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Section 1: 10-K (FORM 10-K)

kim20161231_10k.htm Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission file number 1-10899

 

Kimco Realty Corporation

(Exact name of registrant as specified in its charter)

 

Maryland

 

13-2744380

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

3333 New Hyde Park Road, New Hyde Park, NY 11042-0020

(Address of principal executive offices)     (Zip Code)

 

(516) 869-9000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on

   

which registered

     

Common Stock, par value $.01 per share.

 

New York Stock Exchange

Depositary Shares, each representing one-thousandth of a share of 6.00% Class I Cumulative Redeemable
Preferred Stock, par value $1.00 per share.

 

New York Stock Exchange

Depositary Shares, each representing one-thousandth of a share of 5.50% Class J Cumulative Redeemable
Preferred Stock, par value $1.00 per share.

 

New York Stock Exchange

Depositary Shares, each representing one-thousandth of a share of 5.625% Class K Cumulative Redeemable
Preferred Stock, par value $1.00 per share.

 

New York Stock Exchange

 

 

Securities registered pursuant to section 12(g) of the Act:      None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No ☑

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☑ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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. ☑

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller reporting company.)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes      No ☑

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $12.8 billion based upon the closing price on the New York Stock Exchange for such equity on June 30, 2016.

 

(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.

 

As of February 22, 2017, the registrant had 425,629,020 shares of common stock outstanding.

  

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 April 25, 2017.

 

Index to Exhibits begins on page 36.

 

 
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TABLE OF CONTENTS

 

Item No.

 

Form 10-K
Report
Page

 

PART I

 
     

   1.

Business

3

     

   1A.

Risk Factors

6

     

   1B.

Unresolved Staff Comments

12

     

   2.

Properties

12

     

   3.

Legal Proceedings

13

     

   4.

Mine Safety Disclosures

13

     
 

PART II

 
     

   5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

14

     

   6.

Selected Financial Data

16

     

   7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

     

   7A.

Quantitative and Qualitative Disclosures About Market Risk

33

     

   8.

Financial Statements and Supplementary Data

33

     

   9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

33

     

   9A.

Controls and Procedures

33

     

   9B.

Other Information

34

     
 

PART III

 
     

   10.

Directors, Executive Officers and Corporate Governance

34

     

   11.

Executive Compensation

34

     

   12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

34

     

   13.

Certain Relationships and Related Transactions, and Director Independence

34

     

   14.

Principal Accounting Fees and Services

34

     
 

PART IV

 
     

   15.

Exhibits, Financial Statement Schedules

35

     

   16.

Form 10-K Summary

35

 

 
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FORWARD-LOOKING STATEMENTS

 

This annual report on Form 10-K (“Form 10-K”), together with other statements and information publicly disseminated by Kimco Realty Corporation (the “Company”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with the 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,” “will,” “target,” “forecast” 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 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 adverse economic and local real estate conditions, (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business, (iii) financing risks, such as the inability to obtain equity, debt or other sources of financing or refinancing on favorable terms to the Company, (iv) the Company’s ability to raise capital by selling its assets, (v) changes in governmental laws and regulations, (vi) the level and volatility of interest rates and foreign currency exchange rates and managements’ ability to estimate the impact thereof, (vii) risks related to the Company’s international operations, (viii) the availability of suitable acquisition, disposition, development and redevelopment opportunities, and risks related to acquisitions not performing in accordance with our expectations, (ix) valuation and risks related to the Company’s joint venture and preferred equity investments, (x) valuation of marketable securities and other investments, (xi) increases in operating costs, (xii) changes in the dividend policy for the Company’s common stock, (xiii) the reduction in the Company’s income in the event of multiple lease terminations by tenants or a failure by multiple tenants to occupy their premises in a shopping center, (xiv) impairment charges, (xv) unanticipated changes in the Company’s intention or ability to prepay certain debt prior to maturity and/or hold certain securities until maturity and (xvi) the risks and uncertainties identified under Item 1A, “Risk Factors” and elsewhere in this Form 10-K and in the Company’s other filings with the Securities and Exchange Commission (“SEC”). Accordingly, there is no assurance that the Company’s expectations will be realized. The Company disclaims any intention or obligation to update the forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to refer to any further disclosures the Company makes or related subjects in the Company’s quarterly reports on Form 10-Q and current reports on Form 8-K that the Company files with the SEC.

 

PART I

 

Item 1. Business

 

Background

 

Kimco Realty Corporation, a Maryland corporation, is one of the nation's largest owners and operators of open-air shopping centers.  The terms "Kimco," the "Company," "we," "our" and "us" each refer to Kimco Realty Corporation and our subsidiaries, unless the context indicates otherwise.  The Company is a self-administered real estate investment trust ("REIT") and has owned and operated open-air shopping centers for more than 50 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 December 31, 2016, the Company had interests in 525 shopping center properties (the “Combined Shopping Center Portfolio”), aggregating 85.4 million square feet of gross leasable area (“GLA”), located in 34 states, Puerto Rico and Canada. In addition, the Company had 384 other property interests, primarily through the Company’s preferred equity investments and other real estate investments, totaling 6.3 million square feet of GLA. The Company’s ownership interests in real estate consist of its consolidated portfolio and portfolios where the Company owns an economic interest, such as properties in the Company’s investment real estate management programs, where the Company partners with institutional investors and also retains management.  

 

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. 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 and supported by the Company’s regional offices. As of December 31, 2016, a total of 551 persons were employed by the Company.

 

The Company’s Web site is located at http://www.kimcorealty.com. The information contained on our Web site does not constitute part of this Form 10-K. On the Company’s Web site you can obtain, free of charge, a copy of this 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 SEC. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

 

 
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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"). 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 1994, the Company reorganized as a Maryland corporation. In March 2006, the Company was added to the S & P 500 Index, an index containing the stock of 500 Large Cap companies, most of which are U.S. corporations. The Company's common stock, Class I Depositary Shares, Class J Depositary Shares and Class K Depositary Shares are traded on the New York Stock Exchange (“NYSE”) under the trading symbols “KIM”, “KIMprI”, “KIMprJ” and “KIMprK”, respectively. 

 

The Company’s initial growth resulted primarily from real estate under development and the construction of shopping centers. Subsequently, the Company revised its growth strategy to focus on the acquisition of existing shopping centers and continued its expansion across the nation. The Company implemented its investment real estate management format through the establishment of various institutional joint venture programs, in which the Company has noncontrolling interests. The Company earns management fees, acquisition fees, disposition fees as well as promoted interests based on achieving certain performance metrics. The Company continued its geographic expansion with investments in Canada, Puerto Rico, Mexico, Chile, Brazil and Peru; however, during 2013, based upon a perceived change in market conditions, the Company began its efforts to exit its investments in Mexico and South America. During 2015, the Company began its efforts to exit its investments in Canada. As of December 31, 2016, the Company had essentially sold all of its operating properties in Canada, substantially liquidated its investments in Mexico and had completely exited South America by liquidating its investments in Chile, Brazil and Peru. The Company’s revenues and equity in income (including gains on sales and impairment losses) from its foreign investments in U.S. dollar equivalents and their respective local currencies are as follows (in millions):

 

   

2016

   

2015

   

2014

 

Revenues (consolidated in USD):

                       

Mexico

  $ 0.6     $ 1.9     $ 29.4  

Peru

  $ -     $ -     $ 0.1  

Chile

  $ -     $ 6.7     $ 8.1  

Revenues (consolidated in local currencies):

                       

Mexico (Mexican Pesos “MXN”)

    11.3       28.2       382.3  

Peru (Peruvian Nuevo Sol)

    -       -       0.4  

Chile (Chilean Pesos “CLP”)

    -       4,264.9       4,485.9  
                         

Equity in income (unconsolidated joint ventures, including preferred equity investments in USD):

                       

Canada (1)

  $ 152.6     $ 409.1     $ 49.3  

Mexico (2) (3)

  $ (3.6 )   $ (1.6 )   $ (3.7 )

Chile (4)

  $ -     $ 0.9     $ (0.1 )

Equity in income (unconsolidated joint ventures, including preferred equity investments in local currencies):

                       
Canada (Canadian dollars “CAD”) (1)     199.5       540.1       54.6  

Mexico (MXN)

    29.2       (24.0 )     550.8  

Chile (CLP)

    -       -       (55.3 )

 

 

(1)

Includes gains of $141.9 million (CAD 185.9 million) and $373.8 million (CAD 439.9 million) on disposition of equity interests for the years ended December 31, 2016 and 2015, respectively.

 

(2)

Includes equity losses of $5.2 million, equity losses of $0.8 million, and equity income of $0.4 million for the years ended December 31, 2016, 2015 and 2014, respectively, related to foreign investments for which the reporting currency is denominated in USD and not subject to foreign translation exposure.

 

(3)

Included in the year ended December 31, 2014 is the release of cumulative foreign currency translation adjustment (“CTA”) of $47.3 million in equity losses.

 

(4)

Included in the year ended December 31, 2015 is the release of CTA of $0.8 million in equity income.

 

The Company maintains certain subsidiaries which made joint elections with the Company to be treated as taxable REIT subsidiaries (“TRSs”), which permit the Company to engage in certain business activities which the REIT may not conduct directly. These activities have included (i) ground-up real estate under development of open-air shopping centers and the subsequent sale thereof upon completion, (ii) retail real estate management and disposition services, which primarily focused on leasing and disposition strategies for real estate property interests of both healthy and distressed retailers and (iii) the Company’s investment in AB Acquisition, LLC, which consists of grocers Safeway, Albertsons, Vons and other banners (collectively “Albertsons”).  A TRS is subject to federal and state income taxes on its income, and the Company includes a provision for taxes in its consolidated financial statements.  Effective August 1, 2016, the Company merged Kimco Realty Services Inc. ("KRS"), a TRS, into a wholly-owned Limited Liability Company (“LLC”) of the Company (the “Merger”) and no longer operates KRS as a TRS. The Company analyzed the individual assets of KRS and determined that substantially all of KRS’s assets constitute real estate assets and investments that can be directly owned by the Company without adversely affecting the Company’s status as a REIT, including its investment in Albertsons.  Any non-REIT qualifying assets or activities were transferred to a newly formed TRS.

 

 
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In addition, the Company has capitalized 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. The Company has also provided preferred equity capital in the past to real estate entrepreneurs and, from time to time, provides real estate capital and management services to both healthy and distressed retailers. The Company has also made selective investments in secondary market opportunities where a security or other investment is, in management’s judgment, priced below the value of the underlying assets, however these investments are subject to volatility within the equity and debt markets.

 

Operating and Investment Strategy

 

The Company’s strategy is to be the premier owner and operator of open-air shopping centers through investments primarily in the U.S. To achieve this strategy the Company is (i) continuing to transform the quality of its portfolio by disposing of lesser quality assets and acquiring larger higher quality properties in key markets identified by the Company, for which substantial progress has been achieved as of the end of 2016, (ii) simplifying its business by: (a) reducing the number of joint venture investments and (b) exiting Mexico, South America and Canada, for which the exit of South America has been completed, Mexico has been substantially completed and the Company essentially sold all operating properties in Canada, (iii) pursuing redevelopment opportunities within its portfolio to increase overall value and (iv) selectively acquiring land parcels in our key markets for real estate development projects for long-term investment. As part of the Company’s strategy each property is evaluated for its highest and best use, which may include residential and mixed-use components. In addition, the Company may consider other opportunistic investments related to retailer controlled real estate such as, repositioning underperforming retail locations, retail real estate financing and bankruptcy transaction support. The Company has an active capital recycling program which provides for the disposition of certain U.S. properties. If the Company accepts sales prices for any of these assets that are less than their net carrying values, the Company would be required to take impairment charges and such amounts could be material. In order to execute the Company’s strategy, the Company intends to continue to strengthen its balance sheet by pursuing deleveraging efforts over time, providing it the necessary flexibility to invest opportunistically and selectively, primarily focusing on U.S. open-air shopping centers. 

 

The Company's investment objective is to increase cash flow, current income and, consequently, the value of its existing portfolio of properties and to seek continued growth in desirable demographic areas with successful retailers through (i) the retail 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 open-air shopping centers in geographic regions in which the Company presently operates. The Company may consider investments in other real estate sectors and in geographic markets where it does not presently operate should suitable opportunities arise.

 

The Company's open-air shopping center properties are designed to attract local area customers and are typically anchored by a national or regional discount department store, grocery store 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 would 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.

 

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. As of December 31, 2016, no single open-air shopping center accounted for more than 1.9% 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, or more than 1.5% of the Company’s total shopping center GLA. At December 31, 2016, the Company’s five largest tenants were TJX Companies, The Home Depot, Ahold Delhaize, Bed Bath & Beyond and Albertsons which represented 3.4%, 2.4%, 2.1%, 2.0% and 1.8%, 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.

 

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 open-air 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 other investment opportunities and in seeking tenants who will lease space in the Company’s properties.

 

 
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Item 1A. Risk Factors

 

We are subject to certain business and legal risks including, but not limited to, the following:

 

Loss of our tax status as a REIT or changes in federal tax laws, regulations, administrative interpretations or court decisions relating to REITs could have significant adverse consequences to us and the value of our securities.

 

We have elected to be taxed as a REIT for federal income tax purposes under the Code. We believe that we are organized and operate in a manner that has allowed us to qualify and will allow us to remain qualified as a REIT under the Code. However, there can be no assurance that we have qualified or will continue to qualify as a REIT for federal income tax purposes.

 

Qualification as a REIT involves the application of highly technical and complex Code provisions, for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and U.S. Department of the Treasury. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, regulations, administrative interpretations or court decisions could significantly and negatively change the tax laws with respect to qualification as a REIT, the federal income tax consequences of such qualification or the desirability of an investment in a REIT relative to other investments.

