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

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Table of Contents



 

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 June 30, 2019

 

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)

 

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

Title of each class

Trading

Name of each exchange on

  Symbol(s)

which registered

Common Stock, par value $.01 per share.

KIM

New York Stock Exchange

Depositary Shares, each representing one-thousandth of a share of 6.000% Class I Cumulative Redeemable, Preferred Stock, $1.00 par value per share.

KIMprI

New York Stock Exchange

Depositary Shares, each representing one-thousandth of a share of 5.500% Class J Cumulative Redeemable, Preferred Stock, $1.00 par value per share.

KIMprJ

New York Stock Exchange

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

KIMprK

New York Stock Exchange

Depositary Shares, each representing one-thousandth of a share of 5.125% Class L Cumulative Redeemable, Preferred Stock, $1.00 par value per share.

KIMprL

New York Stock Exchange

Depositary Shares, each representing one-thousandth of a share of 5.250% Class M Cumulative Redeemable, Preferred Stock, $1.00 par value per share.

KIMprM

New York Stock Exchange

 

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 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of July 15, 2019, the registrant had 422,097,406 shares of common stock outstanding.

 



 

 

Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

  

  

  

  

Condensed Consolidated Financial Statements of Kimco Realty Corporation and Subsidiaries (Unaudited) -

  

  

  

  

  

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

3

  

  

 

  

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2019 and 2018

4

  

   

  

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018

5

  

   

  

Condensed Consolidated Statements of Changes in Equity for the Three Months Ended June 30, 2019 and 2018

6

  

   
 

Condensed Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2019 and 2018

7

     

  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018

8

     
Notes to Condensed Consolidated Financial Statements. 9
     
Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

23

     
Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

34

     
Item 4. 

Controls and Procedures.

34

 

PART II - OTHER INFORMATION

 
Item 1. 

Legal Proceedings.

35

     
Item 1A. 

Risk Factors.

35

     
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

35

     
Item 3.

Defaults Upon Senior Securities.

35

     
Item 4.

Mine Safety Disclosures.

35

     
Item 5.

Other Information.

35

     
Item 6.

Exhibits.

36

     
Signatures

 

37

 

2

Table of Contents

 

 

KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share information)

 

   

June 30, 2019

   

December 31, 2018

 

Assets:

               

Real estate, net of accumulated depreciation and amortization of $2,426,924 and $2,385,287, respectively

  $ 9,164,375     $ 9,250,519  

Real estate under development

    304,624       241,384  

Investments in and advances to real estate joint ventures

    584,983       570,922  

Other real estate investments

    191,834       192,123  

Cash and cash equivalents

    113,991       143,581  

Accounts and notes receivable, net

    182,369       184,528  

Operating lease right-of-use assets, net

    99,997       -  

Other assets

    398,730       416,043  

Total assets (1)

  $ 11,040,903     $ 10,999,100  
                 

Liabilities:

               

Notes payable, net

  $ 4,420,370     $ 4,381,456  

Mortgages and construction loan payable, net

    485,132       492,416  

Dividends payable

    130,460       130,262  

Operating lease liabilities

    93,233       -  

Other liabilities

    520,557       560,231  

Total liabilities (2)

    5,649,752       5,564,365  

Redeemable noncontrolling interests

    23,690       23,682  
                 

Commitments and Contingencies

               
                 

Stockholders' equity:

               

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

    43       43  

Common stock, $.01 par value, authorized 750,000,000 shares; issued and outstanding 422,094,230 and 421,388,879 shares, respectively

    4,221       4,214  

Paid-in capital

    6,125,572       6,117,254  

Cumulative distributions in excess of net income

    (835,934 )     (787,707 )

Total stockholders' equity

    5,293,902       5,333,804  

Noncontrolling interests

    73,559       77,249  

Total equity

    5,367,461       5,411,053  

Total liabilities and equity

  $ 11,040,903     $ 10,999,100  

 

(1)

Includes restricted assets of consolidated variable interest entities (“VIEs”) at June 30, 2019 and December 31, 2018 of $227,980 and $239,012, respectively.  See Footnote 11 of the Notes to Condensed Consolidated Financial Statements.

