended and Restated Stock Option Plan
[Incorporated by reference to Exhibit 10.3 to the
1995 Form 10-K].
10.4 -- Employment Agreement between Kimco Realty
Corporation and Michael J. Flynn, dated
November 1, 1998.
10.5 -- Restricted Equity Agreement, Non-Qualified
and Incentive Stock Option Agreement, and
Price Condition Non-Qualified and Incentive
Stock Option Agreement between Kimco Realty
Corporation and Michael J. Flynn, each dated
November 1, 1995 [Incorporated by reference to
Exhibit 10.5 to the 1995 Form 10-K].
10.6 -- Employment Agreement between Kimco Realty Corporation and
Michael V. Pappagallo, dated January 1, 2002.
10.7 -- Employment Agreement between Kimco Realty Corporation and
Jerald Friedman, dated January 13, 1998
[Incorporated by Reference to Exhibit 10.10 to the
Company's and the Price REIT, Inc.'s Joint Proxy
Statement/Prospectus on Form S-4 No. 333-52667].
10.8 -- First Amendment to Amended and Restated Executive Employment
Agreement between Kimco Realty Corporation and
Jerald Friedman, dated January 1, 2002.
10.9 -- Amended and Restated Stock Option Plan
[Incorporated by reference to the Company's and The
Price REIT, Inc.'s Joint Proxy/Prospectus on Form S-4
No. 333-52667].
10.10 -- Employment Agreement between Kimco Realty Corporation
and David B. Henry - the Company commenced a
five-year employment agreement with Mr.
Henry pursuant to which Mr. Henry will serve
as Chief Investment Officer and has been
nominated as Vice Chairman of the Board of
Directors [Incorporated by reference to
Exhibit 10.11 to the Company's Form 10-Q
filed on May 10, 2001].
*10.11 -- Employment Agreement between Kimco Realty
Corporation and Raymond Edwards - the Company
commenced a five-year employment agreement with Mr.
Edwards pursuant to which Mr. Edwards will serve as a
Vice President of the Company. 95
49
INDEX TO EXHIBITS (continued)
Form 10-K
Page
----------
*12.1 -- Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends. 102
*12.2 -- Computation of Ratio of Funds from Operations to Combined
Fixed Charges and Preferred Stock Dividends. 103
*21.1 -- Subsidiaries of the Company 104
*23.1 -- Consent of PricewaterhouseCoopers LLP 110
- ---------------------------------------
* Filed herewith.
50
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 26, 2003
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 26, 2003
- --------------------------- the Board of Directors
Martin S. Kimmel
/s/ Milton Cooper
- --------------------------- Chairman of the Board March 26, 2003
Milton Cooper of Directors and Chief
Executive Officer
/s/ Michael J. Flynn Vice Chairman of the March 26, 2003
- --------------------------- Board of Directors,
Michael J. Flynn President and
Chief Operating Officer
/s/ David B. Henry Vice Chairman of the March 26, 2003
- --------------------------- Board of Directors and
David B. Henry Chief Investment Officer
/s/ Richard G. Dooley Director March 26, 2003
- ---------------------------
Richard G. Dooley
/s/ Joe Grills Director March 26, 2003
- ---------------------------
Joe Grills
/s/ Frank Lourenso Director March 26, 2003
- ---------------------------
Frank Lourenso
/s/ Michael V. Pappagallo
- --------------------------- Vice President - March 26, 2003
Michael V. Pappagallo Chief Financial Officer
/s/ Glenn G. Cohen
- --------------------------- Vice President - March 26, 2003
Glenn G. Cohen Treasurer
/s/ Paul Westbrook Director of Accounting March 26, 2003
- ---------------------------
Paul Westbrook
51
Kimco Realty Corporation
Certification
I, Milton Cooper, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Kimco Realty
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Milton Cooper
Milton Cooper
Chief Executive Officer
52
Kimco Realty Corporation
Certification
I, Michael V. Pappagallo, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Kimco Realty
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Michael V. Pappagallo
Michael V. Pappagallo
Chief Financial Officer
53
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 15 (a) (1) and (2)
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULES
-------
FORM 10-K
Page No.
-----------
KIMCO REALTY CORPORATION AND SUBSIDIARIES
Report of Independent Accountants 55
Consolidated Financial Statements and Financial Statement Schedules:
Consolidated Balance Sheets as of December 31, 2002 and 2001 56
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 57
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2002, 2001 and 2000 58
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2002, 2001 and 2000 59
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 60
Notes to Consolidated Financial Statements 61
Financial Statement Schedules:
II. Valuation and Qualifying Accounts 87
III. Real Estate and Accumulated Depreciation 88
54
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 (collectively, the "Company") at December
31, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
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 of America, 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 our opinion.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which requires that the results of operations, including any
gain or loss on sale, relating to real estate that has been disposed of or is
classified as held for sale after initial adoption be reported in discontinued
operations for all periods presented.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 18, 2003
55
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
The accompanying notes are an integral part of these consolidated
financial statements.
56
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated
financial statements.
57
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
The accompanying notes are an integral part of these consolidated
financial statements.
58
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share information)
The accompanying notes are an integral part of these consolidated
financial statements.
59
KIMCO REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial
statements.
60
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. The Company also provides property
management services for shopping centers owned by affiliated
entities, various real estate joint ventures and unaffiliated third
parties.
Additionally, in connection with the Tax Relief Extension Act of 1999
(the "RMA"), which became effective January 1, 2001, the Company is
now permitted to participate in activities which it was precluded
from previously in order to maintain its qualification as a Real
Estate Investment Trust ("REIT"), so long as these activities are
conducted in entities which elect to be treated as taxable
subsidiaries under the Code, subject to certain limitations. As
such, the Company, through its taxable REIT subsidiaries, is
engaged in various retail real estate related opportunities
including (i) merchant building, through its Kimco Developers, Inc.
("KDI") subsidiary, which is primarily engaged in the ground-up
development of neighborhood and community shopping centers and the
subsequent sale thereof upon completion and (ii) retail real estate
advisory and disposition services which primarily focuses on
leasing and disposition strategies of retail real estate controlled
by both healthy and distressed and/or bankrupt retailers.
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, 2002, the Company's single largest
neighborhood and community shopping center accounted for only 1.2%
of the Company's annualized base rental revenues and only 0.8% of
the Company's total shopping center gross leasable area ("GLA"). At
December 31, 2002, the Company's five largest tenants include Kmart
Corporation, The Home Depot, Kohl's, TJX Companies and Wal-Mart,
which represented approximately 4.5%, 2.8%, 2.7%, 2.5% and 1.9%,
respectively, of the Company's annualized base rental revenues,
including the proportionate share of base rent of revenues from
properties in which the Company has less than a 100% economic
interest.
The principal business of the Company and its consolidated subsidiaries
is the ownership, development and operation of retail shopping
centers. The Company does not distinguish or group its operations
on a geographical basis for purposes of measuring performance.
Accordingly, the Company believes it has a single reportable
segment for disclosure purposes in accordance with accounting
principles generally accepted in the United States.
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 ("GAAP") 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. The most
significant assumptions and estimates relate to the valuation of
real estate, depreciable lives, revenue recognition and the
recoverability of trade accounts receivable. Application of these
assumptions requires the exercise of judgment as to future
uncertainties and, as a result, actual results could differ from
these estimates.
61
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Real Estate
Real estate 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 the property, the carrying value would be
adjusted to an amount to reflect the estimated fair value of the
property.
When a real estate asset is identified by management as held for sale,
the Company ceases depreciation of the asset and estimates the
sales price, net of selling costs. If, in management's opinion, the
net sales price of the asset is less than the net book value of the
asset, an adjustment to the carrying value would be recorded to
reflect the estimated 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:
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.
Real Estate Under Development
Real estate under development represents the ground-up development of
neighborhood and community shopping centers which are held for sale
upon completion. These properties are carried at cost and no
depreciation is recorded on these assets. The cost of land and
buildings under development include specifically identifiable
costs. The capitalized costs include pre-construction costs
essential to the development of the property, development costs,
construction costs, interest costs, real estate taxes, salaries and
related costs and other costs incurred during the period of
development. The Company ceases cost capitalization when the
property is held available for occupancy upon substantial
completion of tenant improvements, but no later than one year from
the completion of major construction activity. If in management's
opinion, the net sales price of these assets is less than the net
carrying value, the carrying value would be written down to an
amount to reflect the estimated fair value of the property.
