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

kim20180331_10q.htm
 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-Q

 

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

 

For the quarterly period ended March 31, 2018

 

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

(Address of principal executive offices) (Zip Code)

 

(516) 869-9000

(Registrant’s telephone number, including area code)

 

        N/A        

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

(Do not check if a smaller reporting company)

 
 

  

     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of April 16, 2018, the registrant had 424,897,242 shares of common stock outstanding.

 



 

 

Table of Contents
 

 

PART I FINANCIAL INFORMATION

 

Item 1.

Financial Statements of Kimco Realty Corporation and Subsidiaries (Unaudited)

  

  

  

  

Condensed Consolidated Financial Statements -

  

  

  

  

  

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

3

  

  

 

  

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017

4

  

   

  

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017

5

  

   

  

Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2018 and 2017

6

  

   

  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

7

  

   
Notes to Condensed Consolidated Financial Statements 8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 31
     
Item 4. Controls and Procedures 32
     
PART II OTHER INFORMATION
     
Item 1. Legal Proceedings 33
     
Item 1A. Risk Factors 33
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
     
Item 3. Defaults Upon Senior Securities 33
     
Item 4. Mine Safety Disclosures 33
     
Item 5. Other Information 33
     
Item 6. Exhibits 33
     
Signatures 35

 

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KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share information)

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Assets:

               

Operating real estate, net of accumulated depreciation of $2,440,836 and $2,433,053, respectively

  $ 9,362,899     $ 9,817,875  

Investments in and advances to real estate joint ventures

    560,068       483,861  

Real estate under development

    465,682       402,518  

Other real estate investments

    203,905       217,584  

Mortgages and other financing receivables

    21,376       21,838  

Cash and cash equivalents

    218,313       238,513  

Marketable securities

    11,627       13,265  

Accounts and notes receivable, net

    184,533       189,757  

Other assets

    344,099       378,515  

Total assets (1)

  $ 11,372,502     $ 11,763,726  
                 

Liabilities:

               

Notes payable, net

  $ 4,597,967     $ 4,596,140  

Mortgages payable, net

    499,355       882,787  

Dividends payable

    132,209       128,892  

Other liabilities

    624,423       617,617  

Total liabilities (2)

    5,853,954       6,225,436  

Redeemable noncontrolling interests

    16,146       16,143  
                 

Commitments and Contingencies

               
                 

Stockholders' equity:

               

Preferred stock, $1.00 par value, authorized 5,996,240 shares, 42,580 and 41,200 shares issued and outstanding (in series), respectively; Aggregate liquidation preference $1,064,500 and $1,030,000, respectively

    43       41  

Common stock, $.01 par value, authorized 750,000,000 shares issued and outstanding 424,899,762 and 425,646,380 shares, respectively

    4,249       4,256  

Paid-in capital

    6,164,185       6,152,764  

Cumulative distributions in excess of net income

    (743,845 )     (761,337 )

Accumulated other comprehensive loss

    (66 )     (1,480 )

Total stockholders' equity

    5,424,566       5,394,244  

Noncontrolling interests

    77,836       127,903  

Total equity

    5,502,402       5,522,147  

Total liabilities and equity

  $ 11,372,502     $ 11,763,726  

 

(1)

Includes restricted assets of consolidated variable interest entities (“VIEs”) at March 31, 2018 and December 31, 2017 of $111,268 and $644,990, respectively. See Footnote 7 of the Notes to Condensed Consolidated Financial Statements.

(2)

Includes non-recourse liabilities of consolidated VIEs at March 31, 2018 and December 31, 2017 of $114,617 and $417,688, respectively. See Footnote 7 of the Notes to Condensed Consolidated Financial Statements.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

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KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 
                 

Revenues

               

Revenues from rental properties

  $ 230,415     $ 227,711  

Reimbursement income

    63,716       58,129  

Other rental property income

    5,586       3,551  

Management and other fee income

    4,361       4,197  
                 

Total revenues

    304,078       293,588  
                 

Operating expenses

               

Rent

    2,818       2,783  

Real estate taxes

    40,434       38,269  

Operating and maintenance

    43,331       42,574  

General and administrative

    22,398       22,230  

Provision for doubtful accounts

    2,131       1,404  

Impairment charges

    7,646       1,617  

Depreciation and amortization

    81,382       92,074  

Total operating expenses

    200,140       200,951  
                 

Operating income

    103,938       92,637  
                 

Other income/(expense)

               

Other income, net

    6,179       1,273  

Interest expense

    (49,943 )     (46,482 )

Income from continuing operations before income taxes, net, equity in income of joint ventures, net, gain on change in control of interests and equity in income from other real estate investments, net

    60,174       47,428  
                 

(Provision)/benefit for income taxes, net

    (52 )     493  

Equity in income of joint ventures, net

    16,913       14,733  

Gain on change in control of interests

    -       10,188  

Equity in income of other real estate investments, net

    9,976       3,687  
                 

Income from continuing operations

    87,011       76,529  
                 

Gain on sale of operating properties/change in control of interests

    56,971       1,686  
                 

Net income

    143,982       78,215  
                 

Net loss/(income) attributable to noncontrolling interests

    108       (1,482 )
                 

Net income attributable to the Company

    144,090       76,733  
                 

Preferred dividends

    (14,589 )     (11,555 )
                 

Net income available to the Company's common shareholders

  $ 129,501     $ 65,178  
                 

Per common share:

               

Net income available to the Company:

               

-Basic

  $ 0.30     $ 0.15  

-Diluted

  $ 0.30     $ 0.15  
                 

Weighted average shares:

               

-Basic

    423,404       423,381  

-Diluted

    424,521       424,146  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 
                 

Net income

  $ 143,982     $ 78,215  

Other comprehensive income:

         

Change in unrealized gain related to available-for-sale securities

    -       28  

Change in unrealized loss on interest rate swap

    278       188  

Change in foreign currency translation adjustments

    -       503  

Other comprehensive income

    278       719  
                 

Comprehensive income

    144,260       78,934  
                 

Comprehensive loss/(income) attributable to noncontrolling interests

    108       (1,482 )
                 

Comprehensive income attributable to the Company

  $ 144,368     $ 77,452  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

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KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months Ended March 31, 2018 and 2017

(Unaudited)

(in thousands)

 

    Cumulative    

Accumulated

                                                                 
   

Distributions

   

Other

                                           

Total

                 
   

 in Excess

   

Comprehensive

   

Preferred Stock

   

Common Stock

   

Paid-in

   

Stockholders'

   

Noncontrolling

   

Total

 
   

of Net Income

   

Income/(Loss)

   

Issued

   

Amount

   

Issued

   

Amount

   

Capital

   

Equity

   

Interests

   

Equity

 
                                                                                 

Balance at January 1, 2017

  $ (676,867 )   $ 5,766       32     $ 32       425,034     $ 4,250     $ 5,922,958     $ 5,256,139     $ 146,735     $ 5,402,874  

