10-K 1 kimco_10k-123112.htm FORM 10-K kimco_10k-123112.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
 
Commission file number 1-10899
 
Kimco Realty Corporation
(Exact name of registrant as specified in its charter)

 
Maryland
 
13-2744380
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 

3333 New Hyde Park Road, New Hyde Park, NY   11042-0020
(Address of principal executive offices)     (Zip Code)
 
(516) 869-9000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on
which registered
Common Stock, par value $.01 per share.
New York Stock Exchange
   
Depositary Shares, each representing one-hundredth of a share of 6.90% Class H Cumulative Redeemable Preferred Stock, par value $1.00 per share.
New York Stock Exchange
   
Depositary Shares, each representing one-thousandth of a share of 6.00% Class I Cumulative Redeemable Preferred Stock, par value $1.00 per share.
New York Stock Exchange
   
Depositary Shares, each representing one-thousandth of a share of 5.50% Class J Cumulative Redeemable Preferred Stock, par value $1.00 per share.
New York Stock Exchange
   
Depositary Shares, each representing one-thousandth of a share of 5.625% Class K Cumulative Redeemable Preferred Stock, par value $1.00 per share.
New York Stock Exchange
 
Securities registered pursuant to section 12(g) of the Act:                                                                                                     None

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

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

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 þ  No ¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
(Do not check if a smaller reporting company.)
 

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $7.4 billion based upon the closing price on the New York Stock Exchange for such equity on June 30, 2012.

 (APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

407,883,635 shares as of February 14, 2013.

DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference to the Registrant's definitive proxy statement to be filed with respect to the Annual Meeting of Stockholders expected to be held on April 30, 2013.

Index to Exhibits begins on page 38.
 


 
Page 1 of 119
 
 
 
TABLE OF CONTENTS

Item No.
 
Form 10-K
Report
Page
 
PART I
 
     
   1.
Business
3
     
   1A.
Risk Factors
5
     
   1B.
Unresolved Staff Comments
11
     
   2.
Properties
11
     
   3.
Legal Proceedings
12
     
   4.
Mine Safety Disclosures
12
     
 
PART II
 
     
   5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
13
     
   6.
Selected Financial Data
15
     
   7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
     
   7A.
Quantitative and Qualitative Disclosures About Market Risk
35
     
   8.
Financial Statements and Supplementary Data
36
     
   9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
36
     
   9A.
Controls and Procedures
36
     
   9B.
Other Information
36
     
 
PART III
 
     
   10.
Directors, Executive Officers and Corporate Governance
36
     
   11.
Executive Compensation
36
     
   12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
37
     
   13.
Certain Relationships and Related Transactions, and Director Independence
37
     
   14.
Principal Accounting Fees and Services
37
     
 
PART IV
 
     
   15.
Exhibits, Financial Statement Schedules
37

 
2

 

FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K (“Form 10-K”), together with other statements and information publicly disseminated by Kimco Realty Corporation (the “Company”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with the safe harbor provisions.  Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and could materially affect actual results, performances or achievements.  Factors which may cause actual results to differ materially from current expectations include, but are not limited to (i) general adverse economic and local real estate conditions, (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business, (iii) financing risks, such as the inability to obtain equity, debt or other sources of financing or refinancing on terms favorable to the Company, (iv) the Company’s ability to raise capital by selling its assets, (v) changes in governmental laws and regulations, (vi) the level and volatility of interest rates and foreign currency exchange rates, (vii) risks related to our international operations, (viii) the availability of suitable acquisition and disposition opportunities, (ix) valuation and risks related to our joint venture and preferred equity investments, (x) valuation of marketable securities and other investments, (xi) increases in operating costs, (xii) changes in the dividend policy for the Company’s common stock, (xiii) the reduction in the Company’s income in the event of multiple lease terminations by tenants or a failure by multiple tenants to occupy their premises in a shopping center, (xiv) impairment charges and (xv) unanticipated changes in the Company’s intention or ability to prepay certain debt prior to maturity and/or hold certain securities until maturity and the risks and uncertainties identified under Item 1A, “Risk Factors” and elsewhere in this Form 10-K and in the Company’s other filings with the SEC.  Accordingly, there is no assurance that the Company’s expectations will be realized.