 

In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. Furthermore, we own a direct or indirect interest in certain subsidiary REITs which elected to be taxed as REITs for federal income tax purposes under the Code. Provided that each subsidiary REIT qualifies as a REIT, our interest in such subsidiary REIT will be treated as a qualifying real estate asset for purposes of the REIT asset tests. To qualify as a REIT, the subsidiary REIT must independently satisfy all of the REIT qualification requirements. The failure of a subsidiary REIT to qualify as a REIT could have an adverse effect on our ability to comply with the REIT income and asset tests, and thus our ability to qualify as a REIT.

 

If we lose our REIT status, we will face serious tax consequences that will substantially reduce the funds available to pay dividends to stockholders for each of the years involved because:

 

 

we would not be allowed a deduction for dividends to stockholders in computing our taxable income and we would be subject to federal income tax at regular corporate rates;

 

we could be subject to the federal alternative minimum tax and possibly increased state and local taxes;

 

unless we were entitled to relief under statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified; and

 

we would not be required to make distributions to stockholders.

 

As a result of all these factors, our failure to qualify as a REIT or new legislation changes in federal tax laws with respect to qualification as a REIT or the tax consequences of such qualification could also impair our ability to expand our business or raise capital and materially adversely affect the value of our securities.

 

To maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions, and the unavailability of such capital on favorable terms at the desired times, or at all, may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, which could adversely affect our financial condition, results of operations, cash flow and per share trading price of our common stock. 

 

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding net capital gains, and we will be subject to regular corporate income taxes on the amount we distribute that is less than 100% of our net taxable income each year, including capital gains. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. While we have historically satisfied these distribution requirements by making cash distributions to our stockholders, a REIT is permitted to satisfy these requirements by making distributions of cash or other property, including, in limited circumstances, its own stock. Assuming we continue to satisfy these distribution requirements with cash, we may need to borrow funds to meet the REIT distribution requirements and avoid the payment of income and excise taxes even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of cash reserves or required debt or amortization payments. These sources, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market's perception of our growth potential, our current debt levels, the market price of our common stock, and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could adversely affect our financial condition, results of operations, cash flow and per share trading price of our common stock.

  

 
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The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes.

 

A REIT's net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.

 

Adverse global market and economic conditions may impede our ability to generate sufficient income and maintain our properties.

 

The economic performance and value of our properties is subject to all of the risks associated with owning and operating real estate, including but not limited to:

 

 

changes in the national, regional and local economic climate;

 

local conditions, including an oversupply of, or a reduction in demand for, space in properties like those that we own;

 

trends toward smaller store sizes as retailers reduce inventory and new prototypes;

 

increasing use by customers of e-commerce and online store sites;

 

the attractiveness of our properties to tenants;

 

the ability of tenants to pay rent, particularly anchor tenants with leases in multiple locations;

 

tenants who may declare bankruptcy and/or close stores;

 

competition from other available properties to attract and retain tenants;

 

changes in market rental rates;

 

the need to periodically pay for costs to repair, renovate and re-let space;

 

changes in operating costs, including costs for maintenance, insurance and real estate taxes;

 

the expenses of owning and operating properties, which are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the properties;

 

changes in laws and governmental regulations, including those governing usage, zoning, the environment and taxes;

 

acts of terrorism and war, acts of God and physical and weather-related damage to our properties; and

 

the potential risk of functional obsolescence of properties over time.

 

Competition may limit our ability to purchase new properties or generate sufficient income from tenants and may decrease the occupancy and rental rates for our properties.

 

Our properties consist primarily of open-air shopping centers and other retail properties. Our performance, therefore, is generally linked to economic conditions in the market for retail space. In the future, the market for retail space could be adversely affected by:

 

 

weakness in the national, regional and local economies;

 

the adverse financial condition of some large retailing companies;

 

the impact of internet sales on the demand for retail space;

 

ongoing consolidation in the retail sector; and

 

the excess amount of retail space in a number of markets.

 

In addition, numerous commercial developers and real estate companies compete with us in seeking tenants for our existing properties and properties for acquisition. New regional malls, open-air lifestyle centers or other retail shopping centers with more convenient locations or better rents may attract tenants or cause them to seek more favorable lease terms at or prior to renewal. Retailers at our properties may face increasing competition from other retailers, e-commerce, outlet malls, discount shopping clubs, direct mail, telemarketing or home shopping networks, all of which could (i) reduce rents payable to us; (ii) reduce our ability to attract and retain tenants at our properties; or (iii) lead to increased vacancy rates at our properties. We may fail to anticipate the effects of changes in consumer buying practices, particularly of growing online sales and the resulting retailing practices and space needs of our tenants or a general downturn in our tenants’ businesses, which may cause tenants to close stores or default in payment of rent.

 

Our performance depends on our ability to collect rent from tenants, including anchor tenants, our tenants’ financial condition and our tenants maintaining leases for our properties.

 

At any time, our tenants may experience a downturn in their business that may significantly weaken their financial condition. As a result, our tenants may delay a number of lease commencements, decline to extend or renew leases upon expiration, fail to make rental payments when due, close stores or declare bankruptcy. Any of these actions could result in the termination of tenants’ leases and the loss of rental income attributable to these tenants’ leases. In the event of a default by a tenant, we may experience delays and costs in enforcing our rights as landlord under the terms of the leases.

 

 
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In addition, multiple lease terminations by tenants, including anchor tenants, or a failure by multiple tenants to occupy their premises in a shopping center could result in lease terminations or significant reductions in rent by other tenants in the same shopping centers under the terms of some leases. In that event, we may be unable to re-lease the vacated space at attractive rents or at all, and our rental payments from our continuing tenants could significantly decrease. The occurrence of any of the situations described above, particularly if it involves a substantial tenant with leases in multiple locations, could have a material adverse effect on our financial condition, results of operations and cash flows.

 

A tenant that files for bankruptcy protection may not continue to pay us rent. A bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar all efforts by us to collect pre-bankruptcy debts from the tenant or the lease guarantor, or their property, unless the bankruptcy court permits us to do so. A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases and could ultimately preclude collection of these sums. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. As a result, it is likely that we would recover substantially less than the full value of any unsecured claims we hold, if at all.

 

We may be unable to sell our real estate property investments when appropriate or on terms favorable to us.

 

Real estate property investments are illiquid and generally cannot be disposed of quickly. In addition, the Code restricts a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on terms favorable to us within a timeframe that we would need.

 

We may acquire or develop properties or acquire other real estate related companies, and this may create risks.

 

We may acquire or develop properties or acquire other real estate related companies when we believe that an acquisition or development is consistent with our business strategies. We may not succeed in consummating desired acquisitions or in completing developments on time or within budget. When we do pursue a project or acquisition, we may not succeed in leasing newly developed or acquired properties at rents sufficient to cover the costs of acquisition or development and operations. Difficulties in integrating acquisitions may prove costly or time-consuming and could divert management’s attention from other activities. Acquisitions or developments in new markets or industries where we do not have the same level of market knowledge may result in poorer than anticipated performance. We may also abandon acquisition or development opportunities that management has begun pursuing and consequently fail to recover expenses already incurred and will have devoted management’s time to a matter not consummated. Furthermore, our acquisitions of new properties or companies will expose us to the liabilities of those properties or companies, some of which we may not be aware of at the time of the acquisition. In addition, development of our existing properties presents similar risks.

 

Newly acquired or re-developed properties may have characteristics or deficiencies currently unknown to us that affect their value or revenue potential. It is also possible that the operating performance of these properties may decline under our management. As we acquire additional properties, we will be subject to risks associated with managing new properties, including lease-up and tenant retention. In addition, our ability to manage our growth effectively will require us to successfully integrate our new acquisitions into our existing management structure. We may not succeed with this integration or effectively manage additional properties, particularly in secondary markets. Also, newly acquired properties may not perform as expected.

 

Unsuccessful real estate under development activities or a slowdown in real estate under development activities could have a direct impact on our growth, results of operations and cash flows.

 

Real estate under development is a component of our operating and investment strategy. We intend to continue pursuing select real estate under development opportunities for long-term investment and construction of retail and/or mixed use properties as opportunities arise. We expect to phase in construction until sufficient preleasing is reached. Our real estate under development and construction activities include the following risks:

 

 

we may abandon real estate under development opportunities after expending resources and could lose all or part of our investment in such opportunities, including loss of deposits or failure to recover expenses already incurred;

 

development, construction or operating costs, including increased interest rates and higher materials, transportation, labor, leasing or other costs, may exceed our original estimates;

 

occupancy rates and rents at a newly completed property may not meet our expectations and may not be sufficient to make the property profitable;

 

construction or permanent financing may not be available to us on favorable terms or at all;

 

we may not complete construction and lease-up on schedule due to a variety of factors including construction delays or contractor changes, resulting in increased expenses and construction costs or tenants or operators with the right to terminate pre-construction leases; and

 

we may not be able to obtain, or may experience delays in obtaining, necessary zoning, land use, building, occupancy and other required governmental permits and authorizations.

 

 
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Additionally, new real estate under development activities typically require substantial time and attention from management, and the time frame required for development, construction and lease-up of these properties could require several years to realize any significant cash return. The foregoing risks could cause the development of properties to hinder the Company’s growth and have an adverse effect on its results of operations and cash flows.

 

Construction and development projects are subject to risks that materially increase the costs of completion.

 

In the event that we decide to develop and construct new properties or redevelop existing properties, we will be subject to risks and uncertainties associated with construction and development. These risks include, but are not limited to, risks related to obtaining all necessary zoning, land-use, building occupancy and other governmental permits and authorizations, risks related to the environmental concerns of government entities or community groups, risks related to changes in economic and market conditions between development commencement and stabilization, risks related to construction labor disruptions, adverse weather, acts of God or shortages of materials which could cause construction delays and risks related to increases in the cost of labor and materials which could cause construction costs to be greater than projected and adversely impact the amount of our development fees or our results of operations or financial condition.

 

We face competition in pursuing acquisition or development opportunities that could increase our costs.

 

We face competition in the acquisition, development, operation and sale of real property from others engaged in real estate investment that could increase our costs associated with purchasing and maintaining assets. Some of these competitors may have greater financial resources than we do. This could result in competition for the acquisition of properties for tenants who lease or consider leasing space in our existing and subsequently acquired properties and for other real estate investment opportunities.

 

We do not have exclusive control over our joint venture and preferred equity investments, such that we are unable to ensure that our objectives will be pursued.

 

We have invested in some properties as a co-venturer or partner, instead of owning directly. In these investments, we do not have exclusive control over the development, financing, leasing, management and other aspects of these investments. As a result, the co-venturer or partner might have interests or goals that are inconsistent with ours, take action contrary to our interests or otherwise impede our objectives. These investments involve risks and uncertainties. The co-venturer or partner may fail to provide capital or fulfill its obligations, which may result in certain liabilities to us for guarantees and other commitment. Conflicts arising between us and our partners may be difficult to manage and/or resolve and it could be difficult to manage or otherwise monitor the existing business arrangements. The co-venturer or partner also might become insolvent or bankrupt, which may result in significant losses to us. 

 

In addition, joint venture arrangements may decrease our ability to manage risk and implicate additional risks, such as:

 

 

potentially inferior financial capacity, diverging business goals and strategies and the need for our venture partner’s continued cooperation;

 

our inability to take actions with respect to the joint venture activities that we believe are favorable to us if our joint venture partner does not agree;

 

our inability to control the legal entity that has title to the real estate associated with the joint venture;

 

our lenders may not be easily able to sell our joint venture assets and investments or may view them less favorably as collateral, which could negatively affect our liquidity and capital resources;

 

our joint venture partners can take actions that we may not be able to anticipate or prevent, which could result in negative impacts on our debt and equity; and

 

our joint venture partners’ business decisions or other actions or omissions may result in harm to our reputation or adversely affect the value of our investments.

 

Our joint venture and preferred equity investments generally own real estate properties for which the economic performance and value is subject to all the risks associated with owning and operating real estate as described above.

 

We intend to continue to sell our non-strategic assets and may not be able to recover our investments, which may result in significant losses to us.

 

There can be no assurance that we will be able to recover the current carrying amount of all of our non-strategic properties and investments and those of our unconsolidated joint ventures in the future. Our failure to do so would require us to recognize impairment charges for the period in which we reached that conclusion, which could materially and adversely affect our business, financial condition, operating results and cash flows.

 

 
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We have completed, or have nearly completed, our efforts to exit our investments in Mexico, South America and Canada, however, we cannot predict the impact of laws and regulations affecting these international operations, including the United States Foreign Corrupt Practices Act, or the potential that we may face regulatory sanctions.

 

Our international operations have included properties in Canada, Mexico, Chile, Brazil and Peru and are subject to a variety of United States and foreign laws and regulations, including the United States Foreign Corrupt Practices Act (“FCPA”) and foreign tax laws and regulations. Although we have completely, or have nearly completed, our efforts to exit our investments in Mexico, South America and Canada, we cannot assure you that our past or any current international operations will continue to be found to be in compliance with such laws or regulations. In addition, we cannot predict the manner in which such laws or regulations might be administered or interpreted, or when, or the potential that we may face regulatory sanctions or tax audits as a result of our international operations.

 

We have received a subpoena from the Enforcement Division of the SEC in connection with the SEC’s investigation, In the Matter of Wal-Mart Stores, Inc. (FW-3678), that the SEC Staff is currently conducting with respect to possible violations of the FCPA. We have cooperated, and will continue to cooperate, with the SEC and the U.S. Department of Justice (“DOJ”), which is conducting a parallel investigation. At this point, we are unable to predict the duration, scope or result of the SEC or DOJ investigations. See “Item 3. Legal Proceedings,” below. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations, which they may seek to impose against corporations and individuals in appropriate circumstances including, but not limited to, injunctive relief, disgorgement, fines, penalties and modifications to business practices and compliance programs. Any of these remedial measures, if applicable to us, could have a material adverse impact on our business, results of operations, financial condition and liquidity.