 

 

(2)

Includes non-recourse liabilities of consolidated VIEs at June 30, 2019 and December 31, 2018 of $145,075 and $143,186, respectively.  See Footnote 11 of the Notes to Condensed Consolidated Financial Statements.

 

 

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

 

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Table of Contents

 

 

KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Revenues

                               

Revenues from rental properties, net

  $ 280,710     $ 289,383     $ 571,344     $ 589,100  

Management and other fee income

    4,163       4,020       8,539       8,381  

Total revenues

    284,873       293,403       579,883       597,481  
                                 

Operating expenses

                               

Rent

    (2,924 )     (2,742 )     (5,616 )     (5,560 )

Real estate taxes

    (37,005 )     (37,274 )     (76,352 )     (77,708 )

Operating and maintenance

    (43,217 )     (41,325 )     (84,113 )     (84,656 )

General and administrative

    (22,633 )     (24,029 )     (48,464 )     (46,427 )

Provision for doubtful accounts

    -       (1,051 )     -       (3,182 )

Impairment charges

    (17,451 )     (22,873 )     (21,626 )     (30,519 )

Depreciation and amortization

    (69,005 )     (79,760 )     (140,566 )     (161,142 )

Total operating expenses

    (192,235 )     (209,054 )     (376,737 )     (409,194 )
                                 

Gain on sale of properties/change in control of interests

    14,762       95,240       38,357       152,211  
                                 

Operating income

    107,400       179,589       241,503       340,498  
                                 

Other income/(expense)

                               

Other income, net

    1,938       3,277       4,560       9,456  

Interest expense

    (44,097 )     (46,434 )     (88,492 )     (96,377 )

Income before income taxes, net, equity in income of joint ventures, net, and equity in income from other real estate investments, net

    65,241       136,432       157,571       253,577  
                                 

Benefit/(provision) for income taxes, net

    344       720       (286 )     668  

Equity in income of joint ventures, net

    22,533       19,040       41,287       35,953  

Equity in income of other real estate investments, net

    13,269       9,617       19,493       19,593  
                                 

Net income

    101,387       165,809       218,065       309,791  
                                 

Net income attributable to noncontrolling interests

    (360 )     (423 )     (869 )     (315 )
                                 

Net income attributable to the Company

    101,027       165,386       217,196       309,476  
                                 

Preferred dividends

    (14,534 )     (14,534 )     (29,068 )     (29,123 )
                                 

Net income available to the Company's common shareholders

  $ 86,493     $ 150,852     $ 188,128     $ 280,353  
                                 

Per common share:

                               

Net income available to the Company:

                               

-Basic

  $ 0.20     $ 0.36     $ 0.45     $ 0.66  

-Diluted

  $ 0.20     $ 0.36     $ 0.44     $ 0.66  
                                 

Weighted average shares:

                               

-Basic

    419,697       420,731       419,581       422,060  

-Diluted

    420,646       421,928       420,798       423,236  


 

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

 

4

Table of Contents

 

 

KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income

  $ 101,387     $ 165,809     $ 218,065     $ 309,791  

Other comprehensive income:

                         

Change in unrealized value on interest rate swap

    -       138       -       416  

Other comprehensive income

    -       138       -       416  
                                 

Comprehensive income

    101,387       165,947       218,065       310,207  
                                 

Comprehensive income attributable to noncontrolling interests

    (360 )     (423 )     (869 )     (315 )
                                 

Comprehensive income attributable to the Company

  $ 101,027     $ 165,524     $ 217,196     $ 309,892  

 

 

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

 

5

Table of Contents

 

 

KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months Ended June 30, 2019 and 2018

(Unaudited)

(in thousands)

 

    Cumulative    

Accumulated

                                                                 
   

Distributions in

   

Other

                                           

Total

                 
   

Excess of

   

Comprehensive

   

Preferred Stock

   

Common Stock

   

Paid-in

   

Stockholders'

   

Noncontrolling

   