PART I

Item 1.  Business

Background

Kimco Realty Corporation, a Maryland corporation, is one of the nation's largest owners and operators of neighborhood and community shopping centers.  The terms "Kimco," the "Company," "we," "our" and "us" each refer to Kimco Realty Corporation and our subsidiaries, unless the context indicates otherwise.  The Company is a self-administered real estate investment trust ("REIT") and has owned and operated neighborhood and community shopping centers for more than 50 years.  The Company has not engaged, nor does it expect to retain, any REIT advisors in connection with the operation of its properties. As of December 31, 2012, the Company had interests in 896 shopping center properties (the “Combined Shopping Center Portfolio”), aggregating 131.3 million square feet of gross leasable area (“GLA”), and 829 other property interests, primarily through the Company’s preferred equity investments, other real estate investments and non-retail properties, totaling  26.6 million square feet of GLA, for a grand total of 1,725 properties aggregating 157.9 million square feet of GLA, located in 44 states, Puerto Rico, Canada, Mexico, Chile, Brazil and Peru. The Company’s ownership interests in real estate consist of its consolidated portfolio and portfolios where the Company owns an economic interest, such as properties in the Company’s investment real estate management programs, where the Company partners with institutional investors and also retains management.  The Company believes its portfolio of neighborhood and community shopping center properties is the largest (measured by GLA) currently held by any publicly traded REIT.

The Company's executive offices are located at 3333 New Hyde Park Road, New Hyde Park, New York 11042-0020 and its telephone number is (516) 869-9000.  Nearly all operating functions, including leasing, legal, construction, data processing, maintenance, finance and accounting are administered by the Company from its executive offices in New Hyde Park, New York and supported by the Company’s regional offices.  As of December 31, 2012, a total of 635 persons are employed by the Company.

The Company’s Web site is located at http://www.kimcorealty.com.  The information contained on our Web site does not constitute part of this Form 10-K.  On the Company’s Web site you can obtain, free of charge, a copy of our Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, as soon as reasonably practicable, after we file such material electronically with, or furnish it to, the Securities and Exchange Commission (the "SEC").  The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
 
 
3

 

The Company began operations through its predecessor, The Kimco Corporation, which was organized in 1966 upon the contribution of several shopping center properties owned by its principal stockholders.  In 1973, these principals formed the Company as a Delaware corporation, and, in 1985, the operations of The Kimco Corporation were merged into the Company. The Company completed its initial public stock offering (the "IPO") in November 1991, and, commencing with its taxable year which began January 1, 1992, elected to qualify as a REIT in accordance with Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code").  If, as the Company believes, it is organized and operates in such a manner so as to qualify and remain qualified as a REIT under the Code, the Company generally will not be subject to federal income tax, provided that distributions to its stockholders equal at least the amount of its REIT taxable income, as defined under the Code.  In 1994, the Company reorganized as a Maryland corporation.  In March 2006, the Company was added to the S & P 500 Index, an index containing the stock of 500 Large Cap companies, most of which are U.S. corporations.  The Company's common stock, Class H Depositary Shares, Class I Depositary Shares, Class J Depositary Shares and Class K Depositary Shares are traded on the New York Stock Exchange (“NYSE”) under the trading symbols “KIM”, “KIMprH”, “KIMprI”, “KIMprJ” and “KIMprK”, respectively.