Investments in Unconsolidated Joint Ventures
The Company accounts for its investments in unconsolidated joint
ventures under the equity method of accounting as the Company
exercises significant influence, but does not control these
entities. These investments are recorded initially at cost and
subsequently adjusted for equity in earnings and cash contributions
and distributions.
On a periodic basis, management assesses whether there are any
indicators that the value of the Company's investments in
unconsolidated joint ventures may be impaired. An investment's
value is impaired only if management's estimate of the fair value
of the investment is less than the carrying value of the
investment. To the extent impairment has occurred, the loss shall
be measured as the excess of the carrying amount of the investment
over the fair value of the investment.
Marketable Securities
The Company classifies its existing marketable equity securities as
available-for-sale in accordance with the provisions of Statement
of Financial Accounting Standard No. 115, Accounting for Certain
Investments in Debt and Equity Securities. These securities are
carried at fair market value, with unrealized gains and losses
reported in stockholders' equity as a component of Other
Comprehensive Income ("OCI"). Gains or losses on securities sold
are based on the specific identification method.
All debt securities are classified as held-to-maturity because the
Company has the positive intent and ability to hold the securities
to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion discounts
to maturity.
62
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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
Base rental revenues from rental property are recognized on a
straight-line basis over the terms of the related leases. Certain
of these leases also provide for percentage rents based upon the
level of sales achieved by the lessee. These percentage rents are
recorded once the required sales level is achieved. In addition,
leases typically provide for reimbursement to the Company of common
area maintenance costs, real estate taxes and other operating
expenses. Operating expense reimbursements are recognized as
earned.
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 REIT for federal income tax
purposes. Accordingly, the Company generally will not be subject to
federal income tax, provided that distributions to its stockholders
equal at least the amount of its REIT taxable income as defined
under Section 856 through 860 of the Internal Revenue Code, as
amended (the "Code").
In connection with the RMA, which became effective January 1, 2001,
the Company is now permitted to participate in certain activities
which it was previously precluded from in order to maintain its
qualification as a REIT, so long as these activities are conducted
in entities which elect to be treated as taxable subsidiaries under
the Code. As such, the Company is subject to federal and state
income taxes on the income from these activities.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or
settled.
Foreign Currency Translation and Transactions
Assets and liabilities of our foreign operations are translated using
year-end exchange rates, and revenues and expenses are translated
using exchange rates as determined throughout the year. Gains or
losses resulting from translation are included in accumulated other
comprehensive income, as a separate component of the Company's
stockholders' equity. Gains or losses resulting from foreign
currency transactions are translated to local currency at the rates
of exchange prevailing at the dates of the transactions. The effect
of the transaction's gain or loss is included in the caption Other
income/(loss), net in the Consolidated Statements of Income.
Derivative / Financial Instruments
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FASB No. 133"), as amended. FASB No. 133
establishes accounting and reporting standards for derivative
instruments. This accounting standard requires the Company to
measure derivative instruments at fair value and to record them in
the Consolidated Balance Sheet as an asset or liability, depending
on the Company's rights or obligations under the applicable
derivative contract. In addition, the fair value adjustments will
be recorded in either stockholders' equity or earnings in the
current period based on the designation of the derivative. The
effective portions of changes in fair value of cash flow hedges are
reported in OCI and are subsequently reclassified into earnings
when the hedged item affects earnings. The changes in fair value of
derivative instruments which are not designated as hedging
instruments and the ineffective portions of hedges are recorded in
earnings for the current period.
63
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company utilizes derivative financial instruments to reduce
exposure to fluctuations in interest rates, foreign currency
exchange rates and market fluctuation on equity securities. The
Company has established policies and procedures for risk assessment
and the approval, reporting and monitoring of derivative financial
instrument activities. The Company has not, and does not plan to
enter into financial instruments for trading or speculative
purposes. Additionally, the Company has a policy of only entering
into derivative contracts with major financial institutions. The
principal financial instruments used by the Company are interest
rate swaps, foreign currency exchange forward contracts, cross
currency swaps and warrant contracts. In accordance with the
provisions of FASB No. 133, these derivative instruments were
designated and qualified as either cash flow or fair value hedges
(see Note 15).
Earnings Per Share
On October 24, 2001, the Company's Board of Directors declared a
three-for-two split (the "Stock Split") of the Company's common
stock which was effected in the form of a stock dividend paid on
December 21, 2001 to stockholders of record on December 10, 2001.
All share and per share data included in the accompanying
Consolidated Financial Statements and Notes thereto have been
adjusted to reflect this Stock Split.
The following table sets forth the reconciliation of earnings and the
weighted average number of shares used in the calculation of basic
and diluted earnings per share (amounts presented in thousands,
except per share data):
(a) In 2000, the effect of the assumed conversion of the Class D
Preferred Stock had an anti-dilutive effect upon the calculation of
net income per common share. Accordingly, the impact of such
conversion has not been included in the determination of diluted
earnings per common share.
64
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations including FASB Interpretation No. 44, Accounting
for Certain Transactions involving Stock Compensation (an
interpretation of APB Opinion No. 25), issued in March 2000, to
account for stock-based employee compensation plans. Under this
method, compensation cost is recognized for awards of shares of
common stock or stock options to directors, officers and employees
of the Company and consolidated subsidiaries only if the quoted
market price of the stock at the grant date (or other measurement
date, if later) is greater than the amount the grantee must pay to
acquire the stock. The following table illustrates the effect on
net income and earnings per share if the fair value based method
had been applied to all outstanding stock awards in each period:
65
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("FASB No. 144"), which supercedes SFAS No. 121.
FASB No. 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair
value less cost to sell. FASB No. 144 retains the requirements of
SFAS No. 121 regarding impairment loss recognition and
measurement. In addition, it requires that one accounting model be
used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more
disposal transactions. Effective January 1, 2002, the Company
adopted FASB No. 144. The adoption of FASB No. 144 did not have a
material adverse impact on the Company's financial position or
results of operations (see Note 5).
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB No. 4,
44 and 64, Amendment of FASB No. 13 and Technical Corrections
("FASB No. 145"). This statement eliminates the requirement to
report gains and losses from extinguishment of debt as
extraordinary unless they meet the criteria of APB Opinion 30. Debt
extinguishments that were classified as extraordinary in prior
periods presented that do not meet the criteria of APB Opinion 30
shall be reclassified. FASB No. 145 is effective for fiscal years
beginning after May 15, 2002. During 2002, the Company elected
early adoption of the provisions of FASB No. 145. The impact of
adopting this statement did not have a material adverse impact on
the Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("FASB 146"). This
statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring).
For purpose of this statement, an exit or disposal activity is
initiated when management, having the authority to approve the
action, commits to an exit or disposal plan or otherwise disposes
of a long-lived asset (disposal group) and, if the activity
involves the termination of employees, the criteria for a plan of
termination of this statement are met. The provisions of this
statement shall be effective for exit or disposal activities
initiated after December 31, 2002. The impact of the adoption of
FASB No. 146 is not expected to have a material adverse impact on
the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others
(an interpretation of FASB Statements No. 5, 57 and 107 and
rescission of FASB Interpretation No. 34). FIN 45 clarifies the
requirements of FASB Statement No. 5, Accounting for Contingencies.
It requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it
assumes under the guarantee regardless of whether or not the
guarantor receives separate identifiable consideration (i.e., a
premium). The Company has adopted the new disclosure requirements,
which are effective beginning with 2002 calendar year-end
financials. FIN 45's provision for initial recognition and
measurement are effective on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of FIN 45
is not expected to have a material adverse impact on the Company's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure an amendment
of FASB Statement No. 123 ("FASB No. 148"). This statement amends
FASB Statement No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
requirements of FASB Statement No. 123 to require prominent
disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. The transition
and annual disclosure provisions of FASB No. 148 shall be applied
for fiscal years ending after December 15, 2002. The new interim
disclosure provisions are effective for the first interim period
beginning after December 15, 2002. Effective January 1, 2003, the
Company will adopt the prospective method provisions of FASB No.