Contributions from noncontrolling interests

    -       -       -       -       -       -       -       -       2,310       2,310  

Comprehensive income:

                                                                               

Net income

    76,733       -       -       -       -       -       -       76,733       1,482       78,215  

Other comprehensive income:

                                                                               

Change in unrealized gain related to available-for-sale securities

    -       28       -       -       -       -       -       28       -       28  

Change in unrealized loss on interest rate swap

    -       188       -       -       -       -       -       188       -       188  

Change in foreign currency translation adjustments

    -       503       -       -       -       -       -       503       -       503  
                                                                                 

Redeemable noncontrolling interests income

    -       -       -       -       -       -       -       -       (1,066 )     (1,066 )

Dividends ($0.27 per common share; $0.3750 per

                                                                               

Class I Depositary Share, $0.3438 per

                                                                               

Class J Depositary Share, and $0.3516 per

                                                                               

Class K Depositary Share, respectively)

    (126,476 )     -       -       -       -       -       -       (126,476 )     -       (126,476 )

Distributions to noncontrolling interests

    -       -       -       -       -       -       -       -       (1,250 )     (1,250 )

Issuance of common stock

    -       -       -       -       776       8       (8 )     -       -       -  

Surrender of restricted stock

    -       -       -       -       (200 )     (2 )     (4,989 )     (4,991 )     -       (4,991 )

Exercise of common stock options

    -       -       -       -       30       -       560       560       -       560  

Amortization of equity awards

    -       -       -       -       -       -       8,651       8,651       -       8,651  

Balance at March 31, 2017

  $ (726,610 )   $ 6,485       32     $ 32       425,640     $ 4,256     $ 5,927,172     $ 5,211,335     $ 148,211     $ 5,359,546  

Balance at December 31, 2017, as previously reported

  $ (761,337 )   $ (1,480 )     41     $ 41       425,646     $ 4,256     $ 6,152,764     $ 5,394,244     $ 127,903     $ 5,522,147  

Impact of change in accounting principles

                                                                               

ASU 2017-05 (1)

    8,098       -       -       -       -       -       -       8,098       -       8,098  

ASU 2016-01 (1)

    (1,136 )     1,136       -       -       -       -       -       -       -       -  

Balance at January 1, 2018, as adjusted

  $ (754,375 )   $ (344 )     41     $ 41       425,646     $ 4,256     $ 6,152,764     $ 5,402,342     $ 127,903     $ 5,530,245  

Comprehensive income:

                                                                               

Net income

    144,090       -       -       -       -       -       -       144,090       (108 )     143,982  

Other comprehensive income:

                                                            -               -  

Change in unrealized loss on interest rate swap

    -       278       -       -       -       -       -       278       -       278  

Redeemable noncontrolling interests income

    -       -       -       -       -       -       -       -       (92 )     (92 )

Dividends ($0.28 per common share; $0.3750 per

                                                                               

Class I Depositary Share, $0.3438 per

                                                                               

Class J Depositary Share, $0.3516 per

                                                                               

Class K Depositary Share, $0.3203 per

                                                                               

Class L Depositary Share and $0.3281 per

                                                                               

Class M Depositary Share, respectively)

    (133,560 )     -       -       -       -       -       -       (133,560 )     -       (133,560 )

Distributions to noncontrolling interests

    -       -       -       -       -       -       -       -       (1,472 )     (1,472 )

Issuance of common stock

    -       -       -       -       1,075       11       (11 )     -       -       -  

Repurchase of common stock

    -       -       -       -       (1,600 )     (16 )     (24,260 )     (24,276 )     -       (24,276 )

Surrender of restricted stock

    -       -       -       -       (224 )     (2 )     (3,372 )     (3,374 )     -       (3,374 )

Exercise of common stock options

    -       -       -       -       3       -       30       30       -       30  

Amortization of equity awards

    -       -       -       -       -       -       4,719       4,719       -       4,719  

Issuance of preferred stock

    -       -       2       2       -       -       33,112       33,114       -       33,114  

Acquisition/deconsolidation of noncontrolling interests

    -       -       -       -       -       -       1,203       1,203       (48,395 )     (47,192 )

Balance at March 31, 2018

  $ (743,845 )   $ (66 )     43     $ 43       424,900     $ 4,249     $ 6,164,185     $ 5,424,566     $ 77,836     $ 5,502,402  

 

 

(1)

Represents the impact of change in accounting principles for its respective Accounting Standard Updates ("ASU"). See Footnote 2 of the Notes to Condensed Consolidated Financial Statements for additional disclosure.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 
                 

Cash flow from operating activities:

               

Net income

  $ 143,982     $ 78,215  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    81,382       92,074  

Impairment charges

    7,646       1,617  

Equity award expense

    5,182       9,631  

Gain on sale of operating properties/change in control of interests

    (56,971 )     (1,686 )

Gain on change in control of interests

    -       (10,188 )

Equity in income of joint ventures, net

    (16,913 )     (14,733 )

Equity in income of other real estate investments, net

    (9,976 )     (3,687 )

Distributions from joint ventures and other real estate investments

    34,661       13,258  

Change in accounts and notes receivable

    5,224       5,769  

Change in accounts payable and accrued expenses

    10,371       7,885  

Change in other operating assets and liabilities

    (12,309 )     (21,103 )

Net cash flow provided by operating activities

    192,279       157,052  
                 

Cash flow from investing activities:

               

Acquisition of operating real estate and other related net assets

    (3,337 )     (38,390 )

Improvements to operating real estate

    (40,384 )     (30,053 )

Acquisition of real estate under development

    (4,592 )     (10,010 )

Improvements to real estate under development

    (54,934 )     (44,434 )

Proceeds from sale/repayments of marketable securities

    129       457  

Investments in and advances to real estate joint ventures

    (5,897 )     (16,874 )

Reimbursements of investments in and advances to real estate joint ventures

    2,431       13,523  

Investments in and advances to other real estate investments

    (302 )     (114 )

Reimbursements of investments in and advances to other real estate investments

    1,344       3,779  

Collection of mortgage loans receivable

    335       243  

Proceeds from sale of operating properties

    184,633       56,498  

Net cash flow provided by/(used for) investing activities

    79,426       (65,375 )
                 

Cash flow from financing activities:

               

Principal payments on debt, excluding normal amortization of rental property debt

    (161,547 )     (59,100 )

Principal payments on rental property debt

    (3,485 )     (4,544 )

Repayments under the unsecured revolving credit facility, net

    -       (15,042 )

Proceeds from issuance of unsecured term loan/notes

    -       400,000  

Repayments under unsecured term loan/notes

    -       (250,000 )

Financing origination costs

    (11 )     (9,905 )

Payment of early extinguishment of debt charges

    -       (588 )

