KIMCO'S Q3 EARNINGS SHOW STEADY PROGRESS; DIVIDEND HIKE REFLECTS CONFIDENCE IN FUTURE
Kimco Realty Corp. turned in another strong performance in the third quarter. We made steady progress toward our key objectives and saw continued improvement across our shopping center portfolio, both in terms of our operating metrics and strong retailer demand for space.
We announced our Q3 2012 earnings the day after Hurricane Sandy pounded the New York tri-state area and left a trail of destruction up the East Coast. We’re happy to report that none of our shopping centers sustained significant damage and the majority of our retailers remain open for business. Storm-related losses will be covered by insurance, so we don’t anticipate any impact on future earnings.
As for the third quarter, here’s a quick snapshot of Kimco’s results:
- We increased our quarterly common cash dividend by 10.5 percent, to 21 cents a share, reflecting our strong performance and confidence in the future.
- Same-site net operating income (NOI) grew for the 10th consecutive quarter.
- Funds from operations (FFO) as adjusted was 31 cents per diluted share, compared with 30 cents per diluted share a year ago.
- Occupancy rates reached their highest levels since December 2008, and leasing spreads remained positive, reflecting strong demand for space amid shrinking supply.
- Progress was made in our ongoing program to sell non-strategic and non-retail properties, including reaching an agreement to sell the InTown Suites portfolio.
We have reason to be confident about our prospects. Despite the weak economy and housing market, consumer spending is holding up, and national retailers in particular are pursuing aggressive expansion plans.
Discount and value-oriented retailers of all types have announced increased store counts for 2013 and 2014, and this bodes well for our portfolio, especially since the available supply of space is limited, and there is no new development on the immediate horizon.
Effective rents are also rising, but remain significantly below peak levels, suggesting strong upside potential. We’re also seeing solid occupancy increases in small-shop space, and we’re making outstanding progress leasing up our Latin American portfolio.
Shopping center operating results
Let’s take a look at our key operating metrics -- same-site NOI, occupancy, and leasing spreads -- for the quarter.
Same-site NOI: Combined (U.S., Canada, Latin America) same-site NOI was up 2.6 percent before the impact of currency, and 1.6 percent on a reported basis, including the impact of currency, the 10th consecutive quarterly increase. In the U.S., same-site NOI was up 2.5 percent.
Occupancy: The trend toward higher occupancy continues, with gross occupancy in both the combined and U.S. portfolios at 93.7 percent, up 70 basis points and 80 basis points from the third quarter of 2011, respectively. The good news here is that, in the U.S., the growth was due solely to smaller space lease-up. In spaces of fewer than 10,000 square feet, occupancy rose 60 basis points, to 83.9 percent, the result of positive leasing activity and, to a lesser extent, dispositions. National and franchise concepts, especially in the food and service sectors, are driving the momentum, and we’re doing our part to help spur growth with our FastTRACK Franchise and KEYS programs.
Leasing spreads: In the U.S., our recognized cash-basis leasing spreads -- the difference between new and old rents -- was 13 percent. The spread on new leases was 40.2 percent, helped in the quarter by a below-market anchor space in Pompano, Fla., being brought up to market, with Whole Foods and Sports Authority taking over the space previously occupied by Kmart. In particular, we saw meaningful increases in re-leasing space left vacant by the Borders and A&P bankruptcies. The spread on renewals and options rose 4.3 percent.
The signs are also positive in our key international markets. Canada continues to be a strong and steady performer, with more retailers looking to expand north of the border. Most recently, Nordstrom announced plans to open four full-line stores, while continuing to pursue opportunities for Nordstrom Rack.
Mexico, our other large international market, has seen 10 straight quarters of year-over-year economic expansion and is attracting significant international capital for real estate investment amid rising values. For the quarter, occupancy in Mexico climbed 130 basis points, and our stabilized Latin American portfolio, in total, now exceeds 90 percent occupancy.
Kimco is determined to become a best-in-class shopping center company, and our portfolio recycling program will help us get there. Our quality trade-up accelerated as we sold nine non-strategic properties during the quarter, and another 14 since the end of the quarter, for a total of $165 million. Proceeds were reinvested in acquiring six wholly owned shopping centers in our core markets, for a gross purchase price of $154 million.
The disposition pipeline remains full, with deals set on 15 more properties and another 20 currently being marketed. Our remaining non-strategic retail properties represent only 6.5 percent of the total portfolio, down from 10 percent two years ago.
On the non-retail side, Kimco announced a deal to sell our largest remaining asset, the InTown Suites portfolio of extended-stay properties, in which we hold a 75 percent interest, for a gross sales price of $735 million, including $617 million of existing debt. This will greatly assist us in reaching our goal to get the non-retail asset base down to under $300 million, less than 2.5 percent of gross assets.
Since our Investor Day in 2010, we have sold 86 non-strategic retail properties for gross proceeds of $530 million, along with about $400 million of non-retail assets, while buying 47 higher quality properties for a gross purchase price of $985 million.
Here’s what we mean by higher quality. The shopping centers we purchased have a combined occupancy of 94.2 percent, average base rent of nearly $14 a square foot, and average household income of $95,000. Contrast that with the properties sold, where occupancy was 83.4 percent, rent was $8.35, and income was $61,000.
Dividend and capital structure
Kimco’s balance sheet continues strengthen, helped by our recent capital transactions. In July, we completed a new $225 million perpetual preferred stock offering at a coupon of 5.5 percent, among the lowest ever for this type of capital. We used the proceeds to redeem our $175 million, 6.65 percent perpetual preferred stock in August.
Most recently, in October, we redeemed our $460 million, 7.75 percent perpetual preferred stock, funding the transaction with the proceeds from our $400 million, 6 percent preferred issuance completed in March, and the balance from our perpetual preferred offering in July.
As a result of these transactions, we will save about $11 million annually and improve our fixed-charge coverage. We expect to end the year with a net-debt-to-recurring-EBITDA ratio of just under six times.
We’re also actively refinancing maturing mortgages in our joint-venture programs, closing on 24 mortgages totaling $628 million at a weighted average rate of just under 4 percent, with six more in the pipeline for $160 million.
In total, we have refinanced about $1.9 million of capital (including preferred stock and debt) this year at significantly lower rates. As we look ahead to the coming year, we are confident we will be able to effectively manage our upcoming debt maturities.
Based on our performance thus far in 2012, and our expectations for 2013, the board of directors approved a 10.5 percent increase in the quarterly cash dividend to $0.21 per common share. For details about the quarterly dividends on our preferred shares, see Kimco's Q3 2012 earnings release.
We maintain our full-year guidance range for FFO as adjusted of $1.24 to $1.26 per diluted share. For the year, we still expect to increase our combined occupancy 50 to 100 basis points, and to grow our combined same-site NOI by 1.5 percent to 3.5 percent. Our preliminary 2013 guidance for FFO as adjusted is $1.28 to $1.33 per diluted share.
For more color on the quarter, I invite you to listen to a replay of our investor conference call (available until Nov. 30) or download a transcript of the call.