148, which will apply the recognition provisions of FASB No. 123 to
all employee awards granted, modified or settled after January 1,
2003. The adoption is not expected to have a material adverse
impact on the Company's financial position or results of
operations.
66
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"), the primary objective of
which is to provide guidance on the identification of entities for
which control is achieved through means other than voting rights
("variable interest entities" or "VIEs") and to determine when and
which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model applies when either (i) the equity
investors (if any) do not have a controlling financial interest or
(ii) the equity investment at risk is insufficient to finance that
entity's activities without additional financial support. In
addition, FIN 46 requires additional disclosures. The Company is
assessing the impact of this interpretation on its accounting for
its investments in unconsolidated joint ventures. The Company's
exposure to losses associated with these unconsolidated joint
ventures is limited to its carrying value in these investments (see
Note 6).
Reclassifications
Certain reclassifications of prior years' amounts have been made to
conform with the current year presentation.
2. Property Acquisitions, Developments and Other Investments:
Operating Properties -
During the years 2002, 2001 and 2000 the Company acquired wholly owned
real estate interests, in separate transactions, at aggregate costs
of approximately $258.7 million, $21.1 million and $62.5 million,
respectively.
Ground-Up Development Properties -
Effective January 1, 2001, the Company elected taxable REIT subsidiary
status for its wholly owned development subsidiary, Kimco
Developers, Inc. ("KDI"). KDI is primarily engaged in the ground-up
development of neighborhood and community shopping centers and the
subsequent sale thereof upon completion.
During the years 2002, 2001 and 2000 certain subsidiaries and
affiliates of the Company expended approximately $148.6 million,
$119.4 million and $74.0 million, respectively, in connection with
the purchase of land and construction costs related to its
ground-up development projects.
Other Investments -
During October 2002, the Company purchased from various joint venture
partners, the remaining interest in a property located in
Harrisburg, PA for an aggregate purchase price of $0.5 million.
This property is now 100% owned by the Company.
During June 2001, the Company purchased from an unaffiliated partner
the remaining 20% interest in a property located in Skokie, IL for
an aggregate purchase price of approximately $0.8 million. The
property is now 100% owned by the Company.
Additionally, during June 2001, the Company purchased from an
unaffiliated partner the remaining 10% interest in a property
located in Smithtown, NY for an aggregate purchase price of
approximately $2.5 million. The property is now 100% owned by the
Company.
During December 2001, the Company purchased the remaining 10% interest
in Kimco Select Investments, a New York general partnership for an
aggregate price of approximately $1.7 million. Kimco Select
Investments 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.
These property acquisitions and other investments have been funded
principally through the application of proceeds from the Company's
public unsecured debt issuances, equity offerings and proceeds from
mortgage financings (see Notes 10, 11 and 16).
67
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
3. Dispositions of Real Estate:
During 2002, the Company, (i) disposed of, in separate transactions, 12
operating properties for an aggregate sales price of approximately
$74.5 million, including the assignment/repayment of approximately
$22.6 million of mortgage debt encumbering three of the properties
and (ii) terminated five leasehold positions in locations where a
tenant in bankruptcy had rejected its lease. These transactions
resulted in net gains of approximately $12.8 million (see Note 5).
During 2002, KDI sold four of its recently completed projects and eight
out-parcels for approximately $128.7 million including the
assignment of approximately $17.7 million in mortgage debt
encumbering one of the properties. The sales resulted in pre-tax
gains of approximately $15.9 million.
During 2001, the Company, in separate transactions, disposed of three
operating properties (including the sale of a property to KIR) and
a portion of another operating property, comprising approximately
0.6 million square feet of GLA. Cash proceeds from these
dispositions aggregated approximately $46.7 million which resulted
in a net gain of approximately $3.0 million. Cash proceeds from the
disposition of the operating property in Elyria, OH, totaling $5.8
million, together with an additional $7.1 million cash investment,
was used to acquire an exchange shopping center property located in
Lakeland, FL during August 2001.
During 2001, KDI sold two of its recently completed projects and five
out-parcels for approximately $61.3 million, which resulted in
pre-tax profits of $13.4 million.
4. Adjustment of Property Carrying Values:
As part of the Company's periodic assessment of its real estate
properties with regard to both the extent to which such assets are
consistent with the Company's long-term real estate investment
objectives and the performance and prospects of each asset, the
Company determined in the fourth quarter of 2002, that its
investment in four operating properties comprised of an aggregate
0.4 million square feet of GLA with an aggregate net book value of
approximately $23.8 million, may not be fully recoverable. Based
upon management's assessment of current market conditions and lack
of demand for the properties, the Company has reduced its
anticipated holding period of these investments. As a result of the
reduction in the anticipated holding period, together with a
reassessment of the potential future operating income of the
properties and the effects of current market conditions, the
Company determined that its investment in these assets was not
fully recoverable and has recorded an adjustment of property
carrying values aggregating approximately $12.5 million.
5. Discontinued Operations and Assets Held for Sale:
In August 2001, the FASB issued Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("FASB 144"). FASB 144 established criteria
beyond that previously specified in Statement of Financial
Accounting Standard No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of
("FASB 121"), to determine when a long-lived asset is classified as
held for sale, and it provides a single accounting model for the
disposal of long-lived assets. FASB 144 was effective beginning
January 1, 2002. In accordance with FASB 144, the Company now
reports as discontinued operations assets held for sale (as defined
by FASB 144) and assets sold in the current period. All results of
these discontinued operations, are included in a separate component
of income on the Consolidated Statements of Income under
Discontinued operations. This change has resulted in certain
reclassifications of 2001 and 2000 financial statement amounts.
68
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The components of Income/(loss) from operations related to discontinued
operations for each of the three years in the period ended December
31, 2002 are shown below. These include the results of operations
through the date of each respective sale for properties sold during
2002 and a full year of operations for those assets classified as
held for sale as of December 31, 2002, (dollars in thousands):
During November 2002, the Company disposed of an operating property
located in Chicago, IL. Net proceeds from this sale of
approximately $8.0 million were accepted by a lender in full
satisfaction of an outstanding mortgage loan of approximately $11.5
million. The Company recognized a gain on early extinguishment of
debt of approximately $3.2 million.
During December 2002, the Company identified two operating properties,
comprised of approximately 0.2 million square feet of GLA, as "Held
for Sale" in accordance with FASB No. 144. The book value of these
properties, aggregating approximately $28.4 million, net of
accumulated depreciation of approximately $2.9 million, exceeded
their estimated fair value. The Company's determination of the fair
value of these properties, aggregating approximately $7.9 million,
is based upon executed contracts of sale with third parties less
estimated selling costs. As a result, the Company recorded an
adjustment of property carrying values of $20.5 million. This
adjustment is included, along with the related property operations
for the current and comparative years, in the caption Income/(loss)
from discontinued operations on the Company's Consolidated
Statements of Income.
6. Investment and Advances in Real Estate Joint Ventures:
Kimco Income REIT ("KIR") -
During 1998, the company formed KIR, an entity that was established for
the purpose of investing in high quality real estate properties
financed primarily with individual non-recourse mortgages. These
properties include, but are not limited to, fully developed
properties with strong, stable cash flows from credit-worthy
retailers with long-term leases. The Company originally held a
99.99% limited partnership interest in KIR. Subsequent to KIR's
formation, the Company sold a significant portion of its original
interest to an institutional investor and admitted three other
limited partners. As of December 31, 2002, KIR has received total
capital commitments of $569.0 million, of which the Company
subscribed for $247.0 million and the four limited partners
subscribed for $322.0 million. The Company has a 43.3%
non-controlling limited partnership interest in KIR and accounts
for its investment under the equity method of accounting.
During 2002, the limited partners in KIR contributed $55.0 million
towards their respective capital commitments, including $23.8
million by the Company. As of December 31, 2002, KIR had unfunded
capital commitments of $129.0 million, including $55.9 million from
the Company.
69
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company's equity in income from KIR for the years ended December
31, 2002, 2001 and 2000 was approximately $16.3 million, $13.2
million and $9.5 million, respectively.