 

We face risks relating to cybersecurity attacks, loss of confidential information and other business disruptions.

 

Our business is at risk from and may be impacted by cybersecurity attacks, including attempts to gain unauthorized access to our confidential data and other electronic security breaches. Such cyber-attacks can range from individual attempts to gain unauthorized access to our information technology systems to more sophisticated security threats. There is no guarantee that the measures we employ to prevent, detect and mitigate these threats will be successful in preventing a cyber-attack. Cybersecurity incidents could compromise the confidential information of our tenants, employees and third party vendors and disrupt and effect the efficiency of our business operations.

 

We may be unable to obtain financing through the debt and equities market, which would have a material adverse effect on our growth strategy, our results of operations and our financial condition. 

 

We cannot assure you that we will be able to access the credit and/or equity markets to obtain additional debt or equity financing or that we will be able to obtain financing on terms favorable to us. The inability to obtain financing on a timely basis could have negative effects on our business, such as:

 

 

we could have great difficulty acquiring or developing properties, which would materially adversely affect our business strategy;

 

our liquidity could be adversely affected;

 

we may be unable to repay or refinance our indebtedness;

 

we may need to make higher interest and principal payments or sell some of our assets on terms unfavorable to us to fund our indebtedness; or

 

we may need to issue additional capital stock, which could further dilute the ownership of our existing shareholders.

 

 
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Adverse changes in our credit ratings could impair our ability to obtain additional debt and equity financing on terms favorable to us, if at all, and could significantly reduce the market price of our publicly traded securities.

 

We are subject to financial covenants that may restrict our operating and acquisition activities.

 

Our revolving credit facility, term loan and the indentures under which our senior unsecured debt is issued contain certain financial and operating covenants, including, among other things, certain coverage ratios and limitations on our ability to incur debt, make dividend payments, sell all or substantially all of our assets and engage in mergers and consolidations and certain acquisitions. These covenants may restrict our ability to pursue certain business initiatives or certain acquisition transactions that might otherwise be advantageous. In addition, failure to meet any of the financial covenants could cause an event of default under our revolving credit facility, term loan and the indentures and/or accelerate some or all of our indebtedness, which would have a material adverse effect on us.

 

Changes in market conditions could adversely affect the market price of our publicly traded securities.

 

The market price of our publicly traded securities depends on various market conditions, which may change from time-to-time. Among the market conditions that may affect the market price of our publicly traded securities are the following:

 

 

the extent of institutional investor interest in us;

 

the reputation of REITs generally and the reputation of REITs with portfolios similar to ours;

 

the attractiveness of the securities of REITs in comparison to securities issued by other entities, including securities issued by other real estate companies;

 

our financial condition and performance;

 

the market’s perception of our growth potential, potential future cash dividends and risk profile;

 

an increase in market interest rates, which may lead prospective investors to demand a higher distribution rate in relation to the price paid for our shares; and

 

general economic and financial market conditions.

 

We may change the dividend policy for our common stock in the future.

 

The decision to declare and pay dividends on our common stock in the future, as well as the timing, amount and composition of any such future dividends, will be at the sole discretion of our Board of Directors and will depend on our earnings, operating cash flows, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our indebtedness including preferred stock, the annual distribution requirements under the REIT provisions of the Code, state law and such other factors as our Board of Directors deems relevant or are requirements under the Code or state or federal laws. Any negative change in our dividend policy could have a material adverse effect on the market price of our common stock.

 

We may not be able to recover our investments in mortgage receivables or other investments, which may result in significant losses to us.

 

In the event of a default by a borrower, it may be necessary for us to foreclose our mortgage or engage in costly negotiations. Delays in liquidating defaulted mortgage loans and repossessing and selling the underlying properties could reduce our investment returns. Furthermore, in the event of default, the actual value of the property securing the mortgage may decrease. A decline in real estate values will adversely affect the value of our loans and the value of the mortgages securing our loans.

 

Our mortgage receivables may be or become subordinated to mechanics' or materialmen's liens or property tax liens. In these instances, we may need to protect a particular investment by making payments to maintain the current status of a prior lien or discharge it entirely. Where that occurs, the total amount we recover may be less than our total investment, resulting in a loss. In the event of a major loan default or several loan defaults resulting in losses, our investments in mortgage receivables would be materially and adversely affected.

 

The economic performance and value of our other investments which we do not control and are in retail operations, are subject to risks associated with owning and operating retail businesses, including:

 

 

changes in the national, regional and local economic climate;

 

the adverse financial condition of some large retailing companies;

 

increasing use by customers of e-commerce and online store sites; and

 

ongoing consolidation in the retail sector,

 

 
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A decline in the value of our other investments may require us to recognize an other-than-temporary impairment (“OTTI”) against such assets. When the fair value of an investment is determined to be less than its amortized cost at the balance sheet date, we assess whether the decline is temporary or other-than-temporary. If we intend to sell an impaired asset, or it is more likely than not that we will be required to sell the impaired asset before any anticipated recovery, then we must recognize an OTTI through charges to earnings equal to the entire difference between the assets amortized cost and its fair value at the balance sheet date. When an OTTI is recognized through earnings, a new cost basis is established for the asset and the new cost basis may not be adjusted through earnings for subsequent recoveries in fair value.

 

We may be subject to liability under environmental laws, ordinances and regulations.

 

Under various federal, state, and local laws, ordinances and regulations, we may be considered an owner or operator of real property and may be responsible for paying for the disposal or treatment of hazardous or toxic substances released on or in our property, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property). This liability may be imposed whether or not we knew about, or were responsible for, the presence of hazardous or toxic substances.

 

Item 1B. Unresolved Staff Comments

 

None

 

Item 2. Properties

 

Real Estate Portfolio. As of December 31, 2016, the Company had interests in 525 shopping center properties aggregating 85.4 million square feet of GLA located in 34 states, Puerto Rico and Canada. In addition, the Company had 384 other property interests, primarily through the Company’s preferred equity investments and other real estate investments, totaling 6.3 million square feet of GLA.  The Company’s portfolio includes noncontrolling interests. Open-air shopping centers comprise the primary focus of the Company's current portfolio.  As of December 31, 2016, the Company’s Combined Shopping Center Portfolio was 95.4% leased.

 

The Company's open-air shopping center properties, which are generally owned and operated through subsidiaries or joint ventures, had an average size of 162,618 square feet as of December 31, 2016. 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. This includes renovating existing facades, installing uniform signage, resurfacing parking lots and enhancing parking lot lighting. During 2016, the Company expended $143.5 million in connection with these property improvements and expensed to operations $34.3 million.

 

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. The Company's open-air shopping centers are usually "anchored" by a national or regional discount department store, grocery store 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 TJX Companies, The Home Depot, Ahold Delhaize, Bed Bath & Beyond, Albertsons, Ross Stores, Petsmart, Kohl’s, Wal-Mart and Whole Foods.

 

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. 

 

Minimum base rental revenues and operating expense reimbursements accounted for 98% and other revenues, including percentage rents, accounted for 2% of the Company's total revenues from rental properties for the year ended December 31, 2016. 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.

 

Approximately 29.8% of the Company's leases of consolidated properties also contain provisions requiring the payment of additional rent calculated as a percentage of tenants’ gross sales above predetermined thresholds.  Percentage rents accounted for less than 1% of the Company's revenues from rental properties for the year ended December 31, 2016.  Additionally, a majority of the Company’s leases have provisions requiring contractual rent increases. The Company’s leases may also include escalation clauses, which provide for increases based upon changes in the consumer price index or similar inflation indices.

 

As of December 31, 2016, the Company’s consolidated operating portfolio, comprised of 59.2 million square feet of GLA, was 95.2% leased. The consolidated operating portfolio consists entirely of properties located in the U.S., inclusive of Puerto Rico.  For the period January 1, 2016 to December 31, 2016, the Company increased the average base rent per leased square foot, which includes the impact of tenant concessions, in its U.S. consolidated portfolio of open-air shopping centers from $14.36 to $14.99, an increase of $0.63.  This increase primarily consists of (i) a $0.10 increase relating to acquisitions, (ii) a $0.19 increase relating to dispositions, and (iii) a $0.34 increase relating to new leases signed net of leases vacated and rent step-ups within the portfolio.

 

 
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The Company has a total of 6,120 leases in the U.S. consolidated operating portfolio. The following table sets forth the aggregate lease expirations for each of the next ten years, assuming no renewal options are exercised. For purposes of the table, the Total Annual Base Rent Expiring represents annualized rental revenue, excluding the impact of straight-line rent, for each lease that expires during the respective year. Amounts in thousands except for number of lease data:

 

Year Ending

December 31,

   

Number of

Leases

Expiring

   

Square Feet

Expiring

   

Total Annual Base

Rent Expiring

   

% of Gross

Annual Rent

 
(1)       168       484     $ 9,892       1.2

%

2017

      717       4,075     $ 68,822       8.2

%

2018

      894       6,309     $ 98,788       11.7

%

2019

      903       6,653     $ 100,430       11.9

%

2020

      819       6,101     $ 94,589       11.2

%

2021

      793       6,745     $ 98,678       11.7

%

2022

      518       5,280     $ 74,069       8.8

%

2023

      273       3,425     $ 47,962       5.7

%

2024

      237       2,954     $ 47,138       5.6

%

2025

      225       2,168     $ 35,144       4.2

%

2026

      234       3,735     $ 49,768       5.9

%

2027

      156       3,033     $ 40,761       4.8

%

 

 

(1)

Leases currently under month to month lease or in process of renewal

 

During 2016, the Company executed 935 leases totaling over 6.8 million square feet in the Company’s consolidated operating portfolio comprised of 344 new leases and 591 renewals and options. The leasing costs associated with these leases are estimated to aggregate $58.4 million or $29.81 per square foot. These costs include $46.4 million of tenant improvements and $12.0 million of leasing commissions. The average rent per square foot on new leases was $18.85 and on renewals and options was $14.97. The Company will seek to obtain rents that are higher than amounts within its expiring leases, however, there are many variables and uncertainties which can significantly affect the leasing market at any time; as such, the Company cannot guarantee that future leases will continue to be signed for rents that are equal to or higher than current amounts.

 

Ground-Leased Properties. The Company has interests in 44 consolidated 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. The Company 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 reverts to the landowner.

 

More specific information with respect to each of the Company's property interests is set forth in Exhibit 99.1, which is incorporated herein by reference.

 

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 taken as a whole, or which is not covered by the Company's liability insurance.

 

On January 28, 2013, the Company received a subpoena from the Enforcement Division of the SEC in connection with an investigation, In the Matter of Wal-Mart Stores, Inc. (FW-3678), that the SEC Staff is currently conducting with respect to possible violations of the Foreign Corrupt Practices Act. The Company has cooperated, and will continue to cooperate, with the SEC and the U.S. Department of Justice (“DOJ”), which is conducting a parallel investigation. At this point, we are unable to predict the duration, scope or result of the SEC or DOJ investigations. 

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 
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PART II

 

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information:    

 

The table below sets forth, for the quarterly periods indicated, the high and low sales prices per share reported on the NYSE Composite Tape and declared dividends per share for the Company’s common stock. The Company’s common stock is traded on the NYSE under the trading symbol "KIM".

 

   

Stock Price

           

Period

 

High

   

Low

   

Dividends

   

2015:

                         

First Quarter

  $ 28.54     $ 25.20     $ 0.24    

Second Quarter

  $ 27.06     $ 22.48     $ 0.24    

Third Quarter

  $ 25.70     $ 22.07     $ 0.24    

Fourth Quarter

  $ 27.33     $ 23.98     $ 0.255 (a)  

2016:

                         

First Quarter

  $ 29.11     $ 24.75     $ 0.255    

Second Quarter

  $ 31.38     $ 26.79     $ 0.255    

Third Quarter

  $ 32.24     $ 28.34     $ 0.255    

Fourth Quarter

  $ 29.23     $ 24.35     $ 0.27 (b)  

 

 

(a)

Paid on January 15, 2016 to stockholders of record on January 4, 2016.

 

(b)

Paid on January 15, 2017 to stockholders of record on January 3, 2017.

 

Holders: The number of holders of record of the Company's common stock, par value $0.01 per share, was 2,292 as of January 31, 2017.

 

Dividends: Since the IPO, the Company has paid regular quarterly cash dividends to its stockholders. While the Company intends to continue paying regular quarterly cash dividends, future dividend declarations will be paid at the discretion of the Board of Directors and will depend on the actual cash flows 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 Company’s Board of Directors will continue to evaluate the Company’s dividend policy on a quarterly basis as they monitor sources of capital and evaluate operating fundamentals. The Company is required by the Code to distribute at least 90% of its REIT taxable income. 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, the ability to refinance near-term debt maturities and any unanticipated capital expenditures.

 

The Company has determined that the $1.02 dividend per common share paid during 2016 consisted of 62% ordinary income, an 8% return of capital and 30% capital gain to its stockholders. The $0.96 dividend per common share paid during 2015 consisted of 100% capital gain to its stockholders.

 

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, unsecured bank debt, mortgage debt and construction loans, convertible preferred stock and perpetual preferred stock. Borrowings under the Company's revolving credit facility have also been an interim source of funds to both finance the purchase of properties and other investments 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 Footnotes 13, 14 and 17 of the Notes to Consolidated Financial Statements included in this Form 10-K.

