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

kim20180930_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 September 30, 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, every Interactive Data File required to be submitted 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 such files.)    Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

     

 

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 October 16, 2018, the registrant had 421,391,305 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 September 30, 2018 and December 31, 2017

3

 

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017

5

 

 

Condensed Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2018 and 2017

6

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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

23

   

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

35

   

Item 4.  Controls and Procedures

36

   

PART II OTHER INFORMATION

   

Item 1.  Legal Proceedings

37

   

Item 1A.  Risk Factors

37

   

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

37

   

Item 3.  Defaults Upon Senior Securities

37

   

Item 4.  Mine Safety Disclosures

37

   

Item 5.  Other Information

37

   

Item 6.  Exhibits

38

   

Signatures

39

 

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KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share information)

 

    September 30, 2018     December 31, 2017  

Assets:

               

Operating real estate, net of accumulated depreciation and amortization of $2,376,667 and $2,433,053, respectively

  $ 9,043,480     $ 9,817,875  

Investments in and advances to real estate joint ventures

    580,737       483,861  

Real estate under development

    540,188       402,518  

Other real estate investments

    191,029       217,584  

Mortgages and other financing receivables

    29,222       21,838  

Cash and cash equivalents

    146,386       238,513  

Marketable securities

    12,026       13,265  

Accounts and notes receivable, net

    183,440       189,757  

Other assets

    383,013       378,515  

Total assets (1)

  $ 11,109,521     $ 11,763,726  
                 

Liabilities:

               

Notes payable, net

  $ 4,409,500     $ 4,596,140  

Mortgages and construction loan payable, net

    477,974       882,787  

Dividends payable

    130,263       128,892  

Other liabilities

    615,613       617,617  

Total liabilities (2)

    5,633,350       6,225,436  

Redeemable noncontrolling interests

    20,074       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 421,391,305 and 425,646,380 shares, respectively

    4,214       4,256  

Paid-in capital

    6,117,339       6,152,764  

Cumulative distributions in excess of net income

    (743,346 )     (761,337 )

Accumulated other comprehensive loss

    -       (1,480 )

Total stockholders' equity

    5,378,250       5,394,244  

Noncontrolling interests

    77,847       127,903  

Total equity

    5,456,097       5,522,147  

Total liabilities and equity

  $ 11,109,521     $ 11,763,726  

 

(1)

Includes restricted assets of consolidated variable interest entities (“VIEs”) at September 30, 2018 and December 31, 2017 of $234,165 and $644,990, respectively. See Footnote 7 of the Notes to Condensed Consolidated Financial Statements.

 

(2)

Includes non-recourse liabilities of consolidated VIEs at September 30, 2018 and December 31, 2017 of $143,399 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 September 30,

   

Nine Months Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Revenues

                               

Revenues from rental properties

  $ 215,049     $ 225,836     $ 668,115     $ 679,321  

Reimbursement income

    58,007       59,490       182,929       178,590  

Other rental property income

    5,643       5,593       16,755       15,242  

Management and other fee income

    4,381       3,926       12,762       12,456  
                                 

Total revenues

    283,080       294,845       880,561       885,609  
                                 

Operating expenses

                               

Rent

    2,702       2,764       8,262       8,312  

Real estate taxes

    37,862       38,363       115,570       115,379  

Operating and maintenance

    39,265       40,262       123,921       125,539  

General and administrative

    21,348       21,523       67,775       63,718  

Provision for doubtful accounts

    1,389       701       4,571       4,201  

Impairment charges

    3,336       2,944       33,855       34,280  

Depreciation and amortization

    74,972       88,443       236,114       275,787  

Total operating expenses

    180,874       195,000       590,068       627,216  
                                 

Operating income

    102,206       99,845       290,493       258,393  
                                 

Other income/(expense)

                               

Other income, net

    5,219       1,101       14,675       3,813  

Interest expense

    (44,081 )     (47,258 )     (140,458 )     (139,830 )

Early extinguishment of debt charges

    (12,762 )     (1,753 )     (12,762 )     (1,753 )