Change in tenants' security deposits

    (521 )     316  

Conversion/distribution of noncontrolling interests

    (4,968 )     (2,092 )

Dividends paid

    (130,241 )     (126,315 )

Proceeds from issuance of stock, net

    33,144       561  

Repurchase of common stock

    (24,276 )     -  

Net cash flow used for financing activities

    (291,905 )     (66,709 )
                 

Net change in cash and cash equivalents

    (20,200 )     24,968  

Cash and cash equivalents, beginning of the period

    238,513       142,486  

Cash and cash equivalents, end of the period

  $ 218,313     $ 167,454  
                 

Interest paid during the period

               

(net of capitalized interest of $3,777 and $2,883, respectively)

  $ 29,084     $ 24,286  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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KIMCO REALTY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                        

 

1. Business and Organization

 

Kimco Realty Corporation and subsidiaries (the "Company"), affiliates and related real estate joint ventures are engaged principally in the ownership, management, development and operation of open-air shopping centers, which are anchored generally by grocery stores, discount department stores, or drugstores. Additionally, the Company provides complementary services that capitalize on the Company’s established retail real estate expertise.

 

The Company elected status as a Real Estate Investment Trust (a “REIT”) for federal income tax purposes beginning in its taxable year ended December 31, 1991 and operates in a manner that enables the Company to maintain its status as a REIT.  As a REIT, with respect to each taxable year, the Company must distribute at least 90 percent of its taxable income (excluding capital gain) and does not pay federal income taxes on the amount distributed to its shareholders.  The Company is not generally subject to federal income taxes if it distributes 100 percent of its taxable income.  Most states, where the Company holds investments in real estate, conform to the federal rules recognizing REITs.  Certain subsidiaries have made a joint election 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.  A TRS is subject to federal and state income taxes on its income, and the Company includes, when applicable, a provision for taxes in its condensed consolidated financial statements.  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 subsidiaries. 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.

 

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidation -

 

The accompanying Condensed Consolidated Financial Statements include the accounts of the Company. The Company’s subsidiaries include subsidiaries which are wholly-owned or which the Company has a controlling interest, including where the Company has been determined to be a primary beneficiary of a variable interest entity (“VIE”) in accordance with the Consolidation guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). All inter-company balances and transactions have been eliminated in consolidation. The information presented in the accompanying Condensed Consolidated Financial Statements is unaudited and reflects all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods presented, and all such adjustments are of a normal recurring nature.  These Condensed Consolidated Financial Statements should be read in conjunction with the Company's audited Annual Report on Form 10-K for the year ended December 31, 2017 (the “10-K”), as certain disclosures in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, that would duplicate those included in the 10-K are not included in these Condensed Consolidated Financial Statements.

 

Reclassifications -

 

Certain amounts in the prior period have been reclassified in order to conform with the current period’s presentation. The Company reclassified $8.3 million of costs related to property management and services of the Company’s operating properties from General and administrative to Operating and maintenance on the Company’s Condensed Consolidated Statements of Income for the three months end March 31, 2017. In addition, in conjunction with the adoption of Accounting Standard Update (“ASU”) 2014-09 discussed below, the Company reclassified $58.1 million of Reimbursement income and $3.6 million of Other rental property income from Revenues from rental properties on the Company’s Condensed Consolidated Statements of Income for the three months ended March 31, 2017.

 

Subsequent Events -

 

The Company has evaluated subsequent events and transactions for potential recognition or disclosure in its condensed consolidated financial statements.

 

Marketable Securities -

 

The Company classifies its marketable equity securities as available-for-sale in accordance with the FASB’s Investments-Debt and Equity Securities guidance. On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). In accordance with the adoption of ASU 2016-01, the Company now recognizes changes in the fair value of equity investments with readily determinable fair values in net income. Previously, changes in fair value of the Company’s available-for-sale marketable securities were recognized in accumulated other comprehensive income (“AOCI”) on the Company’s Condensed Consolidated Balance Sheets. As of December 31, 2017, the Company had aggregate unrealized losses related to its available-for-sale marketable securities of $1.1 million, which were included in AOCI on the Company’s Condensed Consolidated Balance Sheets. In connection with the adoption of ASU 2016-01, the Company recorded a cumulative-effect adjustment of $1.1 million to its beginning retained earnings as of January 1, 2018, which is reflected in Cumulative distributions in excess of net income on the Company’s Condensed Consolidated Statements of Changes in Equity.

 

8

 

Revenue and Gain Recognition

 

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“Topic 606”) using the modified retrospective method applying it to any open contracts as of January 1, 2018, for which the Company did not identify any open contracts. The Company also utilized the practical expedient for which the Company was not required to restate revenue from contracts that began and are completed within the same annual reporting period. Results for reporting periods beginning after January 1, 2018, are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Revenue Recognition (Topic 605). The new guidance provides a unified model to determine how revenue is recognized. To determine the proper amount of revenue to be recognized, the Company performs the following steps: (i) identify the contract with the customer, (ii) identify the performance obligations within the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when (or as) a performance obligation is satisfied. As of March 31, 2018, the Company has no outstanding contract assets or contract liabilities. The adoption of this standard did not result in any material changes to the Company’s revenue recognition as compared to the previous guidance.

 

The Company’s primary source of revenue are leases which fall under the scope of Leases (Topic 840). The revenues which will be impacted by the adoption of Topic 606 include fees for services performed at various unconsolidated joint ventures for which the Company is the manager. These fees primarily include property and asset management fees, leasing fees, development fees and property acquisition/disposition fees. Also affected by Topic 606 are gains on sales of properties, lease termination fees and tax increment financing (“TIF”) contracts. The Company elected to disaggregate its revenue streams into the following line items on the Company’s Condensed Consolidated Statements of Income: Revenues from rental properties, Reimbursement income, Other rental property income and Management and other fee income. The Company believes that these are the proper disaggregated categories as they are the best depiction of its revenue streams both qualitatively and quantitatively.

 

Revenues from rental properties

 

Revenues from rental properties are comprised of minimum base rent, percentage rent, lease termination fee income, amortization of above-market and below-market rent adjustments and straight-line rent adjustments. 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 recognized once the required sales level is achieved.  Rental income may also include payments received in connection with lease termination agreements.  Lease termination fee income is recognized when the lessee provides consideration in order to terminate a lease agreement in place. The performance obligation of the Company is the termination of the lease agreement which occurs upon consideration received and execution of the termination agreement. Upon acquisition of real estate operating properties, the Company estimates the fair value of identified intangible assets and liabilities (including above-market and below-market leases, where applicable).  The capitalized above-market or below-market intangible is amortized to rental income over the estimated remaining term of the respective leases, which includes the expected renewal option period for below-market leases.