Total

 
   

Net Income

   

Income/(Loss)

   

Issued

   

Amount

   

Issued

   

Amount

   

Capital

   

Equity

   

Interests

   

Equity

 

Balance at April 1, 2018

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

Comprehensive income:

                                                                               

Net income

    165,386       -       -       -       -       -       -       165,386       423       165,809  

Other comprehensive income:

                                                            -               -  

Change in unrealized loss on interest rate swap

    -       138       -       -       -       -       -       138       -       138  

Redeemable noncontrolling interests income

    -       -       -       -       -       -       -       -       (93 )     (93 )

Dividends declared to common and preferred shares

    (132,522 )     -       -       -       -       -       -       (132,522 )     -       (132,522 )

Distributions to noncontrolling interests

    -       -       -       -       -       -       -       -       (398 )     (398 )

Repurchase of common stock

    -       -       -       -       (3,500 )     (35 )     (50,815 )     (50,850 )     -       (50,850 )

Surrender of restricted stock

    -       -       -       -       (12 )     -       (118 )     (118 )     -       (118 )

Amortization of equity awards

    -       -       -       -       -       -       4,610       4,610       -       4,610  

Balance at June 30, 2018

  $ (710,981 )   $ 72       43     $ 43       421,388     $ 4,214     $ 6,117,862     $ 5,411,210     $ 77,768     $ 5,488,978  
                                                                                 

Balance at April 1, 2019

  $ (804,241 )   $ -       43     $ 43       422,037     $ 4,220     $ 6,119,855     $ 5,319,877     $ 76,981     $ 5,396,858  

Net income

    101,027       -       -       -       -       -       -       101,027       360       101,387  

Redeemable noncontrolling interests income

    -       -       -       -       -       -       -       -       (93 )     (93 )

Dividends declared to common and preferred shares

    (132,720 )     -       -       -       -       -       -       (132,720 )     -       (132,720 )

Distributions to noncontrolling interests

    -       -       -       -       -       -       -       -       (474 )     (474 )

Issuance of common stock

    -       -       -       -       3       -       -       -       -       -  

Surrender of restricted common stock

    -       -       -       -       (36 )     -       (437 )     (437 )     -       (437 )

Exercise of common stock options

    -       -       -       -       90       1       1,129       1,130       -       1,130  

Amortization of equity awards

    -       -       -       -       -       -       4,536       4,536       -       4,536  

Acquisition of noncontrolling interests

    -       -       -       -       -       -       489       489       (3,215 )     (2,726 )

Balance at June 30, 2019

  $ (835,934 )   $ -       43     $ 43       422,094     $ 4,221     $ 6,125,572     $ 5,293,902     $ 73,559     $ 5,367,461  

 

 

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

 

6

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KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Six Months Ended June 30, 2019 and 2018

(Unaudited)

(in thousands)

 

    Cumulative    

Accumulated

                                                                 
   

Distributions in

   

Other

                                           

Total

                 
   

Excess of

   

Comprehensive

   

Preferred Stock

   

Common Stock

   

Paid-in

   

Stockholders'

   

Noncontrolling

   

Total

 
   

Net Income

   

Income/(Loss)

   

Issued

   

Amount

   

Issued

   

Amount

   

Capital

   

Equity

   

Interests

   

Equity

 

Balance at January 1, 2018

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

Comprehensive income:

                                                                               

Net income

    309,476       -       -       -       -       -       -       309,476       315       309,791  

Other comprehensive income:

                                                            -               -  

Change in unrealized loss on interest rate swap

    -       416       -       -       -       -       -       416       -       416  

Redeemable noncontrolling interests income

    -       -       -       -       -       -       -       -       (185 )     (185 )

Dividends declared to common and preferred shares

    (266,082 )     -       -       -       -       -       -       (266,082 )     -       (266,082 )

Distributions to noncontrolling interests

    -       -       -       -       -       -       -       -       (1,870 )     (1,870 )

Issuance of common stock

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

Repurchase of common stock

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

Surrender of restricted stock

    -       -       -       -       (236 )     (2 )     (3,490 )     (3,492 )     -       (3,492 )