The Company’s initial growth resulted primarily from ground-up development and the construction of shopping centers.  Subsequently, the Company revised its growth strategy to focus on the acquisition of existing shopping centers and continued its expansion across the nation.  The Company implemented its investment real estate management format through the establishment of various institutional joint venture programs, in which the Company has noncontrolling interests.  The Company earns management fees, acquisition fees, disposition fees and promoted interests based on value creation.  The Company continued its geographic expansion with investments in Canada, Mexico, Chile, Brazil and Peru.  The Company’s revenues and equity in income from its foreign investments in U.S. dollar equivalents and their respective local currencies are as follows (in millions):

   
2012
   
2011
   
2010
 
Revenues (consolidated in USD):
                 
Mexico
  $ 47.3     $ 46.3     $ 35.4  
Brazil
  $ 3.8     $ 3.8     $ 3.3  
Peru
  $ 0.4     $ 0.4     $ 0.4  
Chile
  $ 7.4     $ 0.3     $ 0.1  
Revenues (consolidated):
                       
       Mexico (Mexican Pesos “MXN”)
    626.5       570.2       455.8  
Brazil (Brazillian Real)
    7.2       6.3       5.9  
Peru (Peruvian Nuevo Sol)
    1.1       1.1       1.0  
Chile (Chilean Pesos “CLP”)
    3,648.0       144.7       62.8  
                         
Equity in income (unconsolidated joint ventures, including preferred equity investments in USD):
                       
Canada
  $ 45.4     $ 21.3     $ 26.5  
Mexico
  $ 15.0     $ 11.9     $ 12.0  
Chile
  $ 0.4     $ 0.9     $ 0.1  
                         
Equity in income (unconsolidated joint ventures,   including preferred equity investments in local currencies):
                       
Canada (Canadian dollars)
    44.4       19.7       27.3  
Mexico (MXN)
    152.8       123.5       99.0  
Chile (CLP)
    194.2       411.2       32.0  

The Company, through its taxable REIT subsidiaries (“TRS”), as permitted by the Tax Relief Extension Act of 1999, has been engaged in various retail real estate related opportunities, including (i) ground-up development of neighborhood and community shopping centers and the subsequent sale thereof upon completion, (ii) retail real estate management and disposition services, which primarily focused on leasing and disposition strategies for real estate property interests of both healthy and distressed retailers and (iii) acting as an agent or principal in connection with tax-deferred exchange transactions.  The Company may consider other investments through its TRS should suitable opportunities arise.

In addition, the Company has capitalized on its established expertise in retail real estate by establishing other ventures in which the Company owns a smaller equity interest and provides management, leasing and operational support for those properties. The Company has also provided preferred equity capital in the past to real estate entrepreneurs and, from time to time, provides real estate capital and management services to both healthy and distressed retailers.  The Company has also made selective investments in secondary market opportunities where a security or other investment is, in management’s judgment, priced below the value of the underlying assets, however these investments are subject to volatility within the equity and debt markets.

Operating and Investment Strategy

The Company’s vision is to be the premier owner and operator of shopping centers with its core business operations focusing on owning and operating neighborhood and community shopping centers through investments in North America.  This vision has entailed a shift away from non-retail assets that the Company currently holds. These investments include non-retail preferred equity investments, marketable securities, mortgages on non-retail properties and several urban mixed-use properties. The Company has been actively selling its non-retail assets and investments. As of December 31, 2012, these investments had a book value of $398.4 million, which represents less than 3.5% of the Company’s total assets, before depreciation.  In addition, the Company has an active capital recycling program of selling retail assets deemed non-strategic. The Company also has an institutional management business with domestic and foreign institutional partners for the purpose of investing in neighborhood and community shopping centers.
 
 
4

 

The Company's investment objective is to increase cash flow, current income and, consequently, the value of its existing portfolio of properties and to seek continued growth through (i) the retail re-tenanting, renovation and expansion of its existing centers and (ii) the selective acquisition of established income-producing real estate properties and properties requiring significant re-tenanting and redevelopment, primarily in neighborhood and community shopping centers in geographic regions in which the Company presently operates.  The Company may consider investments in other real estate sectors and in geographic markets where it does not presently operate should suitable opportunities arise.