 

Reimbursement income

 

Leases typically provide for reimbursement to the Company of common area maintenance costs (“CAM”), real estate taxes and other operating expenses.  Operating expense reimbursements are recognized as earned. The lease component relating to CAM reimbursement revenue will be within the scope of Topic 606, upon the effective date of ASU 2016-02, Leases (Topic 842). See New Accounting Pronouncements below for further details.

 

Other rental property income

 

Other rental property income mainly consists of ancillary income and TIF income which totaled $5.6 million and $3.6 million for the three months ended March 31, 2018 and 2017, respectively. Ancillary income is derived through various agreements relating to parking lots, clothing bins, temporary storage, vending machines, ATMs, trash bins and trash collections, fireworks sales, etc. The majority of the revenue derived from these sources are through lease agreements/arrangements and are recognized in accordance with the lease terms described in the lease. The Company has TIF agreements with certain municipalities and receives payments in accordance with the agreement. TIF reimbursement income is recognized on a cash-basis when received.

 

9

 

Management and other fee income

 

Property management fees, property acquisition and disposition fees, construction management fees, leasing fees and asset management fees all fall within the scope of Topic 606. These fees arise from contractual agreements with third parties or with entities in which the Company has a noncontrolling interest. Management and other fee income related to partially owned entities are recognized to the extent attributable to the unaffiliated interest. Property and asset management fee income is recognized as a single performance obligation (managing the property) comprised of a series of distinct services (maintaining property, handling issues with tenants, etc.). The Company believes that the overall service of property management is substantially the same each day and has the same pattern of performance over the term of the agreement. As a result, each day of service represents a performance obligation satisfied at that point in time. These fees are recognized at the end of each period for services performed during that period, primarily billed to the customer monthly and terms for payment are payment due upon receipt.

 

Leasing fee income is recognized as a single performance obligation primarily upon the rent commencement date. The Company believes the leasing services it provides are similar for each available space leased and none of the individual activities necessary to facilitate the execution of each lease are distinct. These fees are billed to the customer monthly and terms for payment are payment due upon receipt.

 

Property acquisition and disposition fees are recognized when the Company satisfies a performance obligation by acquiring a property or transferring control of a property. These fees are billed subsequent to the acquisition or sale of the property and payment is due upon receipt.

 

Construction management fees are recognized as a single performance obligation (managing the construction of the project) composed of a series of distinct services.  The Company believes that the overall service of construction management is substantially the same each day and has the same pattern of performance over the term of the agreement.  As a result, each day of service represents a performance obligation satisfied at that point in time.  These fees are based on the amount spent on the construction at the end of each period for services performed during that period, primarily billed to the customer monthly and terms for payment are payment due upon receipt. 

 

Gains on sales of operating properties/change in control of interests

 

On January 1, 2018, the Company also adopted ASU 2017-05, Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“Topic 610”) for gains and losses from the sale and/or transfer of real estate property. The Company adopted Topic 610 using the modified retrospective approach for all contracts effective January 1, 2018. Topic 610 provides that sales of nonfinancial assets, such as real estate, are to be recognized when control of the asset transfers to the buyer, which will occur when the buyer has the ability to direct the use of or obtain substantially all of the remaining benefits from the asset. This generally occurs when the transaction closes and consideration is exchanged for control of the property.

 

In accordance with its election to apply the modified retrospective approach for all contracts, the Company recorded a cumulative-effect adjustment of $8.1 million to its beginning retained earnings as of January 1, 2018, on the Company’s Condensed Consolidated Statements of Changes in Equity and an adjustment to Investments in and advances to real estate joint ventures on the Company’s Condensed Consolidated Balance Sheets. As of December 31, 2017, the Company had aggregate net deferred gains of $8.1 million relating to partial disposals of two operating real estate properties prior to the adoption of ASU 2017-05, of which $6.9 million was included in Investments in and advances to real estate joint ventures and $1.2 million was included in Other liabilities on the Company’s Condensed Consolidated Balance Sheets. The Company had deferred these gains in accordance with prior guidance due to its continuing involvement in the entities which acquired the operating real estate properties.

 

During the three months ended March 31, 2018, the Company sold a portion of its investment in a consolidated operating property to its partner and amended the partnership agreement to provide for joint control of the entity. As a result of the amendment, the Company no longer consolidates the entity and recognized a gain on change in control of $6.8 million, in accordance with the adoption of ASU 2017-05 (See Footnote 3 to the Notes to the Company’s Condensed Consolidated Financial Statements for additional disclosure regarding disposals), which is included in Gain on sale of operating properties/ change in controls of interests on the Company’s Condensed Consolidated Statements of Income.

 

New Accounting Pronouncements

 

       The following table represents ASUs to the FASB’s ASC that, as of March 31, 2018, are not yet effective for the Company and for which the Company has not elected early adoption, where permitted:

 

ASU

Description

Effective

Date

Effect on the financial

statements or other significant

matters

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

The new guidance introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses.

 

January 1, 2020; Early adoption permitted

The Company is still assessing the impact on its financial position and/or results of operations.

 

10

 

ASU 2016-02, Leases (Topic 842)

 

ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for

Transition to Topic 842

This ASU sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840).

 

In January 2018, the FASB issued ASU 2018-01, which includes amendments to clarify land easements are within the scope of the new leases standard (Topic 842) and provide an optional transition practical expedient to not evaluate whether existing and expired land easements that were not previously accounted for as leases under current lease guidance in Topic 840 and are to be accounted for or contain leases under Topic 842. Early adoption is permitted as of the original effective date.

 

The FASB approved an exposure draft in March 2018 which provided lessors with a practical expedient by class of underlying assets to not separate non-lease components from the lease component. However, the practical expedient would be limited to circumstances in which: 1) the timing and pattern of revenue recognition are the same for the non-lease component and the related lease component; and, 2) the combined single lease component would be classified as an operating lease.

January 1, 2019; Early adoption permitted

The Company continues to evaluate the effect the adoption will have on the Company’s financial position and/or results of operations. However, the Company currently believes that the adoption will not have a material impact for operating leases where it is a lessor and will continue to record revenues from rental properties for its operating leases on a straight-line basis. However, for leases where the Company is a lessee, primarily for the Company’s ground leases and administrative office leases, the Company will be required to record a lease liability and a right of use asset on its Consolidated Balance Sheets at fair value upon adoption. In addition, direct internal leasing costs will continue to be capitalized, however, indirect internal leasing costs previously capitalized will be expensed. Within the terms of the Company’s leases where the Company is the lessor, the Company is entitled to receive reimbursement amounts from tenants for operating expenses such as real estate taxes, insurance and other CAM. Upon adoption of this ASU, CAM reimbursement revenue will be accounted for in accordance with ASU 2016-12 Revenue from Contracts with Customers (Topic 606). The Company continues to evaluate the effect the adoption will have on this source of revenue. However, the Company currently does not believe the adoption will significantly affect the timing of the recognition of the Company’s CAM reimbursement revenue.