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

    50,582       51,935       151,948       120,623  
                                 

Benefit for income taxes, net

    315       697       983       2,224  

Equity in income of joint ventures, net

    16,533       9,142       52,486       37,044  

Gain on change in control of interests

    -       -       -       71,160  

Equity in income of other real estate investments, net

    5,045       19,909       24,638       61,952  
                                 

Income from continuing operations

    72,475       81,683       230,055       293,003  
                                 

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

    28,250       40,533       180,461       62,102  
                                 

Net income

    100,725       122,216       410,516       355,105  
                                 

Net income attributable to noncontrolling interests

    (567 )     (1,186 )     (882 )     (13,926 )
                                 

Net income attributable to the Company

    100,158       121,030       409,634       341,179  
                                 

Preferred stock redemption charges

    -       (7,014 )     -       (7,014 )

Preferred dividends

    (14,534 )     (12,059 )     (43,657 )     (35,169 )
                                 

Net income available to the Company's common shareholders

  $ 85,624     $ 101,957     $ 365,977     $ 298,996  
                                 

Per common share:

                               

Net income available to the Company:

                               

-Basic

  $ 0.19     $ 0.24     $ 0.86     $ 0.70  

-Diluted

  $ 0.19     $ 0.24     $ 0.85     $ 0.70  
                                 

Weighted average shares:

                               

-Basic

    419,230       423,688       421,106       423,574  

-Diluted

    419,764       424,311       422,443       424,193  

 

 

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

 

4

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KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net income

  $ 100,725     $ 122,216     $ 410,516     $ 355,105  

Other comprehensive income:

                               

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

    -       153       -       (1,466 )

Change in unrealized value on interest rate swap

    (72 )     103       344       308  

Change in foreign currency translation adjustments

    -       (8,056 )     -       (6,335 )

Other comprehensive income

    (72 )     (7,800 )     344       (7,493 )
                                 

Comprehensive income

    100,653       114,416       410,860       347,612  
                                 

Comprehensive income attributable to noncontrolling interests

    (567 )     (1,186 )     (882 )     (13,926 )
                                 

Comprehensive income attributable to the Company

  $ 100,086     $ 113,230     $ 409,978     $ 333,686  

 

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 Nine Months Ended September 30, 2018 and 2017

(Unaudited)

(in thousands)

 

   

Cumulative Distributions in Excess of

   

Accumulated Other Comprehensive

   

Preferred Stock

   

Common Stock

   

Paid-in

   

Total Stockholders'

   

Noncontrolling

   

Total

 
   

Net Income

   

Income/(Loss)

   

Issued

   

Amount

   

Issued

   

Amount

   

Capital

   

Equity

   

Interests

   

Equity

 

Balance, 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/deemed contributions from noncontrolling interests

    -       -       -       -       -       -       -       -       48,867       48,867  

Comprehensive income:

                                                                               

Net income

    341,179       -       -       -       -       -       -       341,179       13,926       355,105  

Other comprehensive income, net of tax:

                                                                               

Change in unrealized loss on marketable securities

    -       (1,466 )     -       -       -       -       -       (1,466 )     -       (1,466 )

Change in unrealized loss on interest rate swaps

    -       308       -       -       -       -       -       308       -       308  

Change in foreign currency translation adjustment

    -       (6,335 )     -       -       -       -       -       (6,335 )     -       (6,335 )

Redeemable noncontrolling interests income

    -       -       -       -       -       -       -       -       (1,203 )     (1,203 )

Dividends declared to common and preferred shares

    (379,933 )     -       -       -       -       -       -       (379,933 )     -       (379,933 )

Distributions to noncontrolling interests

    -       -       -       -       -       -       -       -       (13,513 )     (13,513 )

Issuance of common stock

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

Issuance of preferred stock

                    9       9                       217,566       217,575               217,575  

Surrender of restricted stock

    -       -       -       -       (239 )     (2 )     (5,597 )     (5,599 )     -       (5,599 )

Exercise of common stock options

    -       -       -       -       62       -       1,174       1,174       -       1,174  

Amortization of equity awards

    -       -       -       -       -       -       15,290       15,290       -       15,290  

Redemption of preferred stock

    -       -       (9 )     (9 )     -       -       (224,991 )     (225,000 )     -       (225,000 )

Balance, September 30, 2017

  $ (715,621 )   $ (1,727 )     32     $ 32       425,633     $ 4,256     $ 5,926,392     $ 5,213,332     $ 194,812     $ 5,408,144  
                                                                                 