In addition, KIR entered into a master management agreement with the
Company, whereby, the Company will perform services for fees
related to management, leasing, operations, supervision and
maintenance of the joint venture properties. For the years ended
December 31, 2002, 2001 and 2000, the Company (i) earned management
fees of approximately $4.4 million, $3.3 million and $2.0 million,
respectively, (ii) received reimbursement of administrative fees of
approximately $1.0 million, $1.4 million and $1.4 million,
respectively, and (iii) earned leasing commissions of approximately
$0.8 million, $0.3 million and $0.1 million, respectively.
During 2002, KIR purchased five shopping center properties, in separate
transactions, aggregating approximately 1.8 million square feet of
GLA for approximately $213.5 million, including the assumption of
approximately $63.1 million of mortgage debt encumbering two of the
properties.
During July 2002, KIR disposed of a shopping center property in Aurora,
IL for an aggregate sales price of approximately $2.4 million,
which represented the approximate book value of the property.
As of December 31, 2002, the KIR portfolio was comprised of 68
shopping center properties aggregating approximately 14.0 million
square feet of GLA located in 21 states.
During 2002, KIR obtained individual non-recourse, non-cross
collateralized fixed-rate ten year mortgages aggregating
approximately $170.3 million on seven of its previously
unencumbered properties with rates ranging from 5.95% to 7.38% per
annum. The net proceeds were used to finance the acquisition of
various shopping center properties.
During the year ended December 31, 2001, KIR purchased 12 shopping
center properties (including one property from the Company for
$37.0 million), in separate transactions, aggregating 2.9 million
square feet of GLA for approximately $349.0 million, including the
assumption of approximately $40.2 million of mortgage debt.
During December 2001, KIR disposed of a shopping center property in
Lake Mary, FL for an aggregate sales price of approximately $2.4
million. This disposition resulted in a gain of approximately $0.5
million. Proceeds from this sale were used to acquire an exchange
shopping center property.
During 2001, KIR obtained individual non-recourse, non-cross
collateralized fixed-rate mortgages aggregating approximately
$280.0 million on 14 of its previously unencumbered properties with
terms ranging from 7 to 10 years and rates ranging from 6.76% to
7.69% per annum. The net proceeds were used to finance the
acquisition of various shopping center properties.
KIR maintains a secured revolving credit facility with a syndicate of
banks, which is scheduled to expire in November 2003. This facility
is collateralized by the unfunded subscriptions of certain
partners, including those of the Company. The facility has an
aggregate availability of up to $100.0 million based upon the
amount of unfunded subscription commitments of certain partners.
During January 2003, the aggregate availability under the credit
facility was reduced to $90.0 million. Under the terms of the
facility, funds may be borrowed for general corporate purposes,
including the acquisition of institutional quality properties.
Borrowings under the facility accrue interest at LIBOR plus 0.80%.
As of December 31, 2002, there was $15.0 million outstanding under
this facility.
RioCan Investments -
During October 2001, the Company formed a joint venture (the "RioCan
Venture") with RioCan Real Estate Investment Trust ("RioCan") in
which the Company has a 50% non-controlling interest, to acquire
retail properties and development projects in Canada. The
acquisition and development projects are to be sourced and managed
by RioCan and are subject to review and approval by a joint
oversight committee consisting of RioCan management and the
Company's management personnel. The Company has committed a total
equity investment of up to CAD $250.0 million Canadian dollars
("CAD") for the acquisition of retail properties and development
projects. Capital contributions will only be required as suitable
opportunities arise and are agreed to by the Company and RioCan.
During 2002, the RioCan Venture acquired 24 shopping center
properties and four development properties, in separate
transactions, comprising approximately 5.7 million square feet of
GLA for an aggregate purchase price of approximately CAD $683.7
million (approximately USD $435.8 million) including the assumption
of approximately CAD $321.5 million (approximately USD $203.1
million) in mortgage debt encumbering 13 of the properties.
70
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During October 2001, the RioCan Venture acquired a portfolio of four
shopping center properties located in British Columbia for an
aggregate purchase price of approximately CAD $170.0 million
(approximately USD $107.8 million) including the assumption of
approximately CAD $108.5 million (approximately USD $68.8 million)
in mortgage debt.
As of December 31, 2002, the RioCan Venture was comprised of 28
operating properties and four development properties consisting of
approximately 6.7 million square feet of GLA.
Kimco / G.E. Joint Venture -
During 2001, the Company formed a joint venture (the "Kimco Retail
Opportunity Portfolio" or "KROP") with GE Capital Real Estate
("GECRE"), in which the Company has a 20% non-controlling interest
and manages the portfolio. The purpose of this joint venture is to
acquire established high growth potential retail properties in the
United States. Total capital commitments to KROP from GECRE and the
Company are for $200.0 million and $50.0 million, respectively, and
such commitments are funded proportionately as suitable
opportunities arise and are agreed to by GECRE and the Company.
During 2002, GECRE and the Company contributed approximately $39.0
million and $9.8 million, respectively, towards their capital
commitments. Additionally, GECRE and the Company provided
short-term interim financing for all acquisitions made by KROP
without a mortgage in place at the time of acquisition. All such
financing bears interest at rates ranging from Libor plus 4.0% to
4.25% and have maturities of less than one year. As of December 31,
2002, outstanding balances relating to short-term interim financing
is $17.3 million each for GECRE and the Company.
During 2002, KROP purchased 16 shopping centers aggregating 1.6 million
square feet of GLA for approximately $177.8 million, including the
assumption of approximately $29.5 million of mortgage debt
encumbering three of the properties.
During October 2002, KROP disposed of a shopping center in Columbia, MD
for an aggregate sales price of approximately $2.9 million, which
resulted in a gain of approximately $0.7 million.
During 2002, KROP obtained a cross-collateralized mortgage with a
five-year term aggregating $73.0 million on eight properties with
an interest rate of Libor plus 1.8%. Upon the sale of one of the
collateralized properties, $1.9 million was repaid during 2002. In
order to mitigate the risks of interest rate fluctuations
associated with this variable rate obligation, KROP entered into an
interest rate cap agreement for the notional value of this
mortgage.
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 2002, the Company acquired seven former Service Merchandise
locations, in separate transactions, through a venture in which the
Company has a 42.5% non-controlling interest. These properties were
purchased for an aggregate purchase price of approximately $20.9
million. In November 2002, the joint venture obtained mortgages on
two of these locations for approximately $7.0 million. The venture
has signed leases for six of these locations and is actively
negotiating with other retailers to lease the remaining location.
During July 2002, the Company acquired a property located in Kalamazoo,
MI, through a joint venture in which the Company has a 50%
non-controlling interest. The property was purchased for an
aggregate purchase price of approximately $6.0 million.
71
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During December 2002, the Company acquired an out-parcel of an existing
property located in Tampa, Fl, through a joint venture in which the
Company has a 50% non-controlling interest. The property was
purchased for an aggregate purchase price of approximately $4.9
million.
Additionally, during 2002, the Company, in separate transactions,
disposed of two operating properties through a joint venture in
which the Company has a 50% non-controlling interest. The
properties were located in Tempe, AZ and Glendale, AZ and sold for
approximately $19.2 million and $1.7 million, respectively.
During March 2001, the Company exercised its option to acquire a 50%
non-controlling interest in a joint venture from KC Holdings, Inc.
("KC Holdings"), an entity formed in connection with the Company's
initial public stock offering in November 1991. This joint venture
consists of three shopping center properties located in Buffalo,
NY, comprising approximately 0.4 million square feet of GLA. The
joint venture was acquired for an aggregate option price of
approximately $3.5 million, paid approximately $2.7 million in cash
and $0.8 million in shares of the Company's common stock (29,638
shares valued at $27.67 per share). The members of the Company's
Board of Directors who are not also shareholders of KC Holdings,
unanimously approved the Company's purchase of this joint venture
investment.