 

 

The following ASUs to the FASB’s ASC have been adopted by the Company during the quarter ended March 31, 2018:

 

ASU

Description

Adoption Date

Effect on the financial

statements or other significant

matters

ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting

The amendment provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The new guidance will be applied prospectively to awards modified on or after the adoption date.

 

January 1, 2018

There was no material impact to the Company’s financial position and/or results of operations.

 

11

 

ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (“Subtopic 610-20”): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

The amendment clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset and defines the term in substance nonfinancial asset. ASU 2017-05 also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty.  Subtopic 610-20, which was issued in May 2014 as part of ASU 2014-09, discussed below, provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. An entity is required to apply the amendments in ASU 2017-05 at the same time it applies the amendments in ASU 2014-09 discussed below. An entity may elect to apply the amendments in ASU 2017-05 either retrospectively to each period presented in the financial statements in accordance with the guidance on accounting changes in ASC Topic 250, Accounting Changes and Error Corrections, paragraphs 10-45-5 through 10-45-10 (i.e. the retrospective approach) or retrospectively with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption (i.e. the modified retrospective approach). An entity may elect to apply all of the amendments in ASU 2017-05 and ASU 2014-09 using the same transition method, or alternatively may elect to use different transition methods.

 

January 1, 2018

The Company adopted the provisions of Subtopic 610-20 using the modified retrospective approach. The Company has applied the guidance to disposals of nonfinancial assets (including real estate assets) within the scope of Subtopic 610-20, see above for impact from the adoption of this ASU.

 

 

ASU 2016-01, Financial Instruments—Overall

(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

 

ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

The amendment addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the following:

(i)  Requires equity investments (excluding those investments accounted for under the equity method of accounting or those that result in consolidation of the investee) with readily determinable fair values to be measured at fair value with the changes in fair value recognized in net income; however, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

(ii) Simplifies the impairment assessment of those equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment

(iii) Eliminates the disclosure of the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost and changes the fair value calculation for those investments

(iv) Changes the disclosure in other comprehensive income for financial liabilities that are measured at fair value in accordance with the fair value options for financial instruments

(v)  Clarifies that a deferred asset related to available-for-sale securities should be included in an entity's evaluation for a valuation allowance.

 

The amendments clarify certain aspects of the guidance issued in ASU 2016-01, discussed below, primarily impacting the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments.

 

January 1, 2018

 

Fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018.

Effective as of date of adoption, changes in fair value of the Company’s available-for-sale marketable securities are recognized in Other income, net on the Company’s Condensed Consolidated Statements of Income. See above and Footnote 9 in the Notes to the Condensed Consolidated Financial Statements for impact from the adoption of this ASU. 

 

 

12

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

 

ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date

 

ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations

 

ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying performance obligations and licensing

 

ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-scope improvements and practical expedients

ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 was anticipated to be effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption was not permitted.

 

In August 2015, the FASB issued ASU 2015-14, which delayed the effective date of ASU 2014-09 by one year making it effective for the first interim period within annual reporting periods beginning after December 15, 2017.

 

Subsequently, in March 2016, the FASB issued ASU 2016-08, which further clarifies the implementation guidance on principal versus agent considerations, and in April 2016, the FASB issued ASU 2016-10, an update on identifying performance obligations and accounting for licenses of intellectual property.

 

Additionally, in May 2016, the FASB issued ASU 2016-12, which includes amendments for enhanced clarification of the guidance. Early adoption is permitted as of the original effective date.

January 1, 2018

The Company’s revenue-producing contracts are primarily leases that are not within the scope of this standard, except for the lease component relating to common area maintenance (“CAM”) reimbursement revenue, which will be within the scope of this standard upon the effective date of ASU 2016-02, Leases (Topic 842).

 

The revenues which are within the scope of this standard include other ancillary income earned through the Company’s operating properties as well as fees for services performed at various unconsolidated joint ventures which the Company manages. These fees primarily include property and asset management fees, leasing fees, development fees and property acquisition/disposition fees. The Company believes the timing of recognition and amount of these revenues will be generally consistent with the previous recognition and measurement. See above for impact from the adoption of this ASU.

 

ASU 2016-18,

Statement of Cash

Flows (Topic 230):

Restricted Cash

This amendment requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. The amendment should be applied using a retrospective transition method to each period presented.

 

January 1,

2018

There was no material impact to the Company’s financial position and/or results of operations.

 

 

3. Operating Property Activities

 

Acquisitions and Dispositions

 

During January 2018, the Company acquired a land parcel adjacent to an existing shopping center located in Ardmore, PA for a purchase price of $3.4 million.

 

The table below summarizes the Company’s disposition activity relating to consolidated operating properties and parcels, in separate transactions (dollars in millions):

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 

Aggregate sales price

  $ 202.5     $ 57.8  

Gain on sale of operating properties

  $ 50.2     $ 1.7  

Impairment charges

  $ 2.4     $ 1.2  

Number of operating properties sold

    19       4  

Number of out-parcels sold

    1       2  

 

In addition, during March 2018, the Company sold a portion of its investment in a consolidated operating property to its partner based on a gross fair value of $320.0 million, including $206.0 million of non-recourse mortgage debt, and amended the partnership agreement to provide for joint control of the entity. As a result of the amendment, the Company no longer consolidates the entity and as such, reduced noncontrolling interests by $43.8 million and recognized a gain on change in control of $6.8 million (which is recorded in Gain on sale of operating properties/change in control of interests on the Company’s Condensed Consolidated Statements of Income), in accordance with the adoption of ASU 2017-05 effective as of January 1, 2018 (See Footnote 2 to the Notes to the Company’s Condensed Consolidated Financial Statements for additional discussion). The Company now has an investment in this unconsolidated property of $62.4 million, included in Investments in and advances to real estate joint ventures on the Company’s Condensed Consolidated Balance Sheets. The Company’s share of this investment is subject to change and is based upon a cash flow waterfall provision within the partnership agreement (54.8% as of the date of deconsolidation).

 

During the three months ended March 31, 2018, the Company disposed of four land parcels, in separate transactions, for an aggregate sales price of $2.9 million, which resulted in an aggregate gain of $0.5 million, included in Other income, net on the Company’s Condensed Consolidated Statements of Income.

 

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Impairments

 

During the three months ended March 31, 2018, the Company recognized aggregate impairment charges of $7.6 million. These impairment charges consist of (i) $5.2 million related to adjustments to property carrying values for properties which the Company has marketed for sale as part of its active capital recycling program and as such has adjusted the anticipated hold periods for such properties and (ii) $2.4 million related to the sale of certain operating properties, as discussed above. The Company’s estimated fair values of these properties were primarily based upon estimated sales prices from signed contracts or letters of intent from third party offers. See Footnote 12 to the Notes to the Company’s Condensed Consolidated Financial Statements for fair value disclosure.