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  

Contributions from noncontrolling interests

    -       -       -       -       -       -       -       -       109       109  

Comprehensive income:

                                                                               

Net income

    409,634       -       -       -       -       -       -       409,634       882       410,516  

Other comprehensive income:

                                                            -               -  

Change in unrealized value on interest rate swap

    -       344       -       -       -       -       -       344       -       344  

Redeemable noncontrolling interests income

    -       -       -       -       -       -       -       -       (279 )     (279 )

Dividends declared to common and preferred shares

    (398,605 )     -       -       -       -       -       -       (398,605 )     -       (398,605 )

Distributions to noncontrolling interests

    -       -       -       -       -       -       -       -       (2,373 )     (2,373 )

Issuance of common stock

    -       -       -       -       1,101       11       (11 )     -       -       -  

Repurchase of common stock

    -       -       -       -       (5,100 )     (51 )     (75,075 )     (75,126 )     -       (75,126 )

Surrender of restricted common stock

    -       -       -       -       (291 )     (2 )     (4,288 )     (4,290 )     -       (4,290 )

Exercise of common stock options

    -       -       -       -       35       -       487       487       -       487  

Amortization of equity awards

    -       -       -       -       -       -       13,065       13,065       -       13,065  

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 )

Adjustment of redeemable noncontrolling interests to estimated fair value

    -       -       -       -       -       -       (3,918 )     (3,918 )     -       (3,918 )

Balance at September 30, 2018

  $ (743,346 )   $ -       43     $ 43       421,391     $ 4,214     $ 6,117,339     $ 5,378,250     $ 77,847     $ 5,456,097  

 

 

(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)

 

   

Nine Months Ended September 30,

 
   

2018

   

2017

 
                 

Cash flow from operating activities:

               

Net income

  $ 410,516     $ 355,105  

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

               

Depreciation and amortization

    236,114       275,787  

Impairment charges

    33,855       34,280  

Deferred Taxes

    -       (238 )

Early extinguishment of debt charges

    12,762       1,753  

Equity award expense

    14,455       17,836  

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

    (180,461 )     (62,102 )

Gain on change in control of interests

    -       (71,160 )

Equity in income of joint ventures, net

    (52,486 )     (37,044 )

Equity in income of other real estate investments, net

    (24,638 )     (61,952 )

Distributions from joint ventures and other real estate investments

    80,900       41,071  

Change in accounts and notes receivable

    6,317       (189 )

Change in accounts payable and accrued expenses

    26,072       37,884  

Change in Canadian withholding tax receivable

    -       4,138  

Change in other operating assets and liabilities

    (47,075 )     (41,353 )

Net cash flow provided by operating activities

    516,331       493,816  
                 

Cash flow from investing activities:

               

Acquisition of operating real estate and other related net assets

    (5,407 )     (110,802 )

Improvements to operating real estate

    (193,445 )     (136,534 )

Acquisition of real estate under development

    (4,592 )     (10,010 )

Improvements to real estate under development

    (175,129 )     (121,764 )

Investments in marketable securities

    (63 )     (9,822 )

Proceeds from sale/repayments of marketable securities

    677       2,442  

Investments in and advances to real estate joint ventures

    (25,781 )     (26,788 )

Reimbursements of investments in and advances to real estate joint ventures

    7,358       17,529  

Investments in and advances to other real estate investments

    (353 )     (666 )

Reimbursements of investments in and advances to other real estate investments

    10,464       40,514  

Investment in other financing receivable

    (65 )     -  

Collection of mortgage loans receivable

    7,446       760  

Investment in other investments

    (357 )     -  

Proceeds from sale of operating properties

    596,502       76,869  

Proceeds from insurance casualty claims

    13,500       -  

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

    230,755       (278,272 )
                 

Cash flow from financing activities:

               

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

    (202,725 )     (678,939 )

Principal payments on rental property debt

    (10,025 )     (11,508 )

Proceeds from mortgage and construction loan financings

    30,366       206,000  

Proceeds/repayments under the unsecured revolving credit facility, net

    122,254       (42 )

Proceeds from issuance of unsecured notes

    -       1,250,000  

Repayments under unsecured notes/term loan

    (315,095 )     (460,988 )

Financing origination costs

    (1,208 )     (22,975 )

Payment of early extinguishment of debt charges

    (13,308 )     (2,461 )