Summarized financial information for the recurring operations of these
real estate joint ventures, is as follows (in millions):
December 31,
-------------------------
2002 2001
-------- --------
Assets:
Real estate, net $2,511.8 $1,676.4
Other assets 132.5 94.1
-------- --------
$2,644.3 $1,770.5
======== ========
Liabilities and Partners' Capital:
Notes Payable $ 49.6 $ 15.0
Mortgages payable 1,720.6 1,189.5
Other liabilities 116.6 72.6
Minority Interest 10.8 14.8
Partners' capital 746.7 478.6
-------- --------
$2,644.3 $1,770.5
======== ========
Other liabilities in the accompanying Consolidated Balance Sheets
include accounts with certain real estate joint ventures totaling
approximately $5.3 million and $8.7 million at December 31, 2002
and 2001, 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.
72
7. Other Real Estate Investments:
Ward Venture -
During March 2001, through a taxable REIT subsidiary, the Company
formed a real estate joint venture, (the "Ward Venture") in which
the Company has a 50% interest, for purposes of acquiring asset
designation rights for substantially all of the real estate
property interests of the bankrupt estate of Montgomery Ward LLC
and its affiliates. These asset designation rights have provided
the Ward Venture the ability to direct the ultimate disposition of
the 315 fee and leasehold interests held by the bankrupt estate.
The asset designation rights expired in August 2002 for the
leasehold positions and expire in December 2004 for the fee owned
locations. During the marketing period, the Ward Venture will be
responsible for all carrying costs associated with the properties
until the property is designated to a user. As of December 31,
2002, there were 12 properties which continue to be marketed.
During 2002, the Ward Venture completed transactions on 32 properties,
and the Company recognized pre-tax profits of approximately $11.3
million.
During 2001, the Ward Venture completed transactions on 271 properties,
and the Company recognized pre-tax profits from the Ward Venture of
approximately $34.6 million.
Leveraged Lease -
During June 2002, the Company acquired a 90% equity participation
interest in an existing leveraged lease of 30 properties. The
properties are leased under a long-term bond-type net lease whose
primary term expires in 2016, with the lessee having certain
renewal option rights. The Company's cash equity investment was
approximately $4.0 million. This equity investment is reported as a
net investment in leveraged lease in accordance with FASB No. 13
(as amended).
During 2002, four of these properties were sold whereby the proceeds
from the sales were used to paydown the mortgage debt by
approximately $9.6 million. As of December 31, 2002, the remaining
26 properties were encumbered by third-party non-recourse debt of
approximately $86.0 million that is scheduled to fully amortize
during the primary term of the lease from a portion of the periodic
net rents receivable under the net lease. As an equity participant
in the leveraged lease, the Company has no general obligation for
principal or interest payments on the debt, which is collateralized
by a first mortgage lien on the properties and collateral
assignment of the lease. Accordingly, this obligation has been
offset against the related net rental receivable under the lease.
The net investment in leveraged lease reflects the original cash
investment adjusted by remaining net rentals of approximately $94.8
million, estimated unguaranteed residual value of approximately
$65.2 million, non-recourse mortgage debt of approximately ($86.0)
million and unearned and deferred income of approximately ($70.0)
million.
Kmart Venture -
During July 2002, the Company formed the Kmart Venture in which the
Company has a 60% controlling participation for purposes of
acquiring asset designation rights for 54 former Kmart locations.
The total commitment to Kmart by the Kmart Venture, prior to the
profit sharing arrangement commencing, is approximately $43.0
million. As of December 31, 2002, the Kmart Venture has completed
transactions on 35 properties and has funded the total commitment
of approximately $43.0 million to Kmart.
Kimsouth -
During November 2002, the Company, through its taxable REIT subsidiary,
together with Prometheus Southeast Retail Trust, completed the
merger and privatization of Konover Property Trust, which has been
renamed Kimsouth Realty, Inc., ("Kimsouth"). The Company acquired
44.5% of the common stock of Kimsouth, which consisted primarily of
38 retail shopping center properties comprising approximately 17.4
million square feet of GLA. Total acquisition value was
approximately $280.9 million including approximately $216.2 million
in mortgage debt. The Company's investment strategy with respect to
Kimsouth includes re-tenanting, repositioning and disposition of
the properties. During December 2002, Kimsouth sold its joint
venture interest in one property to its joint venture partner for
net proceeds of approximately $4.6 million and disposed of a single
property for net proceeds of approximately $2.9 million.
73
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Selected financial information for Kimsouth as of December 31, 2002, is
as follows: real estate, net of accumulated depreciation, $282.3
million; other assets $38.3 million; mortgages payable $185.0
million; other liabilities $3.6 million.
Preferred Equity Capital -
During 2002, the Company established a preferred equity program, which
provides capital to developers and owners of shopping centers.
During 2002, the Company provided, in separate transactions, an
aggregate of approximately $25.6 million in investment capital to
developers and owners of nine shopping centers.
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 sublet to retailers who lease the
stores pursuant to net lease agreements. Income from the investment
in these retail store leases during the years ended December 31,
2002, 2001 and 2000 was approximately $0.8 million, $3.2 million
and $4.0 million, respectively. These amounts represent sublease
revenues during the years ended December 31, 2002, 2001 and 2000 of
approximately $13.9 million, $16.8 million and $19.0 million,
respectively, less related expenses of $11.7 million, $12.2 million
and $13.6 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): 2003,
$12.2 and $9.5; 2004, $10.7 and $8.5; 2005, $8.8 and $7.3; 2006,
$7.8 and $5.8; 2007, $5.2 and $3.9 and thereafter, $6.5 and $4.2,
respectively.
8. Mortgages and Other Financing Receivables:
During August 2001, the Company, through a joint venture in which the
Company had a 50% interest, provided $27.5 million of
debtor-in-possession financing (the "Ames Loan") to Ames Department
Stores, Inc. ("Ames"), a retailer in bankruptcy. This loan bore
interest at prime plus 6.0%, was collateralized by all real estate
owned by Ames and was scheduled to mature in August 2003.
During September 2002, the Ames Loan, was restructured as a two-year
$100.0 million secured revolving loan of which the Company has a
40% interest. This revolving loan is collateralized by all of Ames'
real estate interests. The loan bears interest at 8.5% per annum
and provides for contingent interest upon the successful
disposition of the Ames properties. The outstanding balance on the
revolving loan at December 31, 2002 was approximately $4.1 million.
During March 2002, the Company provided a $15.0 million three-year loan
to Gottchalks, Inc., at an interest rate of 12.0% per annum
collateralized by three properties. The Company receives principal
and interest payment on a monthly basis. As of December 31, 2002,
the outstanding loan balance was approximately $14.3 million.
During March 2002, the Company provided a $50.0 million ten-year loan
to Shopko Stores Inc., at an interest rate of 11.0% per annum
collateralized by 15 properties. The Company receives principal and
interest payments on a monthly basis. As of December 31, 2002, the
outstanding loan balance was approximately $49.8 million.
During May 2002, the Company provided a $15.0 million three-year loan
to Frank's Nursery & Crafts, Inc. ("Frank's"), at an interest rate
of 10.25% per annum collateralized by 40 real estate interests.
Interest is payable quarterly in arrears. An additional $7.5
million revolving loan at an interest rate of 10.25% per annum was
also established. As of December 31, 2002 there were no borrowings
outstanding on the additional revolving loan. As an inducement to
make these loans, Frank's issued the Company approximately 4.4
million warrants with an exercise price of $1.15 per share.
74
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
9. 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 $0.1 million at
December 31, 2002 and 2001.
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.
10. Notes Payable:
The Company has implemented a medium-term notes ("MTN") program
pursuant to which it may, from time to time, offer for sale its
senior unsecured debt for any general corporate purposes, including
(i) funding specific liquidity requirements in its business,
including property acquisitions, development and redevelopment
costs, and (ii) managing the Company's debt maturities.
As of December 31, 2002, a total principal amount of $507.25 million,
in senior fixed-rate MTNs had been issued under the MTN program
primarily for the acquisition of neighborhood and community
shopping centers, the expansion and improvement of properties in
the Company's portfolio and the repayment of certain debt of the
Company. These fixed-rate notes had maturities ranging from five to
twelve years at the time of issuance and bear interest at rates
ranging from 5.98% to 7.91%. Interest on these fixed-rate senior
unsecured notes is payable semi-annually in arrears.