 

 

4. Real Estate Under Development

 

The Company is engaged in various real estate development projects for long-term investment. As of March 31, 2018, the Company had in progress a total of four active real estate development projects and two additional projects held for future development.

 

The costs incurred to date for these real estate development projects are as follows (in thousands):

 

Property Name

Location

 

March 31, 2018

   

December 31, 2017

 

Grand Parkway Marketplace

Spring, TX

  $ 45,063     $ 43,403  

Dania Pointe (1)

Dania Beach, FL

    184,934       152,841  

Mill Station

Owings Mills, MD

    35,689       34,347  

Lincoln Square

Philadelphia, PA

    118,764       90,479  

Avenues Walk (2)

Jacksonville, FL

    48,573       48,573  

Promenade at Christiana (3)

New Castle, DE

    32,659       32,875  
Total (4)     $ 465,682     $ 402,518  

 

 

(1)

These costs include expenditures for phase I and phase II offsite and infrastructure requirements.  During the three months ended March 31, 2018, the Company acquired a parcel adjacent to this development project for a purchase price of $4.6 million.

 

(2)

Mixed-use project to be developed in the future.

 

(3)

Land held for future development.

  (4) Includes capitalized costs of interest, real estate taxes, insurance, legal costs and payroll of $31.8 million and $27.7 million, as of March 31, 2018 and December 31, 2017, respectively. 

 

During the three months ended March 31, 2018, the Company capitalized (i) interest of $3.0 million, (ii) real estate taxes, insurance and legal costs of $0.7 million and (iii) payroll of $0.4 million, in connection with these real estate development projects.

 

 

5. Investments in and Advances to Real Estate Joint Ventures

 

The Company and its subsidiaries have investments in and advances to various real estate joint ventures. These joint ventures are engaged primarily in the operation of shopping centers which are either owned or held under long-term operating leases. The Company and the joint venture partners have joint approval rights for major decisions, including those regarding property operations. As such, the Company holds noncontrolling interests in these joint ventures and accounts for them under the equity method of accounting.

 

The table below presents joint venture investments for which the Company held an ownership interest at March 31, 2018 and December 31, 2017 (in millions, except number of properties):

 

           

March 31, 2018

   

December 31, 2017

 

Joint Venture

 

Ownership

Interest

   

The Company's Investment

   

The Company's Investment

 

Prudential Investment Program (“KimPru” and “KimPru II”) (1) (2) (3)

    15.0%     $ 185.6     $ 179.5  

Kimco Income Opportunity Portfolio (“KIR”) (2)

    48.6%       156.7       154.1  

Canada Pension Plan Investment Board (“CPP”) (2)

    55.0%       109.0       105.0  

Other Joint Venture Programs (3) (4)

 

Various

      108.8       45.3  

Total*

          $ 560.1     $ 483.9  

 

* Representing 118 property interests and 24.1 million square feet of GLA, as of March 31, 2018, and 118 property interests and 23.5 million square feet of GLA, as of December 31, 2017.

 

(1)

Represents four separate joint ventures, with four separate accounts managed by Prudential Global Investment Management (“PGIM”), three of these ventures are collectively referred to as KimPru and the remaining venture is referred to as KimPru II.

(2)

The Company manages these joint venture investments and, where applicable, earns property management fees, construction management fees, property acquisition and disposition fees, leasing management fees and asset management fees.

(3)

As of December 31, 2017, the Company had aggregate net deferred gains of $6.9 million relating to the disposal of operating properties prior to the adoption of ASU 2017-05. These deferred gains were included in the Company’s investment above, of which $5.1 million relates to KimPru II and $1.8 million relates to Other Joint Venture Programs. Upon adoption, the Company recorded a cumulative-effect adjustment of $6.9 million to its beginning retained earnings as of January 1, 2018 on the Company’s Condensed Consolidated Statements of Changes in Equity. See Footnote 2 to the Notes to the Company’s Condensed Consolidated Financial Statements for further detail and discussion.

(4)

During March 2018, the Company sold a portion of its investment in a consolidated operating property to its partner and amended the partnership agreement to provide for joint control of the entity. As a result of the amendment, the Company no longer consolidates the entity. The Company now has an investment in this unconsolidated property of $62.4 million. See Footnotes 2 and 3 to the Notes to the Company’s Condensed Consolidated Financial Statements for further detail and discussion.

 

14

 

The table below presents the Company’s share of net income for the above investments which is included in Equity in income of joint ventures, net on the Company’s Condensed Consolidated Statements of Income for the three months ended March 31, 2018 and 2017 (in millions):

 

   

Three Months Ended March 31,

 

Joint Venture

 

2018

   

2017

 

KimPru and KimPru II

  $ 2.9     $ 3.3  

KIR

    9.0       9.4  

CPP

    1.2       1.7  

Other Joint Venture Programs

    3.8       0.3  

Total

  $ 16.9     $ 14.7  

 

During the three months ended March 31, 2018, certain of the Company’s real estate joint ventures disposed of two operating properties, in separate transactions, for an aggregate sales price of $17.1 million. These transactions resulted in an aggregate gain to the Company of $2.1 million for the three months ended March 31, 2018.

 

During the three months ended March 31, 2017, certain of the Company’s real estate joint ventures disposed of five operating properties, in separate transactions, for an aggregate sales price of $47.7 million. These transactions resulted in an aggregate net gain to the Company of $0.9 million, before income taxes, for the three months ended March 31, 2017. In addition, during the three months ended March 31, 2017, the Company acquired a controlling interest in two operating properties from certain joint ventures, in separate transactions, for a gross purchase price of $15.4 million.

 

The table below presents debt balances within the Company’s unconsolidated joint venture investments for which the Company held noncontrolling ownership interests at March 31, 2018 and December 31, 2017 (dollars in millions):

 

   

As of March 31, 2018

   

As of December 31, 2017

 

Joint Venture

 

Mortgages and

Notes Payable, Net

   

Weighted

Average

Interest Rate

   

Weighted

Average

Remaining

Term (months)*

   

Mortgages and

Notes Payable, Net

   

Weighted

Average

Interest Rate

   

Weighted

Average

Remaining

Term (months)*

 

KimPru and KimPru II

  $ 624.4       3.77

%

    56.8     $ 625.7       3.59

%

    59.8  

KIR

    698.3       4.62

%

    44.6       702.0       4.60

%

    47.5  

CPP

    85.0       3.22

%

    1.0       84.9       2.91

%

    4.0  

Other Joint Venture Programs

    481.1       4.33

%

    77.7       287.6       4.41

%

    27.2  

Total

  $ 1,888.8                     $ 1,700.2                  

 

* Includes extension options

 

 

6. Other Real Estate Investments

 

Preferred Equity Capital -

 

The Company previously provided capital to owners and developers of real estate properties through its Preferred Equity Program. The Company’s maximum exposure to losses associated with its preferred equity investments is primarily limited to its net investment. As of March 31, 2018, the Company’s net investment under the Preferred Equity Program was $188.2 million relating to 319 properties, including 306 net leased properties.  During the three months ended March 31, 2018, the Company recognized income of $10.0 million from its preferred equity investments, including $4.7 million in profit participation earned from two capital transactions. During the three months ended March 31, 2017, the Company earned $3.8 million from its preferred equity investments. These amounts are included in Equity in income of other real estate investments, net on the Company’s Condensed Consolidated Statements of Income.