Contributions from noncontrolling interests

    109       1,422  

Redemption/distribution of noncontrolling interests

    (6,046 )     (95,410 )

Dividends paid

    (397,232 )     (381,182 )

Proceeds from issuance of stock, net

    33,601       218,750  

Repurchase of common stock

    (75,126 )     -  

Redemption of preferred stock

    -       (225,000 )

Change in other financing liabilities

    (4,778 )     891  

Net cash flow used for financing activities

    (839,213 )     (201,442 )
                 

Net change in cash and cash equivalents

    (92,127 )     14,102  

Cash and cash equivalents, beginning of the period

    238,513       142,486  

Cash and cash equivalents, end of the period

  $ 146,386     $ 156,588  
                 

Interest paid during the period including payment of early extinguishment of debt charges of $12,762 and $0, respectively (net of capitalized interest of $13,319 and $10,671, respectively)

  $ 141,371     $ 118,736  

 

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

 

7

Table of Contents

 

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, off-price retailers, discounters or service oriented tenants. 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 September 30, 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 $7.1 million and $22.7 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 and nine months ended September 30, 2017, respectively. In conjunction with the adoption of Accounting Standard Update (“ASU”) 2014-09 discussed below, the Company reclassified $59.5 million and $178.6 million of Reimbursement income and $5.6 million and $15.2 million of Other rental property income from Revenues from rental properties on the Company’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017, respectively.

 

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 September 30, 2018, the Company had 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 totaled $16.8 million and $15.2 million for the nine months ended September 30, 2018 and 2017, respectively, which mainly consists of ancillary income and TIF income. Ancillary income is derived through various agreements relating to parking lots, clothing bins, temporary storage, vending machines, ATMs, trash bins and trash collections, seasonal leases, 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 agreements. 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 tenant inquiries, 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 nine months ended September 30, 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 control of interests on the Company’s Condensed Consolidated Statements of Income.    

 

10

 

New Accounting Pronouncements

 

       The following table represents ASUs to the FASB’s ASC that, as of September 30, 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 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract

The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

January 1, 2020; Early adoption permitted

The adoption of this ASU is not expected to have a material impact on the Company’s financial position and/or results of operations.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

The amendment modifies the disclosure requirements on fair value measurements in Topic 820, based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits.

January 1, 2020; Early adoption permitted

The adoption of this ASU is not expected to have a material impact on the Company’s financial position and/or results of operations.

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.

ASU 2016-02, Leases (Topic 842)

 

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

Transition to Topic 842

 

ASU 2018-10, Codification Improvements to Topic 842, Leases

 

ASU 2018-11, Leases (Topic 842): Targeted Improvements

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.

 

In July 2018, the FASB issued ASU 2018-10, which includes amendments to clarify certain aspects of the new leases standard. These amendments address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. 

January 1, 2019; Early adoption permitted

The Company plans to adopt this standard using the modified retrospective approach, which requires a cumulative-effect adjustment, if any, as of the date of adoption. The Company continues to evaluate the impact of adoption, including the election of certain practical expedients, on the Company’s financial position and/or results of operations.

 

The Company has identified certain leases and accounting policies which it believes the adoption could impact, including its ground leases, administrative office leases, internal leasing costs and non-lease components.

 

For leases where the Company is a lessee, primarily its 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 present value upon adoption.

 

In addition, direct internal leasing costs will continue to be capitalized, however, indirect internal leasing costs previously capitalized will be expensed.

 

11

 

 

Additionally, during July 2018, the FASB issued ASU 2018-11, which includes (i) an additional transition method to provide transition relief on comparative reporting at adoption and (ii) an amendment to provide lessors with a practical expedient to combine lease and non-lease components of a contract if certain criteria are met. Under the transition option, companies can opt to not apply the new guidance, including its disclosure requirements, in the comparative periods they present in their financial statements in the year of adoption. The practical expedient allows lessors to elect, by class of underlying asset, to combine non-lease and associated lease components when certain criteria are met and requires them to account for the combined component in accordance with new revenue standard (Topic 606) if the non-lease components are the predominant component; conversely, if a lessor determines that the lease components are the predominant component, it requires them to account for the combined component as an operating lease in accordance with new leasing standard (Topic 842).