During July 2002, the Company issued an aggregate $102.0 million of
unsecured debt under its MTN program. These issuances consisted of
(i) an $85.0 million floating-rate MTN which matures in August 2004
and bears interest at Libor plus 0.50% per annum and (ii) a $17.0
million fixed-rate MTN which matures in July 2012 and bears
interest at 5.98% per annum. The proceeds from these MTN issuances
were used toward the repayment of a $110.0 million floating-rate
MTN which matured in August 2002. In addition, the Company entered
into an interest rate swap agreement on the $85.0 million
floating-rate MTN which effectively fixed the interest rate at
2.3725% per annum until November 2003.
During November 2002, the Company issued $35.0 million of 4.961%
fixed-rate Senior Notes due 2007 (the "2007 Notes"). Interest on
the 2007 Notes is payable semi-annually in arrears. Net proceeds
from the issuance totaling approximately $34.9 million, after
related transaction costs of approximately $0.1 million, were
primarily used to repay outstanding borrowings on the Company's
unsecured credit facilities.
Also, during November 2002, the Company issued $200.0 million of 6%
fixed-rate Senior Notes due 2012 (the "2012 Notes"). Interest on
the 2012 Notes is payable semi-annually in arrears. The Notes were
sold at 99.79% of par value. Net proceeds from the issuance
totaling approximately $198.3 million, after related transaction
costs of approximately $1.3 million, were primarily used to repay
outstanding borrowings on the Company's unsecured credit
facilities.
As of December 31, 2002, the Company has a total principal amount of
$570.0 million, in fixed-rate unsecured senior notes. These
fixed-rate notes have maturities ranging from 2003 through 2009 and
bear interest at rates ranging from 4.96% to 7.50%. Interest on
these fixed-rate senior unsecured notes is payable semi-annually in
arrears.
75
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2002, the Company had outstanding $100.0 million of
remarketed reset notes, which mature in August 2008. The interest
rate spread applicable to each period is determined pursuant to a
remarketing agreement between the Company and a financial
institution. The current interest rate is LIBOR plus 1.25% per
annum, and interest is payable quarterly in arrears. During
November 2002, the Company entered into an interest rate swap
agreement which effectively fixed the interest rate at 3.03% per
annum through August 2003.
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 $26.0 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.
During August 2000, the Company established a $250.0 million, unsecured
revolving credit facility (the "Credit Facility") with a group of
banks which is scheduled to expire in August 2003. The Company
intends to renew the Credit Facility prior to the maturity date.
This Credit Facility has made available funds for general corporate
purposes, including the funding of property acquisitions,
development and redevelopment costs. Interest on borrowings accrues
at a spread (currently 0.65%) to LIBOR or money-market rates, as
applicable, which fluctuates in accordance with changes in the
Company's senior debt ratings. The Company's senior debt ratings
are currently A-/stable from Standard & Poors and Baa1/stable from
Moody's Investor Services. As part of this Credit Facility, the
Company has a competitive bid option where the Company may auction
up to $100.0 million of its requested borrowings to the bank group.
This competitive bid option provides the Company the opportunity to
obtain pricing below the currently stated spread to LIBOR of 0.65%.
A facility fee of 0.15% per annum is payable quarterly in arrears.
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. As of
December 31, 2002, there was $40.0 million outstanding under this
Credit Facility.
During July 2002, the Company further enhanced its liquidity position
by establishing an additional $150.0 million unsecured revolving
credit facility. During December 2002, the Company paid down the
outstanding balance and terminated this facility.
The scheduled maturities of all unsecured senior notes payable as of
December 31, 2002 are approximately as follows (in millions): 2003,
$140.0; 2004, $185.0; 2005, $200.25; 2006, $85.0; 2007, $195.0 and
thereafter, $497.0.
11. Mortgages Payable:
As part of the Company's strategy to reduce its exposure to Kmart
Corporation, the Company had previously encumbered seven Kmart
sites with individual non-recourse mortgages aggregating
approximately $70.8 million. As a result of the Kmart bankruptcy
filing in January 2002 and the subsequent rejection of leases
including these encumbered sites, the Company, during July 2002,
had suspended debt service payments on these loans and began active
negotiations with the respective lenders.
During December 2002, the Company reached agreement with certain
lenders in connection with four of these locations. The Company
paid approximately $24.2 million in full satisfaction of the loans
encumbering these properties which aggregated $46.5 million and the
Company recognized a gain on early extinguishment of debt of
approximately $22.3 million (see Note 5).
During December 2002, the Company re-tenanted one location and has
brought the mortgage loan encumbering this property current.
During February 2003, the Company reached agreement with the lender in
connection with the two remaining encumbered locations. The Company
paid approximately $8.3 million in full satisfaction of these loans
which aggregated approximately $14.7 million and will recognize a
gain on early extinguishment of debt of approximately $6.2 million
during the first quarter of 2003.
During 2001, the Company obtained four individual non-recourse
fixed-rate mortgage loans providing aggregate proceeds to the
Company of approximately $51.2 million. These ten-year loans mature
in 2011 and have effective interest rates ranging from 7.31% to
7.64% per annum.
76
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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 6.50%
to 9.50% (weighted average interest rate of 7.82% as of December
31, 2002). The scheduled maturities of all mortgages payable as of
December 31, 2002, are approximately as follows (in millions):2003,
$0.0; 2004, $8.8; 2005, $14.6; 2006, $33.8; 2007, $11.1 and
thereafter, $162.5.
Two of the Company's properties are encumbered by approximately $11.1
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.
12. Construction Loans Payable:
During 2002, the Company obtained construction financing on eight
ground-up development projects for an aggregate loan amount of up
to $119.8 million, of which approximately $38.9 million has been
funded as of December 31, 2002. These loans have maturities ranging
from 18 to 36 months and a weighted average interest rate of 4.38%
at December 31, 2002.
The scheduled maturities of all construction loans payable as of
December 31, 2002, are approximately as follows (in millions):
2003, $7.3; 2004, $30.2; and 2005, $6.5.
13. KC Holdings:
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, 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 (the "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. During the Acquisition Options period, which
expired in November 2001, KC Holdings' subsidiaries had conveyed 29
shopping centers and a 50% interest in a joint venture consisting
of three properties back to the Company. Additionally, KC Holdings'
subsidiaries 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 these properties that have been reacquired
by the Company from KC Holdings. The Company manages three of KC
Holdings' four remaining shopping center properties pursuant to a
management agreement (See Note 17).
14. 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
except those listed below for which fair values are reflected. Such
fair value estimates are not necessarily indicative of the amounts
that would be realized upon disposition of the Company's financial
instruments. The following are financial instruments for which the
Company's estimate of fair value differs from the carrying amounts
(in thousands):
December 31, 2002
Carrying Amounts Fair Value
--------------- ---------
Notes payable $1,302,250 $1,353,884
Mortgages payable $ 230,760 $ 282,361
77
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
15. Financial Instruments - Derivatives and Hedging:
The Company is exposed to the effect of changes in interest rates,
foreign currency exchange rate fluctuations and market value
fluctuations of equity securities. The Company limits these risks
by following established risk management policies and procedures
including the use of derivatives.
The principal financial instruments currently used by the Company are
interest rate swaps, foreign currency exchange forward contracts,
cross currency swaps and warrant contracts. The Company, from time
to time, hedges the future cash flows of its floating-rate debt
instruments to reduce exposure to interest rate risk principally
through interest rate swaps with major financial institutions. The
Company has interest-rate swap agreements on its $85.0 million
floating-rate MTN and on its $100.0 million floating-rate
remarketed reset notes, which have been designated and qualified as
cash flow hedges. The Company has determined that these swap
agreements are highly effective in offsetting future variable
interest cash flows related to the Company's debt portfolio. For
the year ended December 31, 2002, the change in the fair value of
the interest rate swaps was $3.3 million which was recorded in
Other Comprehensive Income ("OCI") a component of stockholders'
equity, with a corresponding liability reduction for the same
amount.
During 2002, the Company entered into foreign currency forward
contracts on its Canadian investment in marketable securities in
the amount of approximately CAD $31.2 million (approximately USD
$19.9 million). The Company has designated these foreign currency
forward contracts as fair value hedges. The Company expects these
forward contracts to be highly effective in limiting its exposure
to the variability in the fair value of its Canadian investments as
it relates to changes in the exchange rate. The gain or loss on the
forward contracts will be recognized currently in earnings and the
gain or loss on the Canadian investments attributable to changes in
the exchange rate will be recognized currently in earnings and
shall adjust the carrying amount of the hedged investments.