 

The Company does not believe that the preferential rights available to the holders of its Class I Preferred Stock, Class J Preferred Stock and Class K Preferred Stock, the financial covenants contained in its public bond indentures, as amended, its term loan, 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.

 

 
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Recent Sales of Unregister Securities:

None.

 

Issuer Purchases of Equity Securities: During the year ended December 31, 2016, the Company repurchased 257,477 shares in connection with common shares surrendered or deemed surrendered to the Company to satisfy statutory minimum tax withholding obligations in connection with the vesting of restricted stock awards under the Company’s equity-based compensation plans. The Company expended approximately $6.9 million to repurchase these shares.

 

Period

 

Total

Number of

Shares

Purchased

   

Average

Price

Paid per

Share

   

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs

   

Approximate Dollar

Value of Shares that

May Yet Be

Purchased Under the

Plans or Programs

(in millions)

 

January 1, 2016

January 31, 2016     35,768     $ 26.46       -     $ -  

February 1, 2016

February 29, 2016     186,476     $ 26.37       -       -  

March 1, 2016

March 31, 2016     621     $ 27.78       -       -  

April 1, 2016

April 30, 2016     -     $ -       -       -  

May 1, 2016

May 31, 2016     16,069     $ 28.61       -       -  

June 1, 2016

June 30, 2016     1,110     $ 29.66       -       -  

July 1, 2016

July 31, 2016     -     $ -       -       -  

August 1, 2016

August 31, 2016     11,858     $ 31.27       -       -  

September 1, 2016

September 30, 2016     2,056     $ 28.64       -       -  

October 1, 2016

October 31, 2016     3,519     $ 27.71       -       -  

November 1, 2016

November 30, 2016     -     $ -       -       -  

December 1, 2016

December 31, 2016     -     $ -       -       -  

Total

        257,477     $ 26.80       -     $ -  

 

Total Stockholder Return Performance: The following performance chart compares, over the five years ended December 31, 2016, the cumulative total stockholder return on the Company’s common stock with the cumulative total return of the S&P 500 Index and the cumulative total return of the NAREIT Equity REIT Total Return Index (the "NAREIT Equity Index") prepared and published by the National Association of Real Estate Investment Trusts ("NAREIT"). Equity real estate investment trusts are defined as those which derive more than 75% of their income from equity investments in real estate assets. The NAREIT Equity Index includes all tax qualified equity real estate investment trusts listed on the New York Stock Exchange, American Stock Exchange or the NASDAQ National Market System. Stockholder return performance, presented quarterly for the five years ended December 31, 2016, is not necessarily indicative of future results. All stockholder return performance assumes the reinvestment of dividends. The information in this paragraph and the following performance chart are deemed to be furnished, not filed.

 

 

 
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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 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.

 

    Year ended December 31,  
    2016     2015     2014     2013     2012(2)
    (in thousands, except per share information)  

Operating Data:

                                       

Revenues from rental properties (1)

  $ 1,152,401     $ 1,144,474     $ 958,888     $ 825,210     $ 755,851  

Interest expense (2)

  $ 192,549     $ 218,891     $ 203,759     $ 212,240     $ 223,736  

Early extinguishment of debt charges

  $ 45,674     $ -     $ -     $ -     $ -  

Depreciation and amortization (2)

  $ 355,320     $ 344,527     $ 258,074     $ 224,713     $ 214,827  

Gain on sale of operating properties, net (2)

  $ 92,823     $ 132,908     $ 618     $ 2,798     $ 8,475  

Provision for income taxes, net (3)

  $ 78,583     $ 67,325     $ 22,438     $ 32,654     $ 15,603  

Impairment charges (4)

  $ 93,266     $ 45,383     $ 39,808     $ 32,247     $ 10,289  

Income from continuing operations (5)

  $ 378,850     $ 894,190     $ 375,133     $ 276,884     $ 172,760  

Income per common share, from continuing operations:

                                       

Basic

  $ 0.79     $ 2.01     $ 0.77     $ 0.53     $ 0.19  

Diluted

  $ 0.79     $ 2.00     $ 0.77     $ 0.53     $ 0.19  

Weighted average number of shares of common stock:

                                       

Basic

    418,402       411,319       409,088       407,631       405,997  

Diluted

    419,709       412,851       411,038       408,614       406,689  

Cash dividends declared per common share

  $ 1.035     $ 0.975     $ 0.915     $ 0.855     $ 0.78  

 

   

December 31,

 
   

2016

   

2015

   

2014

   

2013

   

2012

 
   

(in thousands)

 

Balance Sheet Data:

                                       

Real estate, before accumulated depreciation

  $ 12,008,075     $ 11,568,809     $ 10,018,226     $ 9,123,344     $ 8,947,287  

Total assets

  $ 11,230,600     $ 11,344,171     $ 10,261,400     $ 9,644,247     $ 9,731,928  

Total debt

  $ 5,066,368     $ 5,376,310     $ 4,595,970     $ 4,202,018     $ 4,176,011  

Total stockholders' equity

  $ 5,256,139     $ 5,046,300     $ 4,774,785     $ 4,632,417     $ 4,765,160  
                                         

Cash flow provided by operations

  $ 592,096     $ 493,701     $ 629,343     $ 570,035     $ 479,054  

Cash flow provided by/(used for) investing activities

  $ 165,383     $ 21,365     $ 126,705     $ 72,235     $ (51,000 )

Cash flow used for financing activities

  $ (804,527 )   $ (512,854 )   $ (717,494 )   $ (635,377 )   $ (399,061 )

 

(1)   Does not include revenues (i) from rental properties relating to unconsolidated joint ventures and (ii) from properties included in discontinued operations.

(2)   Does not include amounts reflected in discontinued operations.

(3)   Does not include amounts reflected in discontinued operations. Amounts include income taxes related to gain on sale of operating properties.

(4)   Amounts exclude noncontrolling interests and amounts reflected in discontinued operations.

(5)   Amounts include gain on sale of operating properties, net of tax and net of income attributable to noncontrolling interests.

 

 
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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 Form 10-K. Historical results and percentage relationships set forth in the Consolidated Statements of Income contained in the Consolidated Financial Statements, including trends, should not be taken as indicative of future operations.

 

Executive Summary

 

Kimco Realty Corporation is one of the nation’s largest publicly-traded owners and operators of open-air shopping centers. As of December 31, 2016, the Company had interests in 525 shopping center properties aggregating 85.4 million square feet of GLA located in 34 states, Puerto Rico and Canada. In addition, the Company had 384 other property interests, primarily through the Company’s preferred equity investments and other real estate investments, totaling 6.3 million square feet of GLA.

 

The executive officers are engaged in the day-to-day management and operation of real estate exclusively with the Company, with nearly all operating functions, including leasing, asset management, maintenance, construction, legal, finance and accounting, administered by the Company. 

 

The Company’s strategy is to be the premier owner and operator of open-air shopping centers through investments primarily in the U.S.  To achieve this strategy the Company is (i) continuing to transform the quality of its portfolio by disposing of lesser quality assets and acquiring larger higher quality properties in key markets identified by the Company, for which substantial progress has been achieved as of the end of 2016, (ii) simplifying its business by: (a) reducing the number of joint venture investments and (b) exiting Mexico, South America and Canada, for which the exit of South America has been completed, Mexico has been substantially completed and the Company essentially sold all operating properties in Canada, (iii) pursuing redevelopment opportunities within its portfolio to increase overall value and (iv) selectively acquiring land parcels in our key markets for real estate development projects for long-term investment. As part of the Company’s strategy each property is evaluated for its highest and best use, which may include residential and mixed-use components. In addition, the Company may consider other opportunistic investments related to retailer controlled real estate such as, repositioning underperforming retail locations, retail real estate financing and bankruptcy transaction support. The Company has an active capital recycling program which provides for the disposition of certain U.S. properties. If the Company accepts sales prices for any of these assets that are less than their net carrying values, the Company would be required to take impairment charges and such amounts could be material. In order to execute the Company’s strategy, the Company intends to continue to strengthen its balance sheet by pursuing deleveraging efforts over time, providing it the necessary flexibility to invest opportunistically and selectively, primarily focusing on U.S. open-air shopping centers.

 

The following highlights the Company’s significant transactions, events and results that occurred during the year ended December 31, 2016:

 

Financial and Portfolio Information:

 

Net income available to common shareholders was $332.6 million, or $0.79 per diluted share for the year ended December 31, 2016, as compared to $831.2 million, or $2.00 per diluted share for the corresponding period in 2015. This change was primarily attributable to lower gains on sales of operating properties (including joint ventures) of $378.9 million, net of tax and $49.9 million of higher impairments attributable to the sale or pending disposition of operating properties in 2016 (see “Results of Operations” for additional detail).

 

Funds from operations (“FFO”) decreased to $555.7 million or $1.32 per diluted share for the year ended December 31, 2016 from $643.2 million or $1.56 per diluted share for the year ended December 31, 2015, (see additional disclosure on FFO beginning on page 30).

 

FFO as adjusted increased to $629.4 million or $1.50 per diluted share for the year ended December 31, 2016 from $603.4 million or $1.46 per diluted share for the year ended December 31, 2015, (see additional disclosure on FFO beginning on page 30).

 

U.S. same property net operating income (“U.S. same property NOI”) increased 2.8% for the year ended December 31, 2016, as compared to the corresponding period in 2015 (see additional disclosure on U.S. same property NOI beginning on page 32).

 

Executed 935 new leases, renewals and options totaling approximately 6.8 million square feet in the Consolidated Operating Portfolio.

 

The Company’s consolidated operating portfolio occupancy at December 31, 2016 was 95.2%.

 

Acquisition Activity (see Footnotes 3, 4 and 8 of the Notes to Consolidated Financial Statements included in this Form 10-K):

 

 

Acquired 12 consolidated operating properties and two out-parcels comprising an aggregate 2.7 million square feet of GLA, for an aggregate purchase price of $645.6 million including the assumption of $284.7 million of non-recourse mortgage debt encumbering 10 of the properties. The Company acquired nine of these properties for an aggregate purchase price of $505.9 million from joint ventures in which the Company previously held noncontrolling ownership interests and recognized an aggregate gain on change in control of interests of $57.4 million from the fair value adjustment.

 

The Company acquired from its partner the remaining ownership interest in a development project that was held in a joint venture for a gross purchase price of $84.2 million. Additionally, during the year ended December 31, 2016, the Company acquired additional land parcels related to two existing development projects for $13.8 million.

 

 
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Disposition Activity (see Footnote 5 of the Notes to Consolidated Financial Statements included in this Form 10-K):

 

 

During 2016, the Company disposed of 30 consolidated operating properties and two out-parcels, in separate transactions, for an aggregate sales price of $378.7 million. These transactions resulted in (i) an aggregate gain of $86.8 million, after income tax expense, and (ii) aggregate impairment charges of $37.2 million, which were taken prior to sale, before income tax benefit of $10.0 million.

 

Capital Activity (for additional details see Liquidity and Capital Resources below):

 

  

During the years ended December 31, 2016 and 2015, the Company repaid the following notes (dollars in millions):

 

Type

Date Paid

Maturity Date

 

Amount Repaid (USD)

   

Interest Rate

 

Canadian Notes Payable

Aug-16

Apr-18

- Aug-20   $ 270.9     3.855% - 5.99%  

Senior Unsecured Note

Aug-16

 

May-17     $ 290.9       5.70%    

Medium Term Notes

Mar-16

 

Mar-16     $ 300.0       5.783%    

 

Also during 2016, the Company (i) repaid $400.0 million of the Company’s $650.0 million unsecured term loan, (ii) assumed $289.0 million of individual non-recourse mortgage debt relating to the acquisition of 10 properties, including $4.3 million associated with fair value debt adjustments, (iii) paid off $703.0 million of mortgage debt (including fair value of debt adjustment of $2.1 million) that encumbered 47 operating properties and (iv) disposed of an encumbered property through foreclosure with debt of $25.6 million (including fair value of debt adjustment of $0.4 million) .

 

As a result of the above activity the Company was able to extend its debt maturity profile, including extension options, as of December 31, 2016 as follows:

 

 

 
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Critical Accounting Policies

 

The Consolidated Financial Statements of the Company include the accounts of the Company, its wholly-owned subsidiaries and all entities in which the Company has a controlling interest, including where the Company has been determined to be a primary beneficiary of a variable interest entity in accordance with the consolidation guidance of the FASB Accounting Standards Codification (“ASC”). The Company applies these provisions to each of its joint venture investments to determine whether the cost, equity or consolidation method of accounting is appropriate. 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, valuation of real estate and intangible assets and liabilities, valuation of joint venture investments and other investments, realizability of deferred tax assets and uncertain tax positions. Application of these assumptions requires the exercise of judgment as to future uncertainties, and, as a result, actual results could materially differ from these estimates.

 

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, marketable securities and other investments. The Company’s reported net earnings are directly affected by management’s estimate of impairments and/or valuation allowances.

 

Revenue Recognition and Accounts Receivable

 

Base rental revenues from rental properties 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. Operating expense reimbursements are recognized as earned. Rental income may also include payments received in connection with lease termination agreements. In addition, leases typically provide for reimbursement to the Company of common area maintenance, real estate taxes and other operating expenses.

 

The Company makes estimates of the uncollectability of its accounts receivable related to base rents, straight-line rent, 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 earnings are directly affected by management’s estimate of the collectability of accounts receivable.

 

Real Estate

 

The Company’s investments in real estate properties are stated 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. 