 

In addition, the FASB proposed allowing lessors to make an accounting policy election to not evaluate whether sales taxes, real estate taxes and insurance imposed by a third party on a lease revenue-producing activity are the primary obligation of the lessor as owner of the underlying leased asset. The proposal also would require lessors to exclude lessor costs paid directly by lessees to third parties on the lessor’s behalf from variable payments if the amount paid is not readily determinable by the lessor. The proposal would also clarify that lessors are required to allocate (rather than recognize) certain variable payments to lease and non-lease components of a contract when the changes in facts and circumstances on which the variable payment is based occur. However, companies can’t apply proposed guidance until the FASB finalizes it.

  For leases where the Company is a lessor, within the terms of certain of its leases, the Company is entitled to receive reimbursement amounts from tenants for operating expenses such as real estate taxes, insurance and other CAM, which are considered non-lease components. The Company plans to elect the lessor practical expedient to combine the lease and non-lease components. The Company currently does not believe the adoption will significantly affect the timing of the recognition of its combined lease and non-lease components.

 

The following ASUs to the FASB’s ASC have been adopted by the Company during the nine months ended September 30, 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.

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.

 

 

 

12

 

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.

 

 

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 may be within the scope of this standard upon the effective date of ASU 2016-02, Leases (Topic 842) (see discussion above)

 

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 impact to the Company’s statement of cash flows.

 

13

 

 

3. Operating Property Activities

 

Acquisitions and Dispositions

 

During the nine months ended September 30, 2018, the Company acquired two land parcels adjacent to existing shopping centers located in Ardmore, PA and Elmont, NY, in separate transactions, for an aggregate purchase price of $5.4 million.

 

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

 

   

Nine Months Ended September 30,

 
   

2018

   

2017

 

Aggregate sales price/gross fair value

  $ 973.5     $ 230.2  

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

  $ 180.5     $ 62.1  

Impairment charges

  $ 16.3     $ 13.0  

Number of operating properties sold/deconsolidated

    45       15  

Number of out-parcels sold

    4       8  

 

Included in the table above, during the nine months ended September 30, 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, 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 ($62.4 million as of the date of deconsolidation), 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 nine months ended September 30, 2018, the Company disposed of 10 land parcels, in separate transactions, for an aggregate sales price of $9.7 million, which resulted in an aggregate gain of $6.3 million, included in Other income, net on the Company’s Condensed Consolidated Statements of Income.

 

Held-for-Sale

 

At September 30, 2018, the Company had one consolidated property classified as held-for-sale at a net carrying amount of $31.2 million (including accumulated depreciation and amortization of $9.3 million), which is included in Other assets on the Company’s Condensed Consolidated Balance Sheets. The Company’s determination of the fair value of the property was based upon an executed contract of sale with a third party, which is in excess of the carrying value of the property.

 

Impairments

 

During the nine months ended September 30, 2018, the Company recognized aggregate impairment charges of $33.9 million. These impairment charges consist of (i) $17.6 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 period for such properties and (ii) $16.3 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 (i) signed contracts or letters of intent from third party offers or (ii) discounted cash flow models. 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 September 30, 2018, the Company had three active real estate development projects and two projects held for future development.

 

14

 

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

 

Property Name

Location

 

September 30, 2018

   

December 31, 2017

 

Grand Parkway Marketplace II (1)

Spring, TX

  $ -     $ 43,403  

Dania Pointe (2)

Dania Beach, FL

    253,923       152,841  

Mill Station

Owings Mills, MD

    49,570       34,347  

Lincoln Square

Philadelphia, PA

    154,663       90,479  

Avenues Walk (3)

Jacksonville, FL

    48,573       48,573  

Promenade at Christiana (3)

New Castle, DE

    33,459       32,875  

Total (4)

  $ 540,188     $ 402,518  

 

 

(1)

As of September 30, 2018, this development project, aggregating $47.4 million (including capitalized costs of $5.2 million), was placed in service and reclassified into Operating real estate, net on the Company’s Condensed Consolidated Balance Sheets.

 

(2)

These costs include expenditures for phase I and phase II offsite and infrastructure requirements. During the nine months ended September 30, 2018, the Company acquired a parcel adjacent to this development project for a purchase price of $4.6 million.

 

(3)

Mixed-use project to be developed in the future.