The Company's neighborhood and community shopping center properties are designed to attract local area customers and are typically anchored by a discount department store, a supermarket or a drugstore tenant offering day-to-day necessities rather than high-priced luxury items.  The Company may either purchase or lease income-producing properties in the future and may also participate with other entities in property ownership through partnerships, joint ventures or similar types of co-ownership.  Equity investments may be subject to existing mortgage financing and/or other indebtedness.  Financing or other indebtedness may be incurred simultaneously or subsequently in connection with such investments.  Any such financing or indebtedness would have priority over the Company’s equity interest in such property. The Company may make loans to joint ventures in which it may or may not participate.

The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its properties and a large tenant base.  As of December 31, 2012, no single neighborhood and community shopping center accounted for more than 1.7% of the Company's annualized base rental revenues, including the proportionate share of base rental revenues from properties in which the Company has less than a 100% economic interest, or more than 1.2% of the Company’s total shopping center GLA.  At December 31, 2012, the Company’s five largest tenants were The Home Depot, TJX Companies, Wal-Mart, Sears Holdings and Bed Bath & Beyond, which represented  3.0%, 2.9%, 2.6%, 2.0% and 1.7%, respectively, of the Company’s annualized base rental revenues, including the proportionate share of base rental revenues from properties in which the Company has less than a 100% economic interest.

As one of the original participants in the growth of the shopping center industry and one of the nation's largest owners and operators of neighborhood and community shopping centers, the Company has established close relationships with a large number of major national and regional retailers and maintains a broad network of industry contacts.  Management is associated with and/or actively participates in many shopping center and REIT industry organizations.  Notwithstanding these relationships, there are numerous regional and local commercial developers, real estate companies, financial institutions and other investors who compete with the Company for the acquisition of properties and other investment opportunities and in seeking tenants who will lease space in the Company’s properties.

Item 1A. Risk Factors

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

Loss of our tax status as a real estate investment trust could have significant adverse consequences to us and the value of our securities.

We have elected to be taxed as a REIT for federal income tax purposes under the Code.  We believe that we have operated so as to qualify as a REIT under the Code and that our current organization and method of operation comply with the rules and regulations promulgated under the Code to enable us to continue to qualify as a REIT.  However, there can be no assurance that we have qualified or will continue to qualify as a REIT for federal income tax purposes.

Qualification as a REIT involves the application of highly technical and complex Code provisions, for which there are only limited judicial and administrative interpretations.  The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT.  New legislation, regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT, the federal income tax consequences of such qualification or the desirability of an investment in a REIT relative to other investments.

In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains.  Furthermore, we own a direct or indirect interest in certain subsidiary REITs which elected to be taxed as REITs for federal income tax purposes under the Code. Provided that each subsidiary REIT qualifies as a REIT, our interest in such subsidiary REIT will be treated as a qualifying real estate asset for purposes of the REIT asset tests. To qualify as a REIT, the subsidiary REIT must independently satisfy all of the REIT qualification requirements. The failure of a subsidiary REIT to qualify as a REIT could have an adverse effect on our ability to comply with the REIT income and asset tests, and thus our ability to qualify as a REIT.
 
 
5

 

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

 
·
we would not be allowed a deduction for distributions to stockholders in computing our taxable income and we would be subject to federal income tax at regular corporate rates;
 
·
we could be subject to the federal alternative minimum tax and possibly increased state and local taxes;
 
·
unless we were entitled to relief under statutory provisions, we could not elect to be subject to tax as a REIT for four taxable years following the year during which we were disqualified; and
 
·
we would not be required to make distributions to stockholders.

As a result of all these factors, our failure to qualify as a REIT could also impair our ability to expand our business or raise capital and materially adversely affect the value of our securities.

To maintain our REIT status, we may be forced to borrow funds on a short-term basis during unfavorable market conditions.

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, excluding capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our net taxable income each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. While we have historically satisfied these distribution requirements by making cash distributions to our stockholders, a REIT is permitted to satisfy these requirements by making distributions of cash or other property, including, in limited circumstances, its own stock. Assuming we continue to satisfy these distributions requirements with cash, we may need to borrow funds to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments.