 

 

7. Variable Interest Entities (VIE”)

 

Included within the Company’s consolidated operating properties at March 31, 2018 and December 31, 2017, are 22 and 24 consolidated entities that are VIEs, respectively, for which the Company is the primary beneficiary. These entities have been established to own and operate real estate property. The Company’s involvement with these entities is through its majority ownership and management of the properties. The entities were deemed VIEs primarily because the unrelated investors do not have substantive kick-out rights to remove the general or managing partner by a vote of a simple majority or less and they do not have substantive participating rights. The Company determined that it was the primary beneficiary of these VIEs as a result of its controlling financial interest. At March 31, 2018, total assets of these VIEs were $889.6 million and total liabilities were $71.7 million. At December 31, 2017, total assets of these VIEs were $1.2 billion and total liabilities were $383.5 million.

 

15

 

The majority of the operations of these VIEs are funded with cash flows generated from the properties. The Company has not provided financial support to any of these VIEs that it was not previously contractually required to provide, which consists primarily of funding any capital expenditures, including tenant improvements, which are deemed necessary to continue to operate the entity and any operating cash shortfalls that the entity may experience.

 

Additionally, included within the Company’s real estate development projects at March 31, 2018 and December 31, 2017, are two and three consolidated entities that are VIEs, respectively, for which the Company is the primary beneficiary. These entities have been established to develop real estate properties to hold as long-term investments. The Company’s involvement with these entities is through its majority ownership and management of the properties. These entities were deemed VIEs primarily based on the fact that the equity investments at risk are not sufficient to permit the entities to finance their activities without additional financial support. The initial equity contributed to these entities was not sufficient to fully finance the real estate construction as development costs are funded by the partners throughout the construction period. The Company determined that it was the primary beneficiary of these VIEs as a result of its controlling financial interest. At March 31, 2018, total assets of these real estate development VIEs were $296.2 million and total liabilities were $42.9 million. At December 31, 2017, total assets of these real estate development VIEs were $307.9 million and total liabilities were $34.2 million.

 

Substantially all the projected development costs to be funded for these two real estate development projects, aggregating $106.0 million, will be funded with capital contributions from the Company, when contractually obligated. The Company has not provided financial support to these VIEs that it was not previously contractually required to provide.

  

All liabilities of these consolidated VIEs are non-recourse to the Company (“VIE Liabilities”). The assets of the unencumbered VIEs are not restricted for use to settle only the obligations of these VIEs. The remaining VIE assets are encumbered by third party non-recourse mortgage debt. The assets associated with these encumbered VIEs (“Restricted Assets”) are collateral under the respective mortgages and are therefore restricted and can only be used to settle the corresponding liabilities of the VIE. The table below summarizes the consolidated VIEs and the classification of the Restricted Assets and VIE Liabilities on the Company’s Condensed Consolidated Balance Sheets are as follows (dollars in millions):

 

   

As of March 31, 2018

   

As of December 31, 2017

 

Number of unencumbered VIEs

    21       22  

Number of encumbered VIEs

    3       5  

Total number of consolidated VIEs

    24       27  
                 

Restricted Assets:

               

Real estate, net

  $ 104.4     $ 627.5  

Cash and cash equivalents

    3.1       9.8  

Accounts and notes receivable, net

    1.5       3.2  

Other assets

    2.3       4.5  

Total Restricted Assets

  $ 111.3     $ 645.0  
                 

VIE Liabilities:

               

Mortgages payable, net

  $ 35.9     $ 340.9  

Other liabilities

    78.7       76.8  

Total VIE Liabilities

  $ 114.6     $ 417.7  

 

 

8. Mortgages and Other Financing Receivables

 

The Company has various mortgages and other financing receivables which consist of loans acquired and loans originated by the Company. The Company reviews payment status to identify performing versus non-performing loans. As of March 31, 2018, the Company had a total of 11 loans aggregating $21.4 million, of which all were identified as performing loans.

 

 

9. Marketable Securities

 

Effective January 1, 2018, in accordance with the adoption of ASU 2016-01, the Company now recognizes changes in the fair value of equity investments with readily determinable fair values in net income. In addition, the Company recorded a cumulative-effect adjustment of $1.1 million to its beginning retained earnings as of January 1, 2018, which is reflected in Cumulative distributions in excess of net income on the Company’s Condensed Consolidated Statements of Changes in Equity, to reclassify unrealized losses previously reported in AOCI for available-for-sale marketable securities. Also, during the three months ended March 31, 2018, the Company recognized a net loss on changes in fair value of its available-for-sale marketable securities of $1.5 million in Other income, net on the Company’s Condensed Consolidated Statements of Income.

 

16

Table of Contents

 

 

10. Mortgages Payable

 

During the three months ended March 31, 2018, the Company (i) deconsolidated $206.0 million of individual non-recourse mortgage debt relating to an operating property for which the Company no longer has a controlling interest in and (ii) repaid $161.9 million of maturing mortgage debt (including fair market value adjustments of $0.4 million) that encumbered two operating properties.

 

Additionally, during the three months ended March 31, 2018, the Company disposed of an encumbered property through foreclosure. The transaction resulted in a net decrease in mortgage debt of $12.4. In addition, the Company recognized a gain on forgiveness of debt of $4.3 million and relief of accrued interest of $3.4 million, both of which are included in Other income, net in the Company’s Condensed Consolidated Statements of Income.

 

 

11. Noncontrolling Interests

 

      Noncontrolling interests represent the portion of equity that the Company does not own in entities it consolidates as a result of having a controlling interest or determined that the Company was the primary beneficiary of a VIE in accordance with the provisions of the FASB’s Consolidation guidance.  The Company accounts and reports for noncontrolling interests in accordance with the Consolidation guidance and the Distinguishing Liabilities from Equity guidance issued by the FASB. The Company identifies its noncontrolling interests separately within the equity section on the Company’s Condensed Consolidated Balance Sheets. The amounts of consolidated net income attributable to the Company and to the noncontrolling interests are presented separately on the Company’s Condensed Consolidated Statements of Income.  During the three months ended March 31, 2018, there were various transactions that had an impact on noncontrolling interest. See Footnotes 3 and 5 of the Notes to Condensed Consolidated Financial Statements for additional information regarding specific transactions.