 

(4)

Includes capitalized costs of interest, real estate taxes, insurance, legal costs and payroll of $36.9 million and $27.7 million, as of September 30, 2018 and December 31, 2017, respectively.

 

During the nine months ended September 30, 2018, the Company capitalized (i) interest of $10.7 million, (ii) real estate taxes, insurance and legal costs of $2.5 million and (iii) payroll of $1.2 million, in connection with these real estate development projects.

 

 

5. Investments in and Advances to Real Estate Joint Ventures

 

The Company has 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 September 30, 2018 and December 31, 2017 (in millions, except number of properties):

 

   

Ownership

   

The Company's Investment

 

Joint Venture

 

Interest

   

September 30, 2018

   

December 31, 2017

 

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

    15.0%     $ 183.0     $ 179.5  

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

    48.6%       161.9       154.1  

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

    55.0%       127.8       105.0  

Other Joint Venture Programs (3) (4)

 

 

Various       108.0       45.3  

Total*

          $ 580.7     $ 483.9  

 

* Representing 115 property interests and 23.9 million square feet of GLA, as of September 30, 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 related to KimPru II and $1.8 million related 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. As of the date of deconsolidation, the Company had 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.

 

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 and nine months ended September 30, 2018 and 2017 (in millions):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 

Joint Venture

 

2018

   

2017

   

2018

   

2017

 

KimPru and KimPru II

  $ 3.0     $ 3.2     $ 8.5     $ 9.7  

KIR

    8.0       8.2       26.9       24.7  

CPP

    1.2       1.3       3.7       4.3  

Other Joint Venture Programs (1)

    4.3       (3.6 )     13.4       (1.7 )

Total

  $ 16.5     $ 9.1     $ 52.5     $ 37.0  

 

 

(1)

During the nine months ended September 30, 2018, a joint venture investment distributed cash proceeds resulting from the refinancing of an existing loan of which the Company’s share was $3.6 million. This distribution was in excess of the Company’s carrying basis in this joint venture investment and to that extent was recognized as income.

 

15

 

During the nine months ended September 30, 2018, certain of the Company’s real estate joint ventures disposed of five operating properties, in separate transactions, for an aggregate sales price of $48.4 million. These transactions resulted in an aggregate net gain to the Company of $6.1 million for the nine months ended September 30, 2018.

 

During the nine months ended September 30, 2017, certain of the Company’s real estate joint ventures disposed of six operating properties and a portion of one property, in separate transactions, for an aggregate sales price of $49.3 million. These transactions resulted in an aggregate net gain to the Company of $0.1 million, before income taxes, for the nine months ended September 30, 2017. In addition, during the nine months ended September 30, 2017, the Company acquired a controlling interest in three operating properties from certain joint ventures, in separate transactions, for a gross fair value of $320.1 million.

 

The table below presents debt balances within the Company’s unconsolidated joint venture investments for which the Company held noncontrolling ownership interests at September 30, 2018 and December 31, 2017 (dollars in millions):

 

   

As of September 30, 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

  $ 621.8       4.11

%

    50.7     $ 625.7       3.59

%

    59.8  

KIR

    679.0       4.40

%

    43.1       702.0       4.60

%

    47.5  

CPP

    84.4       3.63

%

    57.0       84.9       2.91

%

    4.0  

Other Joint Venture Programs

    476.9       4.18

%

    81.3       287.6       4.41

%

    27.2  

Total

  $ 1,862.1                     $ 1,700.2                  

 

* Includes extension options

 

 

6. Other Real Estate Investments and Other Assets

 

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 September 30, 2018, the Company’s net investment under the Preferred Equity Program was $175.2 million relating to 285 properties, including 273 net leased properties.  During the nine months ended September 30, 2018, the Company recognized income of $24.4 million from its preferred equity investments, including $10.5 million in profit participation earned from six capital transactions. These amounts are included in Equity in income of other real estate investments, net on the Company’s Condensed Consolidated Statements of Income.

 

Albertsons -

 

As of September 30, 2018, the Company owns 9.74% of the common stock of Albertsons Companies, Inc. (“ACI”) through two wholly-owned partnerships and accounts for this investment on the cost method. The Company’s net investment of $140.2 million in ACI is included in Other assets on the Company’s Condensed Consolidated Balance Sheets.