As of December 31, 2002, the Company had foreign currency forward
contracts on its Canadian investments in real estate aggregating
approximately CAD $173.3 million (approximately USD $110.3
million). In addition, the Company had foreign currency forward
contracts and a cross currency swap aggregating $383.7 million
pesos ("MXN")(approximately USD $35.7 million) on its Mexican real
estate investments. The Company has designated these foreign
currency agreements as hedges of the foreign currency exposure of
its net investment in Canadian and Mexican real estate operations.
The Company believes that these agreements are highly effective in
reducing the exposure to fluctuations in the exchange rate. The
gains and losses on these net investment hedges are recorded in OCI
with a corresponding asset or liability for the same amount.
Similarly, the foreign currency translation gains and losses on the
Canadian and Mexican investments attributable to changes in the
exchange rate will also be recorded in OCI.
During 2001, the Company acquired warrants to purchase the common stock
of a Canadian REIT. The Company has designated the warrants as a
cash flow hedge of the variability in expected future cash outflows
upon purchasing the common stock. The Company has determined the
hedged cash outflow is probable and expected to occur prior to the
expiration date of the warrants. The Company has determined that
the warrants are fully effective. For the year ended December 31,
2002, the change in fair value of the warrants was a loss of
approximately $0.1 million which was recorded in OCI with a
corresponding asset for the same amount.
The following table summarized the notional values and fair values of
the Company's derivative financial instruments as of December 31,
2002:
78
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2002, these derivative instruments were reported at
their fair value as other liabilities of $1.5 million and other
assets of $3.7 million. During the next 12 months, the Company
expects to reclassify to earnings as expense approximately $0.6
million of the current balance in accumulated OCI primarily related
to the fair value of the interest rate swaps.
16. Preferred Stock, Common Stock and DownREIT Unit Transactions:
During October 2002, the Company acquired an interest in a shopping
center property located in Daly City, CA valued at $80.0 million
through the issuance of approximately 2.4 million downREIT units
(the "Units") which are convertible at a ratio of 1:1 into the
Company's common stock. The downREIT unit holder has the right to
convert the Units anytime after one year. In addition, the Company
has the right to mandatorily require a conversion after ten years.
If at the time of conversion the common stock price for the 20
previous trading days is less than $33.57 per share the unit holder
would be entitled to additional shares, however, the maximum number
of additional shares is limited to 251,966 based upon a floor
common stock price of $30.36. The Company has the option to settle
the conversion in cash. Dividends on the Units are paid quarterly
at the rate of the Company's common stock dividend multiplied by
1.1057. The value of the units is included in Minority interest in
partnerships on the accompanying Consolidated Balance Sheets.
During March 2001, the Company issued 29,638 shares of common stock at
$27.67 per share in connection with the exercise of its option to
acquire a 50% interest in a joint venture consisting of three
shopping center properties from KC Holdings.
During November 2001, the Company completed a primary public stock
offering of 2,250,000 shares of common stock priced at $32.85 per
share. The net proceeds from this sale of common stock, totaling
approximately $70.1 million (after related transaction costs of
$3.8 million) was used primarily to invest equity capital in a new
joint venture formed with G.E. Capital Real Estate and for
additional equity capital in KIR (see Note 6).
During December 2001, the Company completed a primary public stock
offering of 1,500,000 shares of common stock priced at $33.57 per
share. The net proceeds from this sale of common stock, totaling
approximately $47.6 million (after related transaction costs of
$2.7 million) was used for general corporate purposes, including
(i) the investment of additional equity capital in KIR (see Note 6)
and (ii) the development, redevelopment and expansion of properties
in the Company's portfolio.
Additionally, during November 2001, the Company announced the
redemption of all outstanding depositary shares of the Company's
7-1/2% Class D Cumulative Convertible Preferred Stock (the "Class D
Preferred Stock") in exchange for shares of the Company's common
stock. The Board of Directors set January 3, 2002 as the mandatory
redemption date on which all outstanding depositary shares of Class
D Preferred Stock would be redeemed. Holders of the Class D
Preferred Stock on the redemption date received 0.93168 shares of
the Company's common stock, as adjusted for the Company's
three-for-two common stock split, for each depositary share
redeemed. During 2001, 3,258,642 depositary shares of the Class D
Preferred Stock were voluntarily converted to common stock by the
holders. On January 3, 2002, the remaining 923,900 depositary
shares of the Class D Preferred Stock were redeemed for common
stock by the Company and a final dividend payment of 43.4680 cents
per class D Depositary share was paid on January 15, 2002.
At December 31, 2002, the Company had 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 Company's 8-1/2%
Class B Cumulative Redeemable Preferred Stock, par value $1.00 per
share (the "Class B Preferred Stock") and 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").
79
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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
$25.00 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, and Class C
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
$25.00 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 $25.00 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, and Class C
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
$25.00 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 $25.00 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 and Class B
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, and Class C 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, and each Class C Depositary Share is entitled to one vote.
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 ($25.00 per Class A,
Class B, and Class C 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.
80
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
17. Transactions with Related Parties:
During 2002, the Company, along with its joint venture partner provided
KROP short-term interim financing for all acquisitions by KROP for
which a mortgage was not in place at the time of closing. All such
financing bears interest at rates ranging from Libor plus 4.0% and
4.25% and have maturities of less than one year. As of December 31,
2002, KROP had outstanding short-term interim financing to GECRE
and the Company totaling $17.3 million each. The Company earned
$0.8 million during 2002 related to such interim financing.
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 less than $0.4 million for each of the years ended December 31,
2002, 2001 and 2000, respectively.
In November 1991 the Company was granted Acquisition Options to
reacquire the real estate assets owned by KC Holdings'
subsidiaries. The remaining Acquisition Options expired in November
2001 with regard to the real estate assets which the Company had
not reacquired.
In March 2001, the Company exercised its option to acquire a 50%
interest in a joint venture from KC Holdings. The joint venture
consists of three shopping center properties located in Buffalo,
NY. This joint venture interest was acquired for an aggregate
option price of approximately $3.5 million, paid approximately $2.7
million in cash and $0.8 million in shares of the Company's common
stock (29,638 shares valued at $27.67 per share).
Reference is made to Notes 6, 13, and 16 for additional information
regarding transactions with related parties.
18. Commitments and Contingencies:
The Company and its subsidiaries are primarily 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 99%
of total revenues from rental property for each of the three years
ended December 31, 2002, 2001 and 2000, respectively.
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): 2003, $335.3; 2004, $309.7;
2005, $282.2; 2006, $250.8; 2007, $222.0 and thereafter, $1,333.3.
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): 2003, $10.9; 2004,
$10.8; 2005, $10.1; 2006, $9.5; 2007, $9.0 and thereafter, $125.1.
The Company has issued letters of credit in connection with the
collateralization of tax-exempt mortgage bonds, completion
guarantees for certain construction projects, and guaranty of
payment related to the Company's insurance program. These letters
of credit aggregate approximately $14.9 million.
Additionally, the RioCan Venture, an entity in which the Company holds
a 50% non-controlling interest, has a CAD $5.0 million
(approximately USD $3.2 million) letter of credit facility. This
facility is jointly guaranteed by RioCan and the Company and has
approximately CAD $1.0 million (approximately USD $0.6 million)
outstanding as of December 31, 2002 relating to various development
projects.
81
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
During 2002, the limited partners in KIR, an entity in which the
Company holds a 43.3% non-controlling interest, contributed $55.0
million towards their respective capital commitments, including
$23.8 million by the Company. As of December 31, 2002, KIR had
unfunded capital commitments of $129.0 million, including $55.9
million from the Company.
KIR maintains a secured revolving credit facility with a syndicate of
banks, which is scheduled to expire in November 2003. This facility
is collateralized by the unfunded subscriptions of certain
partners, including those of the Company. The facility has an
aggregate availability of up to $100.0 million based upon the
amount of unfunded subscription commitments of certain partners.