 

Upon acquisition of real estate operating properties, the Company estimates the fair value of acquired tangible assets (consisting of land, building, building improvements and tenant improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships, where applicable), assumed debt and redeemable units issued at the date of acquisition, based on evaluation of information and estimates available at that date. Fair value is determined based on an exit price approach, which contemplates the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If, up to one year from the acquisition date, information regarding fair value of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments are recognized in the reporting period in which the adjustment is identified. The Company expenses transaction costs associated with business combinations in the period incurred. The Company has elected to early adopt ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business at the beginning of its fiscal year ended December 31, 2017, including its interim periods within the year, and will appropriately apply the guidance to its prospective asset acquisitions of operating properties, which includes the capitalization of acquisition costs.

 

Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the assets, as follows:

 

Buildings and building improvements (in years)

 

15 to 50

Fixtures, leasehold and tenant improvements

 

Terms of leases or useful

     (including certain identified intangible assets)

 

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 earnings.

 

 
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On a continuous basis, management assesses whether there are any indicators, including property operating performance, changes in anticipated holding period and general market conditions, that the value of the real estate properties (including any related amortizable intangible assets or liabilities) may be impaired. A property value is considered impaired only if management’s estimate of current and projected operating cash flows (undiscounted and unleveraged) of the property over its anticipated hold period is less than the net carrying value of the property. Such cash flow projections consider factors such as expected future operating income, trends 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 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.

 

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 are subsequently adjusted for cash contributions and distributions. Earnings for each investment are recognized in accordance with each respective investment agreement and, where applicable, are based upon an allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.

 

The Company’s joint ventures and other real estate investments primarily consist of co-investments with institutional and other joint venture partners in open-air shopping center properties, consistent with its core business. These joint ventures typically obtain non-recourse third-party financing on their property investments, thus contractually limiting the Company’s exposure to losses to the amount of its equity investment, and, due to the lender’s exposure to losses, a lender typically will require a minimum level of equity in order to mitigate its risk. From time to time the joint ventures will obtain unsecured debt, which may be guaranteed by the joint venture. The Company’s exposure to losses associated with its unconsolidated joint ventures is primarily limited to its carrying value in these investments.

 

On a continuous basis, management assesses whether there are any indicators, including property operating performance and general market conditions, 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 and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.

 

The Company’s estimated fair values are based upon a discounted cash flow model for each joint venture that includes all estimated cash inflows and outflows over a specified holding period and, where applicable, any estimated debt premiums. Capitalization rates, discount rates and credit spreads utilized in these models are based upon rates that the Company believes to be within a reasonable range of current market rates.

 

Realizability of Deferred Tax Assets and Uncertain Tax Positions

 

The Company is subject to federal, state and local income taxes on the income from its activities relating to its TRS activities and subject to local taxes on certain non-U.S. investments. The Company accounts for income taxes using the asset and liability method, which requires that deferred tax assets and liabilities be recognized based on future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.

 

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on the evidence available, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized.

 

The Company considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Information about an enterprise's current financial position and its results of operations for the current and preceding years is supplemented by all currently available information about future years. The Company must use judgment in considering the relative impact of negative and positive evidence. The Company’s reported net earnings are directly affected by management’s judgement in determining a valuation allowance.

 

 
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The Company recognizes and measures benefits for uncertain tax positions, which requires significant judgment from management. Although the Company believes it has adequately reserved for any uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in the Company’s income tax expense in the period in which a change is made, which could have a material impact on operating results (see Footnote 22 of the Notes to Consolidated Financial Statements included in this Form 10-K).

 

Results of Operations

 

Comparison 2016 to 2015

   

2016

   

2015

   

Change

   

% change

 
   

(amounts in millions)

         
                                 

Revenues from rental properties (1)

  $ 1,152.4     $ 1,144.5     $ 7.9       0.7%  

Rental property expenses: (2)

                               

Rent

  $ 11.0     $ 12.3     $ (1.3 )     (10.6%)  

Real estate taxes

    146.6       147.2       (0.6 )     (0.4%)  

Operating and maintenance

    140.9       145.0       (4.1 )     (2.8%)  
    $ 298.5     $ 304.5     $ (6.0 )     (2.0%)  

Depreciation and amortization (3)

  $ 355.3     $ 344.5     $ 10.8       3.1%  

 

(1)

Revenues from rental properties increased primarily from the combined effect of (i) the acquisition of operating properties during 2016 and 2015, providing incremental revenues for the year ended December 31, 2016, of $57.4 million, as compared to the corresponding period in 2015 and (ii) the completion of certain redevelopment projects, tenant buyouts and net growth in the current portfolio, providing incremental revenues for the year ended December 31, 2016, of $17.4 million, as compared to the corresponding period in 2015, partially offset by (iii) a decrease in revenues of $66.9 million from properties sold during 2016 and 2015.

 

(2)

Rental property expenses include (i) rent expense relating to ground lease payments for which the Company is the lessee, (ii) real estate tax expense for consolidated properties for which the Company has a controlling ownership interest and (iii) operating and maintenance expense, which consists of property related costs including repairs and maintenance costs, roof repair, landscaping, parking lot repair, snow removal, utilities, property insurance costs, security and various other property related expenses. Rental property expenses decreased $6.0 million for the year ended December 31, 2016, as compared to the corresponding period in 2015, primarily due to the disposition of properties during 2016 and 2015, partially offset by the acquisition of properties during 2016 and 2015.

 

(3)

Depreciation and amortization increased for the year ended December 31, 2016, as compared to the corresponding period in 2015, primarily due to operating property acquisitions during 2016 and 2015 and write-offs relating to the Company’s redevelopment projects in 2016, partially offset by property dispositions.

 

Management and other fee income decreased $3.9 million to $18.4 million for the year ended December 31, 2016, as compared to $22.3 million for the corresponding period in 2015. This decrease is primarily attributable to (i) the sale of properties within various joint venture investments and the acquisition of partnership interests in joint ventures by the Company during 2016 and 2015, and (ii) the recognition of enhancement fee income related to the Company’s prior investment in InTown Suites of $1.2 million during 2015.

 

General and administrative costs include employee-related expenses (salaries, bonuses, equity awards, benefits, severance costs and payroll taxes), professional fees, office rent, travel expense and other company-specific expenses. General and administrative expenses decreased $5.4 million for the year ended December 31, 2016, as compared to the corresponding period in 2015, primarily due to a decrease in severance costs and a reduction in professional fees.

 

During the year ended December 31, 2016, the Company recognized impairment charges related solely to adjustments to property carrying values of $93.3 million for which the Company’s estimated fair value was primarily based on third party appraisals and third party offers through signed contracts, letters of intent or discounted cash flow models. During the year ended December 31, 2015, the Company recognized impairment charges of $45.5 million, before noncontrolling interests and income taxes, of which $0.1 million is included in discontinued operations. The 2015 impairment charges consisted of (i) $30.3 million related to adjustments to property carrying values, (ii) $9.0 million relating to a cost method investment, (iii) $5.3 million related to certain investments in other real estate investments and (iv) $0.8 million related to marketable debt securities investments. The adjustments to property carrying values for 2016 and 2015 were recognized in connection with the Company’s efforts to market for sale certain properties and management’s assessment as to the likelihood and timing of such potential transactions and the anticipated hold period for such properties. Certain of the calculations to determine fair value utilized unobservable inputs and as such are classified as Level 3 of the fair value hierarchy. For additional disclosure, see Footnote 16 of the Notes to Consolidated Financial Statements included in this Form 10-K.

 

Interest, dividends and other investment income decreased $37.6 million to $1.5 million for the year ended December 31, 2016, as compared to $39.1 million for the corresponding period in 2015. This decrease is primarily due to the sale of certain marketable securities during the year ended December 31, 2015, which resulted in an aggregate gain of $39.9 million.

 

Interest expense decreased $26.4 million to $192.5 million for the year ended December 31, 2016, as compared to $218.9 million for the corresponding period in 2015.  This decrease is primarily the result of lower levels of borrowings and lower interest rates on borrowings during 2016, as compared to 2015.

 

 
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During the year ended December 31, 2016, the Company incurred early extinguishment of debt charges aggregating $45.7 million in connection with the optional make-whole provisions of unsecured notes that were repaid prior to maturity and prepayment penalties on a mortgage encumbering 10 operating properties, which the Company also paid prior to the scheduled maturity date. See “Liquidity and Capital Resources” for additional details.

 

Provision for income taxes, net increased $12.3 million to $72.5 million for the year ended December 31, 2016, as compared to $60.2 million for the corresponding period in 2015. This increase is primarily due to (i) an increase in the Company’s valuation allowance of $63.5 million as a result of the Company’s merger of its taxable REIT subsidiary into a wholly owned LLC of the Company, partially offset by (ii) a decrease in foreign tax expense of $26.1 million primarily relating to fewer sales of unconsolidated properties within the Company’s Canadian portfolio which were subject to foreign taxes at a consolidated reporting entity level during 2016, as compared to 2015, (iii) an increase in tax benefit of $13.4 million related to impairment charges recognized during 2016, as compared to 2015, (iv) a decrease of $4.5 million in tax expense related to gains recognized during 2015, as compared to 2016, (v) a decrease of $3.0 million in tax expense on operations due to fewer properties in the taxable REIT subsidiary as a result of the TRS Merger, (vi) a decrease of $2.0 million resulting from the favorable settlement of a tax audit during 2016 and (vii) a decrease in tax expense of $2.0 million relating to equity income recognized in connection with the Company’s Albertsons investment during 2015.

 

Equity in income of joint ventures, net decreased $261.7 million to $218.7 million for the year ended December 31, 2016, as compared to $480.4 million for the corresponding period in 2015. This decrease is primarily due to (i) a decrease in gains of $248.1 million resulting from fewer sales of properties and interests within various joint venture investments, including the Company’s Canadian Portfolio, during 2016, as compared to 2015 and (ii) lower equity in income of $26.0 million resulting from the sales of properties within various joint venture investments and the acquisition of partnership interests in joint ventures by the Company during 2016 and 2015, partially offset by (iii) a decrease in impairment charges of $7.2 million recognized during 2016, as compared to 2015.

 

During 2016, the Company acquired nine operating properties and one development project from joint ventures in which the Company had a noncontrolling interest. The Company recorded a gain on change in control of interests of $57.4 million related to the fair value adjustment associated with its previously held equity interest in the operating properties.

 

During 2015, the Company acquired 43 properties from joint ventures in which the Company had noncontrolling interests.  The Company recorded a net gain on change in control of interests of $149.2 million related to the fair value adjustment associated with its previously held equity interests in these properties.

 

Equity in income from other real estate investments, net decreased $8.3 million to $27.8 million for the year ended December 31, 2016, as compared to $36.1 million for the corresponding period in 2015. This decrease is primarily due to (i) a decrease in equity in income of $4.9 million resulting from a cash distribution received in excess of the Company’s carrying basis in 2015, (ii) a decrease in income resulting from the sale of the Company’s leveraged lease portfolio of $3.8 million during 2015 and (iii) a decrease of $2.8 million in earnings from the Company’s Preferred Equity Program during the year ended December 31, 2016, primarily resulting from the sale of the Company’s interests in certain preferred equity investments during 2016 and 2015, partially offset by (iv) an increase of $3.3 million in profit participation from the Company’s Preferred Equity Program from capital transactions during the year ended December 31, 2016, as compared to the corresponding period in 2015.

 

During 2016, the Company disposed of 30 consolidated operating properties and two out-parcels, in separate transactions, for an aggregate sales price of $378.7 million. These transactions resulted in an aggregate gain of $86.8 million, after income tax expense, and aggregate impairment charges of $37.2 million which were taken prior to sale, before income tax benefit of $10.0 million.

 

During 2015, the Company disposed of 89 consolidated operating properties and eight out-parcels, in separate transactions, for an aggregate sales price of $492.5 million. These transactions resulted in an aggregate gain of $143.6 million, after income tax expense, and aggregate impairment charges of $10.2 million, before income tax expense of $2.3 million. Additionally, during 2015, the Company disposed of its remaining operating property in Chile for a sales price of $51.3 million. This transaction resulted in the release of a cumulative foreign currency translation loss of $19.6 million due to the Company’s liquidation of its investment in Chile, partially offset by a gain on sale of $1.8 million, after income tax expense.

 

Net income attributable to the Company was $378.9 million for the year ended December 31, 2016, as compared to $894.1 million for the year ended December 31, 2015. On a diluted per share basis, net income available to the Company for the year ended December 31, 2016 was $0.79 as compared to $2.00 for the year ended December 31, 2015. These changes are primarily attributable to (i) a decrease in equity in income of joint ventures, net, resulting from gains on sales of properties within various joint venture investments during 2015, (ii) a decrease in gain on change in control of interests, net related to the fair value adjustment associated with the Company’s previously held equity interests in properties acquired from various joint ventures during 2016 and 2015, (iii) an increase in impairments of operating properties during 2016, (iv) an increase in early extinguishment of debt charges resulting from the prepayment of secured and unsecured debt by the Company, (v) a decrease in gains on sale of operating properties, (vi) a decrease in gain on sale of marketable securities during 2016, as compared to the corresponding period in 2015, (vii) an increase in provision for income taxes due to a valuation allowance on net deferred tax assets resulting from the merger of KRS into a wholly-owned LLC of the Company and (viii) a decrease in gains through the Company’s preferred equity program and other investments, partially offset by (ix) a decrease in interest expense and (x) incremental earnings due to the acquisition of operating properties during 2016 and 2015 and increased profitability from the Company’s operating properties.