 

On February 20, 2018, ACI announced the execution of a definitive merger agreement under which ACI would acquire all the outstanding shares of Rite Aid Corporation (NYSE: RAD) (“RAD”). RAD scheduled a special stockholder meeting for August 9, 2018 for its stockholders of record to vote on the proposed merger with ACI. However, RAD and ACI mutually agreed to terminate the definitive merger agreement prior to this special stockholder meeting.

 

 

7. Variable Interest Entities (VIE”)

 

Included within the Company’s consolidated operating properties at September 30, 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 September 30, 2018, total assets of these VIEs were $889.9 million and total liabilities were $70.3 million. At December 31, 2017, total assets of these VIEs were $1.2 billion and total liabilities were $383.5 million.

 

16

 

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 September 30, 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 September 30, 2018, total assets of these real estate development VIEs were $400.3 million and total liabilities were $73.1 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, approximately $150.0 million to $200.0 million, will be funded with capital contributions from the Company, when contractually obligated, and/or construction loan financing. 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 and a construction loan. The assets associated with these encumbered VIEs (“Restricted Assets”) are collateral under the respective mortgages and a construction loan 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

September 30, 2018

   

As of

December 31, 2017

 

Number of unencumbered VIEs

    20       22  

Number of encumbered VIEs

    4       5  

Total number of consolidated VIEs

    24       27  
                 

Restricted Assets:

               

Real estate, net

  $ 101.6     $ 627.5  

Real estate under development

    120.9       -  

Cash and cash equivalents

    3.5       9.8  

Accounts and notes receivable, net

    4.8       3.2  

Other assets

    3.4       4.5  

Total Restricted Assets

  $ 234.2     $ 645.0  
                 

VIE Liabilities:

               

Mortgages and construction loan payable, net

  $ 63.6     $ 340.9  

Other liabilities

    79.8       76.8  

Total VIE Liabilities

  $ 143.4     $ 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 September 30, 2018, the Company had a total of 11 loans aggregating $29.2 million, of which all were identified as performing loans.

 

During the nine months ended September 30, 2018, the Company sold an operating property for a sales price of $20.8 million. In conjunction with this sale, the Company issued mortgage financing of $14.7 million which is scheduled to mature on December 20, 2018 and bears interest at a rate equal to the greater of (i) 5.00% or (ii) LIBOR plus 300 basis points (5.16% as of September 30, 2018). This loan is collateralized by the property.

 

17

 

During the nine months ended September 30, 2018, the Company received full payment relating to the following mortgages receivable (dollars in millions):

 

Date Paid

 

Amount Received

   

Interest Rate

   

Maturity Date

Sep-18

  $ 1.8       7.570 %  

Jun-19

Apr-18 (1)

  $ 4.5       7.000 %  

May-18

 

 

(1)

This Canadian denominated (“CAD”) receivable had an aggregate outstanding balance of CAD 5.7 million (USD $4.5 million) upon payoff.

 

 

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 nine months ended September 30, 2018, the Company recognized a net loss on changes in fair value of its available-for-sale marketable securities of $2.0 million in Other income, net on the Company’s Condensed Consolidated Statements of Income.

 

 

10. Notes, Mortgages and Construction Loan Payable

 

Notes Payable -

 

During the nine months ended September 30, 2018, the Company repaid the following notes (dollars in millions):

 

Type

 

Date Paid

 

Amount Repaid

   

Interest Rate

   

Maturity Date

Senior Unsecured Notes (1)

 

Aug-18

  $ 300.0       6.875 %  

Oct-19

Senior Unsecured Notes (2)

 

Jun-18 & Jul-18

  $ 15.1       3.200 %  

May-21

 

 

(1)

The Company recorded an early extinguishment of debt charge of $12.8 million resulting from the early repayment of these notes.

 

(2)

As of September 30, 2018, these notes had an outstanding balance of $484.9 million.

 

Mortgages and Construction Loan Payable -

 

During the nine months ended September 30, 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 holds a controlling interest and (ii) repaid $203.6 million of maturing mortgage debt (including fair market value adjustments of $0.9 million) that encumbered five operating properties.

 

In August 2018, the Company closed on a construction loan commitment of $67.0 million relating to one development property. This loan commitment is scheduled to mature in August 2020, with six additional six-month options to extend the maturity date to August 2023 and bears interest at a rate of LIBOR plus 180 basis points (3.96% as of September 30, 2018). As of September 30, 2018, the construction loan had a balance of $30.4 million outstanding.

