KIMCO’S Q3 EARNINGS: OUTPERFORMING EXPECTATIONS
The string of terms chosen by analysts to describe Kimco’s third quarter hint at the strength of our operations for the period ending September 30th, during which we outperformed expectations and raised guidance for the year.
The investment community saw our increases from last quarter as indicative of steady core growth, and acknowledged that our FFO (funds from operations) exceeded estimates. Other analysts said our core results continue to trend in the right direction and noted the robust pace of non-core asset sales.
Below are some of the highlights from Kimco’s Q3 results:
- Same-site NOI growth: U.S. same-site net operating income (NOI) increased 4.9 percent compared to the third quarter of 2013, including a 1.7 percent increase from the inclusion of redevelopments.
- Positive leasing spreads: U.S. portfolio pro-rata rental-rate leasing spreads increased 7.1 percent, with rental rates for new leases up 10.2 percent and renewals/options increasing 6.4 percent.
- High occupancy rates: Pro-rata occupancy in the U.S. and combined (including Canada and Latin America) portfolios ended the quarter at 95.5 percent and 95.3 percent, respectively. This represented increases of 110 basis points and 130 basis points, respectively, over Q3 2013.
- FFO increase: Funds from operations, a key measure of REIT performance, increased 14.7 percent from the same period last year. Our FFO at the close of this quarter was $159.9 million, or 39 cents per diluted share.
Let’s look a bit closer now at the details and primary drivers behind this quarter’s results.
U.S. same-site NOI growth of 4.9 percent was the highest level since before the great recession with redevelopment projects accounting for a healthy 1.7 percent increase. The company has taken great effort to rapidly expand its redevelopment pipeline over the last year, which now stands at over $1.1 billion including 70 active projects totaling approximately $324 million. It’s apparent that the results of this deep string of projects are showing in the numbers.
Also, increases in our portfolio occupancy were another positive contributor to our NOI growth this quarter. In the third quarter, we signed 188 new leases in the U.S. for a total of 843,000 square feet, which contributed to the rise in U.S. pro-rata occupancy to 95.5 percent. Anchor occupancy reached 98.2 percent (up 80 basis points from the Q3 2013) and small-shop occupancy jumping 230 basis points to 87.0 percent.
When considering occupancy, we gauge our success not only by how much square footage is tenanted, but on the quality of the occupants. Our top tenants such as TJX, Costco, Home Depot, and Burlington continue to increase their store counts. We’ve also seen the return of local mom-and-pop businesses; of our 173 small-shop deals in Q3, more than half were pure mom-and-pops.
We welcome the increased diversity in our tenant mix. Restaurants are expanding in great numbers, and tenants in health and wellness (including national and regional tenants such as Aspen Dental, The Joint Chiropractic, and Hand and Stone Massage) are now a fixture at open-air centers. Also worth noting is that most of our large retailers have been doing a great job offsetting the headwind of e-commerce by blending online initiatives with their brick and mortar businesses. While retail performance in general has continued to be uneven this year, our top tenants are doing very well and there’s a good deal of optimism across the industry for the holiday season ahead.
On balance, the transformation of Kimco’s portfolio is behind the excellent operating metrics we’ve been describing: strong same-site NOI growth, positive leasing spreads, and increased occupancy levels.
The purchase of a portfolio of 10 shopping centers predominantly anchored by grocers (Giant Food, Harris Teeter, Weis Markets, Safeway, and Food Lion) led our acquisition news this quarter. Located in mature markets within the densely populated Mid-Atlantic region, the portfolio is 95.4 percent occupied and was acquired from Kimco’s joint venture with SEB Asset Management for a gross price of $275.8 million. This is our third acquisition from a joint venture in 2014 and another substantial step in our commitment to simplification.
The aggressive asset-recycling program we first announced in September 2010 is in its final stage. During this quarter we sold ownership interests in 24 U.S. properties for a gross sales price of $263.6 million. Additionally, we sold three shopping center properties in Mexico for a gross sales price of $110.8 million and have a contract pending on nine other Mexican assets. Since the beginning of 2014 we’ve sold 67 retail properties in the U.S. and 18 in Latin America for total gross sales of $1.2 billion. We remain on target to complete this phase of our transformation in 2015, and will substantially complete our exit from Latin America by the end of this year.
Dividends and guidance
We’re pleased to announce that, based on Kimco’s performance in 2014, our Board of Directors has approved an increase in the quarterly cash dividend to $0.24 per common share, up from $0.225 — an increase of 6.7 percent on an annualized basis.
The company has tightened its full-year guidance range for FFO as adjusted per share to $1.38 – $1.40. Our prior guidance was $1.36 – $1.40. The midpoint of the current range would represent a 4.5 percent annual growth rate. Guidance for our combined portfolio occupancy has been revised for a range of +80 to +100 basis points (up from previous guidance of +50 to +75), and guidance for same-site NOI is currently +2.75 to +3.5 percent (up from +2.5 to +3.5 percent).
As Kimco CFO Glenn Cohen said on our October 28th earnings call, our solid third quarter performance is ultimately the result of adhering to our stated strategy. For more details, you’re invited to listen to a recording of the earnings webcast or read the transcript.
We’ll be back with a fourth-quarter report in the new year. Enjoy the holidays.