 

 
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Results of Operations

 

Comparison 2015 to 2014

   

2015

   

2014

   

Change

   

% change

 
   

(amounts in millions)

         
                                 

Revenues from rental properties (1)

  $ 1,144.5     $ 958.9     $ 185.6       19.4%  

Rental property expenses: (2)

                               

Rent

  $ 12.3     $ 14.3     $ (2.0 )     (14.0%)  

Real estate taxes

    147.2       124.7       22.5       18.0%  

Operating and maintenance

    145.0       119.7       25.3       21.1%  
    $ 304.5     $ 258.7     $ 45.8       17.7%  

Depreciation and amortization (3)

  $ 344.5     $ 258.1     $ 86.4       33.5%  

 

(1)

Revenues from rental properties increased primarily from the combined effect of (i) the acquisition of operating properties during 2015 and 2014, providing incremental revenues for the year ended December 31, 2015, of $179.9 million, as compared to the corresponding period in 2014 and (ii) the completion of certain redevelopment projects, tenant buyouts and net growth in the current portfolio, providing incremental revenues for the year ended December 31, 2015, of $23.5 million, as compared to the corresponding period in 2014, partially offset by (iii) a decrease in revenues of $17.8 million from properties sold during 2015 and 2014.

 

(2)

Rental property expenses include (i) rent expense relating to ground lease payments for which the Company is the lessee, (ii) real estate tax expense for consolidated properties for which the Company has a controlling ownership interest and (iii) operating and maintenance expense, which consists of property related costs including repairs and maintenance costs, roof repair, landscaping, parking lot repair, snow removal, utilities, property insurance costs, security and various other property related expenses. Rental property expenses increased for the year ended December 31, 2015, as compared to the corresponding period in 2014, primarily due to the acquisitions of properties during 2015 and 2014, partially offset by the disposition of properties in 2015, which resulted in (i) a net increase in real estate taxes of $22.5 million, (ii) a net increase in repairs and maintenance costs of $9.7 million, (iii) a net increase in property services of $4.8 million, (iv) a net increase in snow removal costs of $3.6 million, (v) a net increase in professional fees of $2.4 million and (vi) a net increase in insurance expense of $3.1 million, due to an increase in insurance claims.

 

(3)

Depreciation and amortization increased for the year ended December 31, 2015, as compared to the corresponding period in 2014, primarily due to operating property acquisitions during 2015 and 2014 and amounts relating to the Company’s redevelopment projects in 2015, partially offset by property dispositions.

 

Management and other fee income decreased $12.7 million to $22.3 million for the year ended December 31, 2015, as compared to $35.0 million for the corresponding period in 2014. This decrease is primarily attributable to (i) the sale of properties within various joint venture investments and the acquisition of partnership interests in joint ventures by the Company during 2015 and 2014 and (ii) a decrease in enhancement fee income related to InTown Suites of $4.1 million for the year ended December 31, 2015, as compared to the corresponding period in 2014, resulting from the repayment of debt that was previously guaranteed by the Company. 

 

During the year ended December 31, 2015, the Company recognized impairment charges of $45.5 million, before noncontrolling interests and income taxes, of which $0.1 million is included in discontinued operations. These impairment charges consist of (i) $30.3 million related to adjustments to property carrying values, (ii) $9.0 million relating to a cost method investment, (iii) $5.3 million related to certain investments in other real estate investments and (iv) $0.8 million related to marketable debt securities investments. During the year ended December 31, 2014, the Company recognized impairment charges of $217.8 million, of which $178.0 million, before income tax benefits of $1.7 million, is included in discontinued operations. These impairment charges consist of (i) $118.4 million related to adjustments to property carrying values, (ii) the release of a cumulative foreign currency translation loss of $92.9 million relating to the substantial liquidation of the Company’s investment in Mexico, (iii) $4.8 million related to a cost method investment and (iv) $1.6 million related to a preferred equity investment. The adjustments to property carrying values were recognized in connection with the Company’s efforts to market certain properties and management’s assessment as to the likelihood and timing of such potential transactions and the anticipated hold period for such properties. Certain of the calculations to determine fair value utilized unobservable inputs and as such are classified as Level 3 of the fair value hierarchy. For additional disclosure, see Footnote 16 of the Notes to Consolidated Financial Statements included in this Form 10-K.

 

Interest, dividends and other investment income increased $38.1 million to $39.1 million for the year ended December 31, 2015, as compared to $1.0 million for the corresponding period in 2014. This increase is primarily due to the sale of certain marketable securities during 2015, which resulted in an aggregate gain of $39.9 million.

 

Other income/(expense), net changed $10.7 million to income of $2.2 million for the year ended December 31, 2015, as compared to an expense of $8.5 million for the corresponding period in 2014. This change is primarily due to (i) the release of contingent liabilities related to potential earn-out payments, for which the Company ultimately was not required to pay of $5.8 million, (ii) a decrease in acquisition related costs of $2.3 million and (iii) an increase in gains on land sales of $0.8 million.

 

 
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Interest expense increased $15.1 million to $218.9 million for the year ended December 31, 2015, as compared to $203.8 million for the corresponding period in 2014.  This increase is primarily the result of higher levels of borrowings during 2015, as compared to 2014, primarily relating to the acquisition of operating properties during 2015 and 2014. 

 

Provision for income taxes, net increased $37.8 million to $60.2 million for the year ended December 31, 2015, as compared to $22.4 million for the corresponding period in 2014. This increase is primarily due to (i) an increase in foreign tax expense of $33.6 million primarily resulting from the sale of certain Canadian investments during 2015, as compared to 2014 and (ii) an increase in tax expense of $4.3 million relating to equity in income recognized in connection with the Company’s Albertsons investment during 2015, as compared to 2014.

 

Equity in income of joint ventures, net increased $320.8 million to $480.4 million for the year ended December 31, 2015, as compared to $159.6 million for the corresponding period in 2014. This increase is primarily due to (i) an increase in gains of $316.1 million resulting from the sale of properties and sale of interests within various joint venture investments during the year ended December 31, 2015, as compared to the corresponding period in 2014 and (ii) the release of cumulative foreign currency translation loss of $47.3 million relating to the substantial liquidation of the Company’s investment in Mexico during 2014, partially offset by (iii) a decrease in equity in income of $15.6 million resulting from a cash distribution received in excess of the Company’s carrying basis in 2014, (iv) an increase in impairment charges of $14.9 million recognized during the year ended December 31, 2015, as compared to the corresponding period in 2014 and (v) lower equity in income resulting from the sales of properties within various joint venture investments and the acquisition of partnership interests in joint ventures by the Company during 2015 and 2014.

 

During 2015, the Company acquired 43 properties from joint ventures in which the Company had noncontrolling interests.  The Company recorded a net gain on change in control of interests of $149.2 million related to the fair value adjustment associated with its previously held equity interests in these properties.

 

During 2014, the Company acquired 34 properties from joint ventures in which the Company had noncontrolling interests. The Company recorded an aggregate net gain on change in control of interests of $107.2 million related to the fair value adjustment associated with its original ownership of these properties.

 

During 2015, the Company disposed of 89 consolidated operating properties and eight out-parcels, in separate transactions, for an aggregate sales price of $492.5 million. These transactions resulted in an aggregate gain of $143.6 million, after income tax expense, and aggregate impairment charges of $10.2 million, before income tax expense of $2.3 million. Additionally, during 2015, the Company disposed of its remaining operating property in Chile for a sales price of $51.3 million. This transaction resulted in the release of a cumulative foreign currency translation loss of $19.6 million due to the Company’s liquidation of its investment in Chile, partially offset by a gain on sale of $1.8 million, after income tax expense. 

 

During 2014, the Company disposed of 90 consolidated operating properties, in separate transactions, for an aggregate sales price of $833.5 million, including 27 operating properties in Latin America. These transactions, which are included in Discontinued Operations on the Company’s Consolidated Statements of Income, resulted in (i) an aggregate gain of $203.3 million, before income taxes of $12.0 million, (ii) the release of a cumulative foreign currency translation loss of $92.9 million relating to the substantial liquidation of the Company’s investment in Mexico and (iii) aggregate impairment charges of $85.1 million before income tax benefits of $1.7 million.

 

Net income attributable to the Company was $894.1 million for the year ended December 31, 2015. Net income attributable to the Company was $424.0 million for the year ended December 31, 2014. On a diluted per share basis, net income attributable to the Company was $2.00 for the year ended December 31, 2015, as compared to $0.89 for the year ended December 31, 2014. These changes are primarily attributable to (i) incremental earnings due to the acquisition of operating properties during 2015 and 2014 and increased profitability from the Company’s operating properties, (ii) an increase in equity in income of joint ventures, net, primarily from gains on sale of Canadian assets, (iii) an increase in gains on sale of marketable securities and (iv) an increase in gain on change in control of interests, net, partially offset by (v) an increase in depreciation and amortization, (vi) the disposition of operating properties during 2015 and 2014 and (vii) an increase in provision for income taxes, net.

 

Liquidity and Capital Resources

 

The Company’s capital resources include accessing the public debt and equity capital markets, mortgage and construction loan financing, borrowings under term loans and immediate access to an unsecured revolving credit facility with bank commitments of $1.75 billion at December 31, 2016, which were subsequently increased to $2.25 billion during February 2017.

 

 
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The Company’s cash flow activities are summarized as follows (in millions):

 

   

Year Ended December 31,

 
   

2016

   

2015

   

2014

 

Net cash flow provided by operating activities

  $ 592.1     $ 493.7     $ 629.3  

Net cash flow provided by investing activities

  $ 165.4     $ 21.4     $ 126.7  

Net cash flow used for financing activities

  $ (804.5 )   $ (512.9 )   $ (717.5 )

 

Operating Activities

 

The Company anticipates that cash on hand, borrowings under its revolving credit facility, issuance of equity and public debt, as well as other debt and equity alternatives, will provide the necessary capital required by the Company.  Cash flows provided by operating activities for the year ended December 31, 2016, were $592.1 million, as compared to $493.7 million for the comparable period in 2015. The increase of $98.4 million is primarily attributable to (i) the acquisition of operating properties during 2016 and 2015, (ii) new leasing, expansion and re-tenanting of core portfolio properties and (iii) changes in operating assets and liabilities due to timing of receipts and payments, partially offset by (iv) a decrease in operational distributions from the Company’s joint venture programs due to the sale of certain joint venture properties during 2016 and 2015.

 

Investing Activities 

 

Cash flows provided by investing activities for the year ended December 31, 2016, was $165.4 million, as compared to $21.4 million for the comparable period in 2015. This increase of $144.0 million resulted primarily from (i) a decrease in acquisition of operating real estate and other related net assets of $458.2 million, (ii) a decrease in investment in other investments of $190.3 million related to the Company’s KRS AB Acquisition, LLC joint venture investment in Safeway Inc. during 2015, (iii) an increase in return of investment from liquidation of real estate joint ventures of $103.2 million primarily due to the liquidation of certain Canadian joint ventures in 2016, as compared to the corresponding period in 2015, and (iv) a decrease in improvements to operating real estate of $23.2 million, partially offset by (v) a decrease in distributions from liquidation of real estate joint ventures of $235.4 million, (vi) a decrease in proceeds from the sale of operating properties of $132.4 million, (vii) a decrease in proceeds from sale/repayments of marketable securities of $74.2 million, (viii) an increase in improvements to real estate under development of $55.9 million, (ix) a decrease in collection of mortgage loan receivables of $54.2 million, (x) a decrease in reimbursements of investments and advances to real estate joint ventures and other real estate investments of $51.9 million and (xi) an increase in acquisition of real estate under development of $35.2 million.

 

Acquisitions of Operating Real Estate and Other Related Net Assets

 

During the years ended December 31, 2016 and 2015, the Company expended $203.2 million and $661.4 million, respectively, towards the acquisition of operating real estate properties. The Company continues to transform its operating portfolio through its capital recycling program by acquiring what the Company believes are high quality U.S. retail properties and disposing of lesser quality assets. The Company anticipates acquiring approximately $300.0 million to $400.0 million of operating properties during 2017. The Company intends to fund these acquisitions with proceeds from property dispositions, cash flow from operating activities, assumption of mortgage debt, if applicable, and availability under the Company’s revolving line of credit.

 

Improvements to Operating Real Estate

 

During the years ended December 31, 2016 and 2015, the Company expended $143.5 million and $166.7 million, respectively, towards improvements to operating real estate. These amounts consist of the following (in thousands):

 

   

Year Ended December 31,

 
   

2016

   

2015

 

Redevelopment/renovations

  $ 96,319     $ 125,994  

Tenant improvements/tenant allowances

    39,016       30,127  

Other

    8,154       10,549  

Total (1)

  $ 143,489     $ 166,670  

 

 

(1)

During the years ended December 31, 2016 and 2015, the Company capitalized interest of $2.4 million and $3.0 million, respectively, and capitalized payroll of $2.1 million and $3.0 million, respectively, in connection with the Company’s improvements to operating real estate.

 

During the years ended December 31, 2016 and 2015, the Company capitalized personnel costs of $15.4 million and $13.9 million, respectively, relating to deferred leasing costs.

 

 
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The Company has an ongoing program to redevelop and re-tenant its properties to maintain or enhance its competitive position in the marketplace. The Company is actively pursuing redevelopment opportunities within its operating portfolio which it believes will increase the overall value by bringing in new tenants and improving the assets’ value. The Company has identified three categories of redevelopment, (i) large scale redevelopment, which involves demolishing and building new square footage, (ii) value creation redevelopment, which includes the subdivision of large anchor spaces into multiple tenant layouts, and (iii) creation of out-parcels and pads which are located in the front of the shopping center properties. The Company anticipates its capital commitment toward these redevelopment projects and re-tenanting efforts during 2017 will be approximately $250.0 million to $300.0 million. The funding of these capital requirements will be provided by cash flow from operating activities and availability under the Company’s revolving line of credit.