 

During the nine months ended September 30, 2018, the Company disposed of an encumbered property through foreclosure. The transaction resulted in a net decrease in mortgage debt of $12.4 million. 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 nine months ended September 30, 2018, there were various transactions that had an impact on noncontrolling interest. See Footnotes 3 and 5 to the Notes to Condensed Consolidated Financial Statements for additional information regarding specific transactions.

 

In addition, during the nine months ended September 30, 2018, the Company acquired its partners’ interests 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.

 

18

 

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.

 

The following table presents the change in the redemption value of the Redeemable noncontrolling interests for the nine months ended September 30, 2018 and 2017 (in thousands): 

 

   

2018

   

2017

 

Balance at January 1,

  $ 16,143     $ 86,953  

Issuance of redeemable partnership interests (1)

    -       10,000  

Income

    279       1,203  

Distributions

    (266 )     (2,448 )

Redemption/conversion of redeemable units (2)

    -       (79,569 )

Adjustment to estimated redemption value (1)

    3,918       -  

Balance at September 30,

  $ 20,074     $ 16,139  

 

 

(1)

During 2017, KIM Lincoln, a wholly owned subsidiary of the Company, and Lincoln Member entered into a joint venture agreement wherein KIM Lincoln has a 90% controlling interest and Lincoln Member has a 10% noncontrolling interest. During the nine months ended September 30, 2018, the Company recorded an adjustment of $3.9 million to the estimated redemption fair market value of this noncontrolling interest in accordance with the provisions of the joint venture agreement and ASC 480 – Accounting for Redeemable Equity Instruments.

 

(2)

During 2017, the Company redeemed the remaining 79,642,697 Preferred A Units for a total redemption price of $79.9 million, including an accrued preferred return of $0.4 million. These units, which had a par value of $1.00 and return per annum of 5.0%, were issued during 2006 in connection with the acquisition of seven shopping center properties located in Puerto Rico.

 

 

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):

 

   

September 30, 2018

   

December 31, 2017

 
   

Carrying

Amounts

   

Estimated

Fair Value

   

Carrying

Amounts

   

Estimated

Fair Value

 

Notes payable, net (1)

  $ 4,409,500     $ 4,136,860     $ 4,596,140     $ 4,601,479  

Mortgages and construction loan payable, net (2)

  $ 477,974     $ 468,585     $ 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 September 30, 2018 and December 31, 2017, were $4.0 billion and $4.6 billion, respectively. The estimated fair value amounts classified as Level 3 as of September 30, 2018 and December 31, 2017, were $127.9 million and $1.9 million, respectively.

 

(2)

The Company determined that its valuation of its mortgages and construction loan were classified within Level 3 of the fair value hierarchy. 

 

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.

 

19

 

The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

 

   

Balance at

September 30, 2018

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Marketable equity securities

  $ 10,769     $ 10,769     $       $ -  

 

   

Balance at

December 31, 2017

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Marketable equity securities

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

Liabilities:

                               

Interest rate swap

  $ 344     $ -     $ 344     $ -  

 

Assets measured at fair value on a non-recurring basis during the nine months ended September 30, 2018 and the year ended December 31, 2017, are as follows (in thousands): 

 

   

Balance at

September 30, 2018

   

Level 1

   

Level 2

   

Level 3

 
                                 

Real estate

  $ 79,955     $ -     $ -     $ 79,955  

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 nine months ended September 30, 2018 and 2017, the Company recognized impairment charges related to adjustments to property carrying values of $33.9 million and $34.3 million, respectively. The Company’s estimated fair values of these properties were primarily based upon estimated sales prices from (i) signed contracts or letters of intent from third party offers or (ii) discounted cash flow models. The Company does not have access to the unobservable inputs used to determine the estimated fair values of third party offers. For the discounted cash flow models, the capitalization rates primarily range from 8.5% to 9.0% and discount rates primarily range from 9.50% to 10.0% which were utilized in the models based upon unobservable rates that the Company believes to be within a reasonable range of current market rates for each respective investment. 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. Stockholders’ Equity

 

Preferred Stock

 

The Company’s outstanding Preferred Stock is detailed below:

 

As of September 30, 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 Preferred Stock 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.

 

20

 

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