Exercise of common stock options

    -       -       -       -       3       -       30       30       -       30  

Amortization of equity awards

    -       -       -       -       -       -       9,329       9,329       -       9,329  

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 June 30, 2018

  $ (710,981 )   $ 72       43     $ 43       421,388     $ 4,214     $ 6,117,862     $ 5,411,210     $ 77,768     $ 5,488,978  
                                                                                 

Balance at January 1, 2019

  $ (787,707 )   $ -       43     $ 43       421,389     $ 4,214     $ 6,117,254     $ 5,333,804     $ 77,249     $ 5,411,053  

Net income

    217,196       -       -       -       -       -       -       217,196       869       218,065  

Redeemable noncontrolling interests income

    -       -       -       -       -       -       -       -       (185 )     (185 )

Dividends declared to common and preferred shares

    (265,423 )     -       -       -       -       -       -       (265,423 )     -       (265,423 )

Distributions to noncontrolling interests

    -       -       -       -       -       -       -       -       (1,159 )     (1,159 )

Issuance of common stock

    -       -       -       -       786       8       (8 )     -       -       -  

Surrender of restricted common stock

    -       -       -       -       (223 )     (2 )     (3,687 )     (3,689 )     -       (3,689 )

Exercise of common stock options

    -       -       -       -       142       1       1,810       1,811       -       1,811  

Amortization of equity awards

    -       -       -       -       -       -       9,714       9,714       -       9,714  

Acquisition of noncontrolling interests

    -       -       -       -       -       -       489       489       (3,215 )     (2,726 )

Balance at June 30, 2019

  $ (835,934 )   $ -       43     $ 43       422,094     $ 4,221     $ 6,125,572     $ 5,293,902     $ 73,559     $ 5,367,461  

 

 

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

 

7

Table of Contents

 

 

KIMCO REALTY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

   

Six Months Ended June 30,

 
   

2019

   

2018

 
                 

Cash flow from operating activities:

               

Net income

  $ 218,065     $ 309,791  

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

               

Depreciation and amortization

    140,566       161,142  

Impairment charges

    21,626       30,519  

Equity award expense

    10,284       10,423  

Gain on sale of properties/change in control of interests

    (38,357 )     (152,211 )

Equity in income of joint ventures, net

    (41,287 )     (35,953 )

Equity in income of other real estate investments, net

    (19,493 )     (19,593 )

Distributions from joint ventures and other real estate investments

    60,858       67,005  

Change in accounts and notes receivable

    2,159       9,306  

Change in accounts payable and accrued expenses

    (8,382 )     (5,139 )

Change in other operating assets and liabilities

    (32,510 )     (23,304 )

Net cash flow provided by operating activities

    313,529       351,986  
                 

Cash flow from investing activities:

               

Acquisition of operating real estate and other related net assets

    -       (3,337 )

Improvements to operating real estate

    (139,865 )     (127,380 )

Acquisition of real estate under development

    -       (4,592 )

Improvements to real estate under development

    (57,496 )     (121,393 )

Investments in marketable securities

    (157 )     (63 )

Proceeds from sale/repayments of marketable securities

    151       129  

Investments in and advances to real estate joint ventures

    (16,214 )     (15,240 )

Reimbursements of investments in and advances to real estate joint ventures

    2,702       5,228  

Investments in and advances to other real estate investments

    (9,685 )     (353 )

Reimbursements of investments in and advances to other real estate investments

    5,960       10,444  

Investment in other financing receivable

    (48 )     -  

Collection of mortgage loans receivable

    5,351       5,427  

Proceeds from sale of operating properties

    106,782       472,781  

Proceeds from insurance casualty claims

    2,000       6,500  

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

    (100,519 )     228,151  
                 

Cash flow from financing activities:

               

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

    (6,198 )     (175,209 )

Principal payments on rental property debt

    (6,179 )     (6,852 )

Proceeds from construction loan financing

    7,149       -  

Proceeds/(repayments) under the unsecured revolving credit facility, net

    35,000       (7,746 )