 

In addition, during the three months ended March 31, 2018, the Company acquired its partners’ interest in three consolidated entities, in two separate transactions, for an aggregate purchase price of $3.4 million. These transactions resulted in a net decrease in Noncontrolling interest of $4.6 million and a corresponding net increase in Paid-in capital of $1.2 million on the Company’s Condensed Consolidated Balance Sheets. There are no remaining partners in two of these consolidated entities.

 

      Included within noncontrolling interests are units that were determined to be contingently redeemable that are classified as Redeemable noncontrolling interests and presented in the mezzanine section between Total liabilities and Stockholder’s equity on the Company’s Condensed Consolidated Balance Sheets.

 

 

12. Fair Value Measurements

 

All financial instruments of the Company are reflected in the accompanying Condensed Consolidated Balance Sheets at amounts which, in management’s estimation, based upon an interpretation of available market information and valuation methodologies, reasonably approximate their fair values except those listed below, for which fair values are disclosed. The valuation method used to estimate fair value for fixed-rate and variable-rate debt is based on discounted cash flow analyses, with assumptions that include credit spreads, market yield curves, trading activity, loan amounts and debt maturities. The fair values for marketable securities are based on published values, securities dealers’ estimated market values or comparable market sales. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition.

 

As a basis for considering market participant assumptions in fair value measurements, the FASB’s Fair Value Measurements and Disclosures guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 

The following are financial instruments for which the Company’s estimate of fair value differs from the carrying amounts (in thousands):

 

   

March 31, 2018

   

December 31, 2017

 
   

Carrying

Amounts

   

Estimated

Fair Value

   

Carrying

Amounts

   

Estimated

Fair Value

 

Notes payable, net (1)

  $ 4,597,967       4,418,144     $ 4,596,140     $ 4,601,479  

Mortgages payable, net (2)

  $ 499,355       494,366     $ 882,787     $ 881,427  

 

 

(1)

The Company determined that the valuation of its Senior Unsecured Notes were classified within Level 2 of the fair value hierarchy and its Credit Facility was classified within Level 3 of the fair value hierarchy.  The estimated fair value amounts classified as Level 2 as of March 31, 2018 and December 31, 2017, were $4.4 billion and $4.6 billion, respectively. The estimated fair value amounts classified as Level 3 as of March 31, 2018 and December 31, 2017, were $2.2 million and $1.9 million, respectively.

 

(2)

The Company determined that its valuation of Mortgages payable, net was classified within Level 3 of the fair value hierarchy. 

 

17

 

The Company has certain financial instruments that must be measured under the FASB’s Fair Value Measurements and Disclosures guidance, including available for sale securities. The Company currently does not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis.

 

The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis as of  March 31, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

 

   

Balance at

March 31, 2018

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Marketable equity securities

  $ 10,334     $ 10,334     $ -     $ -  

Liabilities:

                               

Interest rate swaps

  $ 66     $ -     $ 66     $ -  

 

   

Balance at

December 31, 2017

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Marketable equity securities

  $ 11,936     $ 11,936     $ -     $ -  

Liabilities:

                               

Interest rate swaps

  $ 344     $ -     $ 344     $ -  

 

Assets measured at fair value on a non-recurring basis during the three months ended March 31, 2018 and the year ended December 31, 2017, are as follows (in thousands): 

 

   

Balance at

March 31, 2018

   

Level 1

   

Level 2

   

Level 3

 
                                 

Real estate

  $ 104,850     $ -     $ -     $ 104,850  
Investments in real estate joint ventures (1)   $ 62,429     $ -     $ -     $ 62,429  

 

   

Balance at

December 31, 2017

   

Level 1

   

Level 2

   

Level 3

 
                                 

Real estate

  $ 108,313     $ -     $ -     $ 108,313  

 

 

(1)

Fair value measurement as of date of deconsolidation. See Footnotes 3 and 5 to the Notes to the Company’s Condensed Consolidated Financial Statements for further detail and discussion.

 

During the three months ended March 31, 2018 and 2017, the Company recognized impairment charges related to adjustments to property carrying values of $7.6 million and $1.6 million, respectively. The Company’s estimated fair values of these properties were primarily based upon estimated sales prices from signed contracts or letters of intent from third party offers for which the Company does not have access to the unobservable inputs used to determine these estimated fair values. Based on these inputs, the Company determined that its valuation of these investments was classified within Level 3 of the fair value hierarchy. (See Footnote 3 to the Notes to the Company’s Condensed Consolidated Financial Statements for additional discussion regarding impairment charges).

 

 

13. Preferred Stock and Common Stock

 

The Company’s outstanding Preferred Stock is detailed below:

 

As of March 31, 2018

Class of

Preferred

Stock

 

Shares

Authorized

   

Shares

Issued and

Outstanding

   

Liquidation

Preference

(in thousands)

   

Dividend

Rate

   

Annual

Dividend per

Depositary

Share

   

 

Par

Value

 

Optional

Redemption

Date

Class I

    18,400       7,000     $ 175,000       6.000 %   $ 1.50000     $ 1.00  

3/20/2017

Class J

    9,000       9,000       225,000       5.500 %   $ 1.37500     $ 1.00  

7/25/2017

Class K

    8,050       7,000       175,000       5.625 %   $ 1.40625     $ 1.00  

12/7/2017

Class L

    10,350       9,000       225,000       5.125 %   $ 1.28125     $ 1.00  

8/16/2022

Class M (1)

    10,580       10,580       264,500       5.250 %   $ 1.31250     $ 1.00  

12/20/2022

              42,580     $ 1,064,500                            

 

(1)

During January 2018, the underwriting financial institutions for the Class M issuance elected to exercise the over-allotment option and as a result, the Company issued an additional 1,380,000 Class M Depositary Shares, each representing a one-thousandth fractional interest in a share of the Company's 5.250% Class M Cumulative Redeemable Preferred Stock, $1.00 par value per share. The Company received net proceeds before expenses of $33.4 million from this over-allotment issuance.

 

18

 

As of December 31, 2017

Class of

Preferred

Stock

 

Shares

Authorized

   

Shares

Issued and

Outstanding

   

Liquidation

Preference

(in thousands)

   

Dividend

Rate

   

Annual

Dividend per

Depositary

Share

   

 

Par

Value

 

Optional

Redemption

Date

Class I

    18,400       7,000     $ 175,000       6.000 %   $ 1.50000     $ 1.00  

3/20/2017

Class J

    9,000       9,000       225,000       5.500 %   $ 1.37500     $ 1.00  

7/25/2017

Class K

    8,050       7,000       175,000       5.625 %   $ 1.40625     $ 1.00  

12/7/2017

Class L

    10,350       9,000       225,000       5.125 %   $ 1.28125     $ 1.00  

8/16/2022

Class M

    10,580       9,200       230,000       5.250 %   $ 1.31250     $ 1.00  

12/20/2022

              41,200     $ 1,030,000