 

Real Estate Under Development

 

The Company is engaged in select real estate development projects, which are expected to be held as long-term investments by the Company. As of December 31, 2016, the Company had in progress a total of six consolidated real estate development projects located in the U.S. The Company anticipates its capital commitment toward these development projects during 2017 will be approximately $150.0 million to $200.0 million. The funding of these capital requirements will be provided by cash flow from operating activities and availability under the Company’s revolving line of credit. The Company anticipates remaining costs to complete for these projects to be approximately $225.0 million to $275.0 million. Additionally, during the year ended December 31, 2016, the Company capitalized interest of $6.9 million, real estate taxes and insurance of $4.3 million and payroll of $1.8 million, in connection with these real estate development projects.

 

Financing Activities 

 

Cash flow used for financing activities for the year ended December 31, 2016, was $804.5 million, as compared to $512.9 million for the comparable period in 2015. This change of $291.6 million resulted primarily from (i) an increase in repayments under unsecured term loan/notes of $511.9 million, (ii) an increase in principal payments of $135.6 million, (iii) a decrease in contributions from noncontrolling interests, net of $106.2 million, primarily relating to the joint venture investment in Safeway, (iv) a decrease in proceeds from issuance of unsecured term loan/notes of $100.0 million, (v) an increase in early extinguishment of debt charges of $45.7 million and (vi) an increase in dividends paid of $18.2 million, partially offset by (vii) an increase in proceeds from issuance of stock of $288.7 million, (viii) a decrease in redemption of preferred stock of $175.0 million, (ix) an increase in proceeds from unsecured revolving credit facility, net of $126.4 million and (x) a decrease in redemption of noncontrolling interests of $43.2 million.

 

The Company continually evaluates its debt maturities, and, based on management’s current assessment, believes it has viable financing and refinancing alternatives that will not materially adversely impact its expected financial results. The Company continues to pursue borrowing opportunities with large commercial U.S. and global banks, select life insurance companies and certain regional and local banks. The Company has noticed a continuing trend that, although pricing remains dependent on specific deal terms, generally spreads for non-recourse mortgage financing had been widening due to global economic issues, but have recently stabilized. However, the unsecured debt markets are functioning well and credit spreads are at manageable levels.

 

Debt maturities for 2017 consist of: $451.6 million of consolidated debt; $358.2 million of unconsolidated joint venture debt; and $59.3 million of debt on properties included in the Company’s Preferred Equity Program, assuming the utilization of extension options where available. Subsequent to December 31, 2016, the Company paid off the remaining $250.0 million outstanding balance on the Company’s unsecured term loan. The 2017 consolidated debt maturities are anticipated to be repaid with operating cash flows, borrowings from the Company’s revolving credit facility (which at December 31, 2016, had $1.725 billion available and was subsequently increased to $2.25 billion) and debt refinancing where applicable.   The 2017 debt maturities on properties in the Company’s unconsolidated joint ventures and Preferred Equity Program are anticipated to be repaid through debt refinancing, unsecured credit facilities and partner capital contributions, as deemed appropriate.

 

The Company intends to maintain strong debt service coverage and fixed charge coverage ratios as part of its commitment to maintain its investment-grade debt ratings.   The Company may, from time-to-time, seek to obtain funds through additional common and preferred equity offerings, unsecured debt financings and/or mortgage/construction loan financings and other capital alternatives.

 

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 $12.2 billion.  Proceeds from public capital market activities have been used for the purposes of, among other things, repaying indebtedness, acquiring interests in open-air shopping centers, funding real estate under development projects, expanding and improving properties in the portfolio and other investments.

 

During February 2015, the Company filed a shelf registration statement on Form S-3, which is effective for a term of three years, for the future unlimited offerings, from time-to-time, of debt securities, preferred stock, depositary shares, common stock and common stock warrants. The Company, pursuant to this shelf registration statement 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 Footnote 13 of the Notes to Consolidated Financial Statements included in this Form 10-K.)

 

 
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At the Market Continuous Offering Program (“ATM program”)

 

During February 2015, the Company established an ATM program, pursuant to which the Company may offer and sell shares of its common stock, par value $0.01 per share, with an aggregate gross sales price of up to $500.0 million through a consortium of banks acting as sales agents. Sales of the shares of common stock may be made, as needed, from time to time in “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, including by means of ordinary brokers’ transactions on the NYSE or otherwise (i) at market prices prevailing at the time of sale, (ii) at prices related to prevailing market prices or (iii) as otherwise agreed to with the applicable sales agent. During the year ended December 31, 2016, the Company issued 9,806,377 shares and received proceeds of $285.2 million, net of commissions and fees of $2.9 million. As of December 31, 2016, the Company had $211.9 million available under this ATM program.

 

Medium Term Notes (“MTN”) and Senior Notes

 

The Company’s supplemental indenture governing its MTN and senior notes contains the following covenants, all of which the Company is compliant with:

 

Covenant

 

Must Be

 

As of 12/31/16

 

Consolidated Indebtedness to Total Assets

 

<65%

  38%  

Consolidated Secured Indebtedness to Total Assets

 

<40%

  8%  

Consolidated Income Available for Debt Service to Maximum Annual Service Charge

 

>1.50x

 

6.0x

 

Unencumbered Total Asset Value to Consolidated Unsecured Indebtedness

 

>1.50x

 

2.8x

 

 

For a full description of the various indenture covenants refer to the Indenture dated September 1, 1993; the First Supplemental Indenture dated August 4, 1994; the Second Supplemental Indenture dated April 7, 1995; the Third Supplemental Indenture dated June 2, 2006; the Fourth Supplemental Indenture dated April 26, 2007; the Fifth Supplemental Indenture dated as of September 24, 2009; the Sixth Supplemental Indenture dated as of May 23, 2013; and the Seventh Supplemental Indenture dated as of April 24, 2014, each as filed with the SEC. See the Exhibits Index for specific filing information.

 

During the year ended December 31, 2016, the Company issued the following Senior Unsecured Notes (dollars in millions):

 

 

Date Issued

Maturity Date

 

Amount Issued

Interest Rate

 

Nov-16

Mar-24

$

400.0

2.7%

 

Nov-16

Dec-46

$

350.0

4.125%

 

Aug-16

Oct-26

$

500.0

2.8%

 

May-16

Apr-45

$

150.0

4.25%

 

Interest on these senior unsecured notes is payable semi-annually in arrears. The Company used the net proceeds from these issuances, after the underwriting discounts and related offering costs, for general corporate purposes, including to pre-fund near-term debt maturities or to reduce borrowings under the Company’s revolving credit facility.

 

During the year ended December 31, 2016, the Company repaid (i) its $300.0 million 5.783% medium term notes, which matured in March 2016 and (ii) its $290.9 million 5.70% senior unsecured notes, which were scheduled to mature in May 2017. The Company recorded an early extinguishment of debt charge of $10.2 million resulting from the early repayment of its $290.9 million 5.70% notes.

 

Canadian Notes Payable

 

During August 2016, Kimco North Trust III, a wholly-owned subsidiary of the Company, repaid (i) its CAD $150.0 million (USD $116.1 million) 5.99% notes, which were scheduled to mature in April 2018 and (ii) its CAD $200.0 million (USD $154.8 million) 3.855% notes, which were scheduled to mature in August 2020. The Company recorded aggregate early extinguishment of debt charges of CAD $34.1 million (USD $26.3 million) resulting from the early repayment of these notes.

 

Credit Facility

 

The Company had a $1.75 billion unsecured revolving credit facility (the “Credit Facility”) with a group of banks, which was scheduled to expire in March 2018 with two additional six month options to extend the maturity date, at the Company’s discretion, to March 2019. The Credit Facility, which could be increased to $2.25 billion through an accordion feature, accrued interest at a rate of LIBOR plus 92.5 basis points (1.67% as of December 31, 2016) on drawn funds. In addition, the Credit Facility included a $500 million sub-limit which provided the Company the opportunity to borrow in alternative currencies including Canadian Dollars, British Pounds Sterling, Japanese Yen or Euros. Pursuant to the terms of the Credit Facility, the Company, among other things, was subject to covenants requiring the maintenance of (i) maximum leverage ratios on both unsecured and secured debt and (ii) minimum interest and fixed coverage ratios. As of December 31, 2016, the Credit Facility had a balance of $25.0 million outstanding and $0.7 million appropriated for letters of credit.

 

 
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In February 2017, the Company closed on a new $2.25 billion unsecured revolving credit facility (the “New Credit Facility”) with a group of banks, which is scheduled to expire in March 2021 with two additional six month options to extend the maturity date, at the Company’s discretion, to March 2022. The New Credit Facility could be increased to $2.75 billion through an accordion feature. The New Credit Facility replaces the Company’s Credit Facility discussed above, that was scheduled to mature in March 2018. The New Credit Facility accrues interest at a rate of LIBOR plus 87.5 basis points on drawn funds. In addition, there is a $500.0 million sub-limit which provides the company the opportunity to borrow in alternative currencies including Canadian Dollars, British Pounds Sterling, Japanese Yen or Euros. Pursuant to the terms of the New Credit Facility, the Company continues to be subject to the covenants under the Credit Facility. For a full description of the New Credit Facility’s covenants refer to the Amended and Restated Credit Agreement dated as of February 1, 2017, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 30, 2017.

 

Pursuant to the terms of the Credit Facility, the Company, among other things, is subject to maintenance of various covenants. The Company is currently in compliance with these covenants. The financial covenants for the Credit Facility are as follows:

 

Covenant

 

Must Be

 

As of 12/31/16

Total Indebtedness to Gross Asset Value (“GAV”)

 

<60%

 

41%

Total Priority Indebtedness to GAV

 

<35%

 

8%

Unencumbered Asset Net Operating Income to Total Unsecured Interest Expense

 

>1.75x

 

4.90x

Fixed Charge Total Adjusted EBITDA to Total Debt Service

 

>1.50x

 

2.84x

 

For a full description of the Credit Facility’s covenants refer to the Credit Agreement dated as of March 17, 2014, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 20, 2014.

 

Term Loan

 

The Company had a $650.0 million unsecured term loan (“Term Loan’) which was scheduled to mature in January 2017, with three one-year extension options at the Company’s discretion, and accrued interest at a spread (95 basis points at December 31, 2016) to LIBOR or at the Company’s option at a base rate as defined per the agreement (1.60% at December 31, 2016). During November 2016, the Company repaid $400.0 million of borrowings under the Company’s Term Loan. As of December 31, 2016, the Term Loan had a balance of $250.0 million. Pursuant to the terms of the credit agreement for the Term Loan, the Company, among other things, is subject to covenants requiring the maintenance of (i) maximum indebtedness ratios and (ii) minimum interest and fixed charge coverage ratios. The Term Loan covenants are similar to the Credit Facility covenants described above. During January 2017, the Company repaid the remaining $250.0 million balance on the Term Loan and terminated the agreement.

 

Mortgages Payable

 

During 2016, the Company (i) assumed $289.0 million of individual non-recourse mortgage debt relating to the acquisition of 10 properties, including $4.3 million associated with fair value debt adjustments and (ii) paid off $703.0 million of mortgage debt (including fair market value adjustment of $2.1 million) that encumbered 47 operating properties. In connection with the early prepayment of certain of these mortgages, the Company recorded an early extinguishment of debt charge of $9.2 million.

 

Additionally, during 2016, the Company disposed of an encumbered property through foreclosure. This transaction resulted in a net decrease in mortgage debt of $25.6 million (including fair market value adjustment of $0.4 million) and a gain on forgiveness of debt of $3.1 million, which is included in Other income/(expense), net in the Company’s Consolidated Statements of Income.

 

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 and construction loans to partially fund the capital needs of its real estate under development projects. As of December 31, 2016, the Company had over 360 unencumbered property interests in its portfolio.

 

Dividends

 

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. The Company’s Board of Directors will continue to evaluate the Company’s dividend policy on a quarterly basis as the Board of Directors monitors sources of capital and evaluates the impact of the economy and capital markets availability on operating fundamentals.  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 were $474.0 million in 2016, $455.8 million in 2015 and $427.9 million in 2014.

 

 
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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. On October 25, 2016, the Company’s Board of Directors declared an increased quarterly cash dividend of $0.27 per common share, an annualized increase of 5.9%, payable to shareholders of record on January 3, 2017, which was paid on January 15, 2017. Additionally, on February 2, 2017, the Company’s Board of Directors declared a quarterly cash dividend of $0.27 per common share payable to shareholders of record on April 5, 2017, which is scheduled to be paid on April 17, 2017.

 

The Board of Directors also declared quarterly dividends with respect to the Company’s various series of cumulative redeemable preferred shares (Class I, Class J and Class K). All dividends on the preferred shares are scheduled to be paid on April 17, 2017, to shareholders of record on April 4, 2017, with an ex-dividend date of March 31, 2017.

 

Other

 

The Company is subject to taxes on its activities in Canada, Puerto Rico and Mexico.  In general, under local country law applicable to the structures the Company has in place and applicable treaties, the repatriation of cash to the Company from its subsidiaries and joint ventures in Canada, Puerto Rico and Mexico generally are not subject to withholding tax. The Company is subject to and also includes in its tax provision non-U.S. income taxes on certain investments located in jurisdictions outside the U.S. These investments are held by the Company at the REIT level and not in the Company’s taxable REIT subsidiary. Accordingly, the Company does not expect a U.S. income tax impact associated with the repatriation of undistributed earnings from the Company’s foreign subsidiaries.