Repayments under unsecured notes

    -       (6,365 )

Financing origination costs

    (7 )     (11 )

Payment of early extinguishment of debt charges

    (1,531 )     (546 )

Redemption/distribution of noncontrolling interests

    (4,060 )     (5,454 )

Dividends paid

    (265,226 )     (264,711 )

Proceeds from issuance of stock, net

    1,811       33,144  

Repurchase of common stock

    -       (75,126 )

Change in other financing liabilities

    (3,359 )     (4,197 )

Net cash flow used for financing activities

    (242,600 )     (513,073 )
                 

Net change in cash and cash equivalents

    (29,590 )     67,064  

Cash and cash equivalents, beginning of the period

    143,581       238,513  

Cash and cash equivalents, end of the period

  $ 113,991     $ 305,577  
                 

Interest paid during the period including payment of early extinguishment of debt charges of $1,531 and $546, respectively (net of capitalized interest of $6,680 and $8,199, respectively)

  $ 86,621     $ 96,974  

 

 

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

 

8

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, home improvement centers, discounters and/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, 2018 (the “10-K”), as certain disclosures in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, that would duplicate those included in the 10-K are not included in these Condensed Consolidated Financial Statements.

 

Revenues and Trade Accounts Receivable -

 

The Company’s primary source of revenues are derived from lease agreements which fall under the scope of ASU 2016-02, Leases (Topic 842), (“Topic 842”), which includes rental income and expense reimbursement income. The Company also has revenues which are accounted for under ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“Topic 606”) which 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 and tax increment financing (“TIF”) contracts. The Company presents its revenue streams on the Company’s Condensed Consolidated Statements of Income as Revenues from rental properties, net and Management and other fee income.

 

Revenues from rental properties, net

 

Revenues from rental properties, net 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. Upon the adoption of Topic 842, the Company elected the lessor practical expedient to combine the lease and non-lease components, determined the lease component was the predominant component and as a result, accounted for the combined components under Topic 842. Non-lease components include reimbursements paid to the Company from tenants for common area maintenance costs, real estate taxes and other operating expenses. The combined components are included in Revenues from rental properties, net on the Company’s Condensed Consolidated Statements of Income.

 

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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 an existing lease agreement and has vacated the leased space. If the lessee continues to occupy the leased space for a period of time after the lease termination is agreed upon, the termination fee is accounted for as a lease modification based on the modified lease term. 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 asset or liability 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.

 

Also included in Revenues from rental properties, net are 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.

 

Trade Accounts Receivable

 

The Company reviews its trade accounts receivable, including its straight-line rent receivable, related to base rents, straight-line rent, expense reimbursements and other revenues for collectability. The Company analyzes its accounts receivable, customer credit worthiness and current economic trends when evaluating the adequacy of the collectability of the lessee’s total accounts receivable balance on a lease by lease basis. In addition, tenants in bankruptcy are analyzed and considerations are made in connection with the expected recovery of pre-petition and post-petition bankruptcy claims. If a lessee’s accounts receivable balance is considered uncollectible, the Company will write-off the receivable balances associated with the lease and will only recognize lease income on a cash basis. If the Company subsequently determines that it is probable it will collect the remaining lessee’s lease payments under the lease term, the Company will then reinstate the straight-line balance and the lease income will then be limited to the lesser of (i) the straight-line rental income or (ii) the lease payments that have been collected from the lessee. The Company’s reported net earnings are directly affected by management’s estimate of the collectability of its trade accounts receivable. Trade accounts receivable, primarily derived from expense reimbursements, that are being disputed by the lessee will not be written-off as it is presumed the Company will collect these receivables upon resolution with the tenant.

 

Leases -

 

The FASB issued Topic 842, which amended the guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for those leases classified as operating leases.