During January 2003, the aggregate availability under the credit
facility was reduced to $90.0 million. As of December 31, 2002,
there was $15.0 million outstanding under this facility.
19. Incentive Plans:
The Company maintains a stock option plan (the "Plan") pursuant to
which a maximum 13,500,000 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, 2002, 2001 and 2000 is as follows:
Weighted Average
Exercise Price
Shares Per Share
--------- ---------------
Options outstanding, December 31, 1999 4,869,138 $20.56
Exercised (290,106) $17.03
Granted 1,347,637 $27.09
Forfeited (387,874) $19.07
----------
Options outstanding, December 31, 2000 5,538,795 $22.44
Exercised (1,694,227) $20.62
Granted 2,119,175 $30.71
Forfeited (54,390) $25.76
----------
Options outstanding, December 31, 2001 5,909,353 $25.90
Exercised (307,831) $18.76
Granted 1,562,525 $31.27
Forfeited (61,974) $27.99
----------
Options outstanding, December 31, 2002 7,102,073 $27.37
=========
Options exercisable -
December 31, 2000 2,921,737 $20.13
========= ======
December 31, 2001 2,369,288 $21.98
========= ======
December 31, 2002 3,298,417 $24.06
========= ======
The exercise prices for options outstanding as of December 31, 2002
range from $14.17 to $33.67 per share. The weighted average
remaining contractual life for options outstanding as of December
31, 2002 was approximately 7.8 years. Options to purchase
1,731,321, 3,293,846 and 913,042 shares of the Company's common
stock were available for issuance under the Plan at December 31,
2002, 2001 and 2000, 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, net income and
net income per diluted common share for the years ended December
31, 2002, 2001 and 2000 would have been reduced by approximately
$3.2 million or $0.03 per diluted share, $2.7 million or $0.03 per
diluted share and $2.2 million or $0.03 per diluted share,
respectively. Effective January 1, 2003, the Company will adopt the
prospective method provisions of FASB No. 148, which will apply the
recognition provisions of FASB No. 123 to all employee awards
granted, modified or settled after January 1, 2003.
82
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
These pro forma adjustments to net income and net income per diluted
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 2002, 2001 and 2000 include: (i)
weighted average risk-free interest rates of 3.06%, 4.85% and
5.69%, respectively; (ii) weighted average expected option lives of
4.1 years, 5.5 years, and 4.4 years, respectively; (iii) an
expected volatility of 16.12%, 15.76% and 15.82%, respectively, and
(iv) an expected dividend yield of 6.87%, 6.74% and 6.95%,
respectively. The per share weighted average fair value at the
dates of grant for options awarded during 2002, 2001 and 2000 was
$1.50, $1.98 and $2.05, 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% of their
eligible compensation, is fully vested and funded as of December
31, 2002. Company contributions to the plan were approximately $0.7
million, $0.7 million and $0.6 million for the years ended December
31, 2002, 2001 and 2000, respectively.
20. Income Taxes:
The Company elected to qualify as a REIT in accordance with the Code
commencing with its taxable year which began January 1, 1992. To
qualify as a REIT, the Company must meet a number of organizational
and operational requirements, including a requirement that it
currently distribute at least 90% of its adjusted REIT taxable
income to its stockholders. It is management's intention to adhere
to these requirements and maintain the Company's REIT status. As a
REIT, the Company generally will not be subject to corporate
federal income tax, provided that distributions to its stockholders
equal at least the amount of its REIT taxable income as defined
under the Code. If the Company fails to qualify as a REIT in any
taxable year, it will be subject to federal income taxes at regular
corporate rates (including any applicable alternative minimum tax)
and may not be able to qualify as a REIT for four subsequent
taxable years. Even if the Company qualifies for taxation as a
REIT, the Company is subject to certain state and local taxes on
its income and property and federal income and excise taxes on its
undistributed taxable income. In addition, taxable income from
non-REIT activities managed through taxable REIT subsidiaries is
subject to federal, state and local income taxes.
Reconciliation between GAAP Net Income and Federal Taxable Income:
The following table reconciles GAAP net income to taxable income for
the years ended December 31, 2002, 2001 and 2000 (in thousands):
Note 1 - All adjustments to "GAAP net income from REIT operations" are
net of amounts attributable to minority interest and taxable REIT
subsidiaries.
83
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Reconciliation between Cash Dividends Paid and Dividends Paid
Deductions:
Cash dividends paid were equal to the dividends paid deduction for the
years ended December 31, 2002, 2001 and 2000, and amounted to (in
thousands) $235,602, $209,785 and $189,896, respectively.
Characterization of Distributions:
The following characterizes distributions paid for the years ended
December 31, 2002, 2001 and 2000 (in thousands):
Taxable REIT Subsidiaries ("TRS"):
Commencing January 1, 2001, the Company is subject to federal, state
and local income taxes on the income from it TRS activities.
Income taxes have been provided for on the asset and liability method
as required by Statement of Financial Accounting Standard No. 109,
Accounting for Income Taxes. Under the asset and liability method,
deferred income taxes are recognized for the temporary differences
between the financial reporting basis and the tax basis of the TRS
assets and liabilities.
The Company's TRS income and provision for income taxes for the years
ended December 31, 2002 and 2001, are summarized as follows (in
thousands):
2002 2001
---- ----
Taxable income before income taxes $36,477 $48,439
------- -------
Less provision for income taxes:
Federal 10,538 15,682
State and local 2,366 3,694
Total tax provision 12,904 19,376
------- -------
TRS net income $23,573 $29,063
======= =======
There was no provision for income taxes for the year ended December 31,
2000.
Deferred tax assets of approximately $4.4 million as of December 31,
2002 and 2001 and deferred tax liabilities of approximately $1.7
million as of December 31, 2002, are included in the caption Other
assets and Other liabilities on the accompanying Consolidated
Balance Sheets at December 31, 2002 and 2001, respectively. These
deferred tax assets and liabilities relate primarily to differences
in the timing of the recognition of income/(loss) between GAAP and
tax basis of accounting of (i) real estate joint ventures, (ii)
other real estate investments and (iii) other deductible temporary
differences.
84
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The income tax provision differs from the amount computed by applying
the statutory federal income tax rate to taxable income before
income taxes as follows (in thousands):
2002 2001
---- ----
Federal provision at statutory tax rate (35%) $12,767 $16,954
State and local taxes, net of federal benefit 2,010 2,422
Other (1,873) -
-------- ------
$12,904 $19,376
======= =======
21. Supplemental Financial Information:
The following represents the results of operations, expressed in
thousands except per share amounts, for each quarter during years
2002 and 2001:
(1) All periods have been adjusted to reflect the impact of
operating properties sold during 2002 and properties classified as
held for sale as of December 31, 2002 which are reflected in
Discounted operations in the Consolidated Statements of Income.
Accounts and notes receivable in the accompanying Consolidated Balance
Sheets are net of estimated unrecoverable amounts of approximately
$5.8 million and $4.3 million at December 31, 2002 and 2001,
respectively.
22. Pro Forma Financial Information (Unaudited):
As discussed in Notes 2 and 3, the Company and certain of its
subsidiaries acquired and disposed of interests in certain
operating properties during 2002. 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,
2002 and 2001, adjusted to give effect to these transactions as of
January 1, 2001.
85
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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, 2001, nor does it purport to represent the results of operations
for future periods. (Amounts presented in millions, except per
share figures.)
Years ended December 31,
2002 2001
---- ----
Revenues from rental property $473.8 $478.1
Net income $235.6 $237.7
Net income per common share:
Basic $2.08 $2.21
===== =====
Diluted $2.06 $2.17
===== =====
86
KIMCO REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
KIMCO REALTY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For Years Ended December 31, 2002, 2001 and 2000
(in thousands)
87
SCHEDULE III
KIMCO REALTY CORPORATION AND SUBSIDARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
88
89
90
91
92
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:
The aggregate cost for Federal income tax purposes was approximately $3.3
billion at December 31, 2002.
The changes in total real estate assets for the years ended December 31, 2002,
2001 and 2000 are as follows:
The changes in accumulated depreciation for the years ended December 31, 2002,
2001, and 2000 are as follows:
93