 

Contractual Obligations and Other Commitments

 

The Company has debt obligations relating to its revolving credit facility, Term Loan, MTNs, senior notes and mortgages with maturities ranging from less than one year to 30 years. As of December 31, 2016, the Company’s total debt had a weighted average term to maturity of 8.7 years. In addition, the Company has non-cancelable operating leases pertaining to its shopping center portfolio. As of December 31, 2016, the Company had 44 consolidated 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. The following table summarizes the Company’s debt maturities (excluding extension options, unamortized debt issuance costs of $50.8 million and fair market value of debt adjustments aggregating $27.7 million) and obligations under non-cancelable operating leases as of December 31, 2016 (in millions):

 

   

Payments due by period

         

Contractual Obligations:

 

2017

   

2018

   

2019

   

2020

   

2021

   

Thereafter

   

Total

 

Long-Term Debt-Principal (1)

  $ 712.4     $ 449.4     $ 415.9     $ 101.2     $ 645.4     $ 2,765.2     $ 5,089.5  

Long-Term Debt-Interest (2)

  $ 181.3     $ 152.4     $ 140.5     $ 122.7     $ 107.3     $ 979.7     $ 1,683.9  

Operating Leases:

                                                       

Ground Leases (3)

  $ 8.7     $ 8.7     $ 8.8     $ 8.3     $ 8.3     $ 143.0     $ 185.8  

 

 

(1)

Maturities utilized do not reflect extension options, which range from one to three years.

 

(2)

For loans which have interest at floating rates, future interest expense was calculated using the rate as of December 31, 2016.

 

(3)

For leases which have inflationary increases, future ground rent expense was calculated using the rent as of December 31, 2016.

 

The Company had a $250.0 million unsecured term loan and $462.4 million of secured debt scheduled to mature in 2017. Subsequent to December 31, 2016, the Company paid off the $250.0 million unsecured term loan. The Company anticipates satisfying the remaining maturities with a combination of operating cash flows, its unsecured revolving credit facility, exercise of extension options, where available, and new debt issuances.

 

The Company has issued letters of credit in connection with completion and repayment guarantees for loans encumbering certain of the Company’s development and redevelopment projects and guarantee of payment related to the Company’s insurance program. As of December 31, 2016, these letters of credit aggregated $40.8 million.

 

In connection with the construction of its development/redevelopment projects and related infrastructure, certain public agencies require posting of performance and surety bonds to guarantee that the Company’s obligations are satisfied. These bonds expire upon the completion of the improvements and infrastructure. As of December 31, 2016, the Company had $30.1 million in performance and surety bonds outstanding.

 

The Company has accrued $5.0 million of non-current uncertain tax positions and related interest under the provisions of the authoritative guidance that addresses accounting for income taxes, which are included in Other liabilities on the Company’s Consolidated Balance Sheets at December 31, 2016. These amounts are not included in the table above because a reasonably reliable estimate regarding the timing of settlements with the relevant tax authorities, if any, cannot be made.

 

 
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Off-Balance Sheet Arrangements

 

Unconsolidated Real Estate Joint Ventures

 

The Company has investments in various unconsolidated real estate joint ventures with varying structures. These joint ventures primarily operate shopping center properties. Such arrangements are generally with third-party institutional investors and individuals. The properties owned by the joint ventures are primarily financed with individual non-recourse mortgage loans, however, the Company, on a selective basis, has obtained unsecured financing for certain joint ventures. As of December 31, 2016, the Company did not guarantee any joint venture unsecured debt. 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 (see Footnote 8 of the Notes to Consolidated Financial Statements included in this Form 10-K). As of December 31, 2016, these investments include the following joint ventures:

 

Venture

 

Kimco

Ownership

Interest

   

Number of

Properties

   

Non-

Recourse

Mortgages

Payable

(in millions)

   

Number of

Encumbered

Properties

   

Weighted

Average

Interest

Rate

   

Weighted

Average

Term

(months)*

 
                                                 
                                                 

KimPru and KimPru II (a)

  15.0%         48     $ 448.6       16     3.31%         73.0  

KIR (b)

   48.6%         45     $ 730.7       38      4.69%         55.4  

CPP (c)

   55.0%         5     $ 84.8       1      2.17%         16.0  

 

* Average remaining term includes extensions

 

(a)

Represents the Company’s joint ventures with Prudential Global Investment Management. As of December 31, 2016, KimPru also has an unsecured term loan with an outstanding balance of $200.0 million, which is scheduled to mature in August 2019, with two one-year extension options at the joint venture’s discretion, and bears interest at a rate equal to LIBOR plus 1.75% (2.52% at December 31, 2016).

 

(b)

Represents the Company’s joint ventures with certain institutional investors. As of December 31, 2016, KIR has an unsecured revolving credit facility with an outstanding balance of $16.0 million, which is scheduled to mature in June 2018, with two one-year extension options at the joint venture’s discretion, and bears interest at a rate equal to LIBOR plus 1.75% (2.52% at December 31, 2016).

 

(c)

Represents the Company’s joint ventures with Canada Pension Plan Investment Board (CPPIB).

 

The Company has various other unconsolidated real estate joint ventures with varying structures. As of December 31, 2016, these other unconsolidated joint ventures had individual non-recourse mortgage loans aggregating $584.3 million. The aggregate debt as of December 31, 2016, of all of the Company’s unconsolidated real estate joint ventures is $2.1 billion. As of December 31, 2016, these loans had scheduled maturities ranging from one month to 10 years and bore interest at rates ranging from 2.01% to 7.25%. Approximately $358.2 million of the aggregate outstanding loan balance matures in 2017. These maturing loans are anticipated to be repaid with operating cash flows, debt refinancing and partner capital contributions, as deemed appropriate (see Footnote 8 of the Notes to Consolidated Financial Statements included in this Form 10-K).

 

Other Real Estate Investments

 

The Company previously provided capital to owners and developers of real estate properties through its Preferred Equity Program. As of December 31, 2016, the Company’s net investment under the Preferred Equity Program was $193.7 million relating to 365 properties, including 346 net leased properties. As of December 31, 2016, these preferred equity investment properties had individual non-recourse mortgage loans aggregating $427.4 million. These loans have scheduled maturities ranging from one month to eight years and bear interest at rates ranging from 4.19% to 10.47%. Due to the Company’s preferred position in these investments, the Company’s share of each investment is subject to fluctuation and is dependent upon property cash flows. The Company’s maximum exposure to losses associated with its preferred equity investments is limited to its invested capital.

 

Funds From Operations

 

Funds From Operations (“FFO”) is a supplemental non-GAAP measure utilized to evaluate the operating performance of real estate companies. The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income/(loss) attributable to common shareholders computed in accordance with generally accepted accounting principles in the United States (“GAAP”), excluding (i) gains or losses from sales of operating real estate assets and change in control of interests, plus (ii) depreciation and amortization of operating properties and (iii) impairment of depreciable real estate and in substance real estate equity investments and (iv) after adjustments for unconsolidated partnerships and joint ventures calculated to reflect funds from operations on the same basis.

 

The Company presents FFO as it considers it an important supplemental measure of our operating performance and believes it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting results. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.

 

 
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The Company also presents FFO as adjusted as an additional supplemental measure as it believes it is more reflective of the Company’s core operating performance. The Company believes FFO as adjusted provides investors and analysts an additional measure in comparing the Company’s performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. FFO as adjusted is generally calculated by the Company as FFO excluding certain transactional income and expenses and non-operating impairments which management believes are not reflective of the results within the Company’s operating real estate portfolio.

 

FFO is a supplemental non-GAAP financial measure of real estate companies’ operating performances, which does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative for net income as a measure of liquidity.  Our method of calculating FFO and FFO as adjusted may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.

 

The Company’s reconciliation of net income available to common shareholders to FFO and FFO as adjusted for the three months and years ended December 31, 2016 and 2015 is as follows (in thousands, except per share data):

 

   

Three Months Ended

December 31,

   

Year Ended

December 31,

 
   

2016

   

2015

   

2016

   

2015

 

Net income available to common shareholders

  $ 66,718     $ 360,020     $ 332,630     $ 831,215  

Gain on disposition of operating property

    (10,950 )     (43,347 ) (4)     (92,824 )     (131,844 ) (4)

Gain on disposition of joint venture operating properties and change in control of interests

    (14,880 )     (327,933 ) (4)     (217,819 )     (557,744 ) (4)

Depreciation and amortization - real estate related

    89,476       82,732       347,315       333,840  

Depreciation and amortization - real estate joint ventures

    9,477       14,552       45,098       68,556  

Impairment of operating properties

    24,125       8,545       101,928       52,021  

(Benefit)/provision for income taxes (2)

    (1,227 )     51,849       39,570       53,792  

Noncontrolling interests (2)

    245       (3,239 )     (182 )     (6,591 )

FFO

    162,984       143,179       555,716       643,245  

Transactional (income)/expense:

                               

Profit participation from other real estate investments

    (830 )     (48 )     (10,883 )     (11,399 )

Transactional losses from other real estate investments

    -       -       461       -  

Gains from land sales

    (1,255 )     (798 )     (3,607 )     (7,621 )

Acquisition costs

    1,133       2,546       5,023       4,430  

Prepayment penalties

    -       -       45,674       -  

Severance costs – Canada

    -       1,974       -       1,974  

Gain on forgiveness of debt

    (7,357 )     -       (7,357 )     -  

Distributions in excess of Company’s investment basis

    -       (303 )     (845 )     (5,553 )

Gain on sale of marketable securities

    -       (1,365 )     -       (39,853 )

Impairments on other investments

    5,300       9,012       6,358       17,860  

Preferred stock redemption charge

    -       5,816       -       5,816  

Other expense/(income), net

    62       (5,101 )     22       (5,505 )

Provision/(benefit) for income taxes (3)

    257       (1,841 )     38,433       (227 )

Noncontrolling interests (3)

    125       -       410       270  

Total transactional (income)/expense, net

    (2,565 )     9,892       73,689       (39,808 )

FFO as adjusted

  $ 160,419     $ 153,071     $ 629,405     $ 603,437  

Weighted average shares outstanding for FFO calculations:

                               

Basic

    423,087       411,667       418,402       411,319  

Units

    841       860       853       791  

Dilutive effect of equity awards

    1,162       1,481       1,307       1,414  

Diluted

    425,090  (1)     414,008  (1)     420,562  (1)     413,524  (1)
                                 

FFO per common share – basic

  $ 0.39     $ 0.35     $ 1.33     $ 1.56  

FFO per common share – diluted

  $ 0.38  (1)   $ 0.35  (1)   $ 1.32  (1)   $ 1.56  (1)

FFO as adjusted per common share – basic

  $ 0.38     $ 0.37     $ 1.50     $ 1.47  

FFO as adjusted per common share – diluted

  $ 0.38  (1)   $ 0.37  (1)   $ 1.50  (1)   $ 1.46  (1)

 

(1)

Reflects the potential impact if certain units were converted to common stock at the beginning of the period, which would have a dilutive effect on FFO. FFO would be increased by $229 and $217 for the three months ended December 31, 2016 and 2015, respectively, and $881 and $781 for the years ended December 31, 2016 and 2015, respectively. The effect of other certain convertible units would have an anti-dilutive effect upon the calculation of Income from continuing operations per share.  Accordingly, the impact of such conversion has not been included in the determination of diluted earnings per share calculations.

(2)

Related to gains, impairment and deprecation on operating properties, where applicable.

(3)

Related to transaction (income)/expense, where applicable.

(4)

Includes cumulative foreign currency translation net loss of $18.8 million due to the liquidation of the Company's Chilean Portfolio as follows: (i) $19.6 million of loss in Gain on disposition of operating property, net, partially offset by (ii) $0.8 million of gain in Gain on disposition of joint venture operating properties and change in control of interests.

 

 
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U.S. Same Property Net Operating Income (“U.S. same property NOI”)

 

U.S. same property NOI is a supplemental non-GAAP financial measure of real estate companies’ operating performance and should not be considered an alternative to net income in accordance with GAAP or as a measure of liquidity. U.S. same property NOI is considered by management to be an important performance measure of the Company’s operations and management believes that it is frequently used by securities analysts and investors as a measure of the Company’s operating performance because it includes only the net operating income of U.S. properties that have been owned for the entire current and prior year reporting periods including those properties under redevelopment and excludes properties under development and pending stabilization. Properties are deemed stabilized at the earlier of (i) reaching 90% leased or (ii) one year following a project’s inclusion in operating real estate. U.S. same property NOI assists in eliminating disparities in net income due to the development, acquisition or disposition of properties during the particular period presented, and thus provides a more consistent performance measure for the comparison of the Company's properties.

 

U.S. same property NOI is calculated using revenues from rental properties (excluding straight-line rent adjustments, lease termination fees, amortization of above/below market rents and includes charges for bad debt) less operating and maintenance expense, real estate taxes and rent expense plus the Company’s proportionate share of U.S. same property NOI from U.S. unconsolidated real estate joint ventures, calculated on the same basis. The Company’s method of calculating U.S. same property NOI may differ from methods used by other REITs and, accordingly, may not be comparable to such other REITs.

 

The following is a reconciliation of the Company’s Income from continuing operations to U.S. same property NOI (in thousands):

 

   

Three Months

Ended December 31,

   

Year Ended
December 31,

 
   

2016

   

2015

   

2016

   

2015

 

Income from continuing operations

  $ 69,836     $ 339,117     $ 299,353     $ 774,405  

Adjustments:

                               

Management and other fee income

    (4,117 )     (4,369 )     (18,391 )     (22,295 )

General and administrative expenses

    27,462       33,413       117,302       122,735  

Impairment charges

    25,140       17,475       93,266       45,383  

Depreciation and amortization

    90,884       86,095       355,320       344,527  

Interest and other expense, net

    40,818       52,525       232,798       174,656  

(Benefit)/provision for income taxes, net

    (747 )     48,297       72,545       60,230  

Gain on change in control of interests, net

    (4,290 )     (3,091 )     (57,386 )     (149,234 )

Equity in income of other real estate investments, net

    (5,241 )     (4,854 )     (27,773 )     (36,090 )

Non same property net operating income

    (16,194 )     (41,218 )     (88,070 )     (173,189 )

Non-operational expense/(income) from joint ventures, net