 

The Company adopted this standard effective January 1, 2019 under the modified retrospective approach and elected the optional transition method to apply the provisions of Topic 842 as of the adoption date, rather than the earliest period presented. As such, the requirements of Topic 842 were not applied in the comparative periods presented in the Company’s Condensed Consolidated Financial Statements. The Company also elected the package of practical expedients, which permits the Company to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) any initial direct costs for any existing leases as of the effective date. The Company did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment.

 

Lessor

 

In July 2018, the FASB issued guidance codified in ASU 2018-11, Leases - Targeted Improvements (“ASU 2018-11”). ASU 2018-11 provides a practical expedient, which allows lessors to combine non-lease components with the related lease components if (i) both the timing and pattern of transfer are the same for the non-lease component(s) and related lease component, and (ii) the lease component would be classified as an operating lease if accounted for separately. The single combined component is accounted for under Topic 842 if the lease component is the predominant component and is accounted for under Topic 606 if the non-lease components are the predominant components. Lessors are permitted to apply the practical expedient to all existing leases on a retrospective or prospective basis. The Company elected the practical expedient to combine its lease and non-lease components that meet the defined criteria and will account for the combined lease component under Topic 842 on a prospective basis.

 

As a lessor, the Company's recognition of rental revenue remained mainly consistent with previous guidance, apart from the narrower definition of initial direct costs that can be capitalized. The new standard defines initial direct costs as only the incremental costs that would not have been incurred if the lease had not been obtained. Under Topic 842 initial direct costs include commissions paid to third parties, including brokers, leasing and referral agents and internal leasing commissions paid to employees for successful execution of lease agreements. These initial direct costs are capitalized and generally amortized over the term of the related leases using the straight-line method. Internal employee compensation, payroll-related benefits and certain external legal fees are considered indirect costs associated with the execution of lease agreements and will no longer be capitalized; these costs will be included in general and administrative expense. As a result of electing the package of practical expedients described above, existing leases and related initial direct costs have not been reassessed prior to the effective date, and therefore, adoption of the lease standard did not have an impact on the Company’s previously reported Condensed Consolidated Statements of Income for initial direct costs.

 

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Lessee

 

The Company’s leases where it is the lessee primarily consist of ground leases and administrative office leases. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments over the lease term. The Company utilized an incremental borrowing rate based on the information available at adoption of Topic 842 in determining the present value of lease payments since these leases do not provide an implicit rate. Variable lease payments are excluded from the lease liabilities and corresponding ROU assets, as they are recognized in the period in which the obligation for those payments is incurred. Many of the Company’s lessee agreements include options to extend the lease, which it did not include in its minimum lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term. Upon the adoption of Topic 842, the Company recognized $106.0 million of ROU assets, including net intangible assets of $7.3 million, which were reclassified from Real estate, net to Operating lease right-of-use assets, net and $98.7 million of corresponding Operating lease liabilities for its operating leases on the Company’s Condensed Consolidated Balance Sheets. See Footnote 7 to the Notes to the Company’s Condensed Consolidated Financial Statements for further details.

 

Reclassifications -

 

      Certain amounts in the prior period have been reclassified in order to conform to the current period’s presentation. In conjunction with the adoption of Topic 842 discussed above, the Company reclassified during the three and six months ended June 30, 2018: (i) $61.2 million and $124.9 million of Reimbursement income, respectively, and (ii) $5.5 million and $11.1 million of Other rental property income, respectively, to Revenues from rental properties, net on the Company’s Condensed Consolidated Statement of Income. The reclassification is solely for comparative purposes as the Company has not elected to adopt Topic 842 retrospectively.

 

Subsequent Events -

 

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

 

New Accounting Pronouncements -

 

       The following table represents ASUs to the FASB’s ASC that, as of June 30, 2019, 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 2018-17, Consolidation (Topic 810) – Targeted Improvements to Related Party Guidance for Variable Interest Entities

The amendment to Topic 810 clarifies the following areas:

(i)  Applying the variable interest entity (VIE) guidance to private companies under common control, and

(ii)  Considering indirect interests held through related parties under common control, and for determining whether fees paid to decision makers and service providers are variable interests.

 

This update improves the accounting for those areas, thereby improving general purpose financial reporting. Retrospective adoption is required.

 

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 2018-15, 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.

 

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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 for 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

 

ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses

 

ASU 2019-05, Financial Instruments – Credit Losses (Topic 326), Targeted Transition Relief

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.

 

In November 2018, the FASB issued ASU 2018-19, which includes amendments to (i) clarify receivables arising from operating leases are within the scope of the new leasing standard (Topic 842) discussed below and (ii) align the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements. Early adoption is permitted as of the original effective date.

 

In May 2019, the FASB issued ASU 2019-05 which amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (i) were previously recorded at amortized cost and (ii) are within the scope of ASC 326-203 if the instruments are eligible for the fair value option under ASC 825-10.4. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. These amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in ASU 2016-13. Certain disclosures are required. The effective date will be the same as the effective date in ASU 2016-13. 

 

January 1, 2020; Early adoption permitted

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

 

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The following ASUs to the FASB’s ASC have been adopted by the Company as of January 1, 2019:

 

ASU

Description

Adoption

Date

Effect on the financial

statements or other significant

matters

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

 

ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors

 

ASU 2019-01, Leases (Topic 842): Codification 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 that land easements are within the scope of the new leasing 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 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 leasing 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. 

 

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 the new leasing standard (Topic 842).

 

In December 2018, the FASB issued ASU 2018-20, which includes narrow-scope improvements for lessors. The FASB amended the new leasing standard to allow lessors to make an accounting policy election not to evaluate whether sales taxes and similar taxes imposed by a governmental authority on a specific lease revenue-producing transaction are the primary obligation of the lessor as owner of the underlying leased asset. The amendments also require a lessor to exclude lessor costs paid directly by a lessee to third parties on the lessor’s behalf from variable payments and include lessor costs that are paid by the lessor and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense. In addition, the amendments clarify that when lessors allocate variable payments to lease and non-lease components they are required to follow the recognition guidance in the new leasing standard for the lease component and other applicable guidance, such as the new revenue standard, for the non-lease component.

 

In February 2019, the FASB issued ASU 2019-01, which includes amendments to address the following:

(i)   Determining the fair value of the underlying asset by lessors that are

not manufacturers or dealers;

(ii)  Presentation on the statement of cash flows for sales-type and direct financing leases; and

(iii) Transition disclosures related to Topic 250, Accounting Changes and Error Corrections.

January 1, 2019

The Company adopted this standard using the modified retrospective approach. 

 

The Company has identified certain leases and accounting policies which the adoption impacted, including its ground leases, administrative office leases, initial leasing costs and non-lease components.

 

See above for further details.

 

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3. Operating Property Activities

 

Acquisitions of Operating Properties -

 

During the six months ended June 30, 2019, the Company acquired the following operating properties, in separate transactions, through direct asset purchases (in thousands):

 

       

Purchase Price

         

Property Name

Location

Month Acquired

 

Cash*

   

GLA**

 

Bell Camino Out-parcel

Sun City, AZ

Jan-19

  $ 5,678       45  

Gateway at Donner Pass Out-parcel

Truckee, CA

Jan-19

    13,527       40  

Rancho Penasquitos Out-parcel

San Diego, CA

Jan-19

    12,064       40  
        $ 31,269       125  


* The Company utilized an aggregate $31.0 million associated with Internal Revenue Code §1031 sales proceeds.

** Gross leasable area ("GLA")

 

Included in Revenues from rental properties, net on the Company’s Condensed Consolidated Statements of Income for the six months ended June 30, 2019 is $0.6 million in revenue resulting from these acquisitions.

 

Purchase Price Allocations -

 

The purchase price for these acquisitions is allocated to real estate and related intangible assets acquired and liabilities assumed, as applicable, in accordance with our accounting policies for asset acquisitions. The purchase price allocations for properties acquired during the six months ended June 30, 2019, are as follows (in thousands): 

 

   

Allocation as of

June 30, 2019

   

Weighted-Average
Amortization Period
(in Years)

 

Land

  $ 8,266       n/a  

Buildings

    15,935