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

The economic performance and value of our properties is subject to all of the risks associated with owning and operating real estate, including:

 
·
changes in the national, regional and local economic climate;
 
·
local conditions, including an oversupply of, or a reduction in demand for, space in properties like those that we own;
 
·
trends toward smaller store sizes as retailers reduce inventory and new prototypes;
 
·
increasing use by customers of e-commerce and online store sites;
 
·
the attractiveness of our properties to tenants;
 
·
the ability of tenants to pay rent, particularly anchor tenants with leases in multiple locations;
 
·
tenants who may declare bankruptcy and/or close stores;
 
·
competition from other available properties to attract and retain tenants;
 
·
changes in market rental rates;
 
·
the need to periodically pay for costs to repair, renovate and re-let space;
 
·
changes in operating costs, including costs for maintenance, insurance and real estate taxes;
 
·
the fact that the expenses of owning and operating properties are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the properties; and
 
·
changes in laws and governmental regulations, including those governing usage, zoning, the environment and taxes.

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

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

 
·
weakness in the national, regional and local economies;
 
·
the adverse financial condition of some large retailing companies;
 
·
the impact of internet sales on the demand for retail space;
 
·
ongoing consolidation in the retail sector; and
 
·
the excess amount of retail space in a number of markets.
 
 
6

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

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

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

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

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

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

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

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

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

Newly acquired or re-developed properties may have characteristics or deficiencies currently unknown to us that affect their value or revenue potential.  It is also possible that the operating performance of these properties may decline under our management.  As we acquire additional properties, we will be subject to risks associated with managing new properties, including lease-up and tenant retention.  In addition, our ability to manage our growth effectively will require us to successfully integrate our new acquisitions into our existing management structure.  We may not succeed with this integration or effectively manage additional properties, particularly in secondary markets.  Also, newly acquired properties may not perform as expected.
 
 
7

 

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

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

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

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

Although our joint venture arrangements may allow us to share risks with our joint-venture partners, these arrangements may also decrease our ability to manage risk.  Joint ventures implicate additional risks, such as:

 
·
potentially inferior financial capacity, diverging business goals and strategies and the need for our venture partner’s continued cooperation;
 
·
our inability to take actions with respect to the joint venture activities that we believe are favorable to us if our joint venture partner does not agree;
 
·
our inability to control the legal entity that has title to the real estate associated with the joint venture;
 
·
our lenders may not be easily able to sell our joint venture assets and investments or may view them less favorably as collateral, which could negatively affect our liquidity and capital resources;
 
·
our joint venture partners can take actions that we may not be able to anticipate or prevent, which could result in negative impacts on our debt and equity; and
 
·
our joint venture partners’ business decisions or other actions or omissions may result in harm to our reputation or adversely affect the value of our investments.

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

We intend to sell many of our non-retail and non-strategic assets over the next several years and may not be able to recover our investments, which may result in significant losses to us.

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

We have significant international operations, which may be affected by economic, political and other risks associated with international operations, and this could adversely affect our business.

The risks we face in international business operations include, but are not limited to:

 
·
currency risks, including currency fluctuations;
 
·
unexpected changes in legislative and regulatory requirements;
 
·
potential adverse tax burdens;
 
·
burdens of complying with different accounting and permitting standards, labor laws and a wide variety of foreign laws;
 
·
obstacles to the repatriation of earnings and cash;
 
·
regional, national and local political uncertainty;
 
·
economic slowdown and/or downturn in foreign markets;
 
·
difficulties in staffing and managing international operations;
 
·
difficulty in administering and enforcing corporate policies, which may be different than the normal business practices of local cultures; and
 
·
reduced protection for intellectual property in some countries.
 
 
8

 
 
Each of these risks might impact our cash flow or impair our ability to borrow funds, which ultimately could adversely affect our business, financial condition, operating results and cash flows.

In order to fully develop our international operations, we must overcome cultural and language barriers and assimilate different business practices. In addition, we are required to create compensation programs, employment policies and other administrative programs that comply with laws of multiple countries. We also must communicate and monitor standards and directives in our international locations. Our failure to successfully manage our geographically diverse operations could impair our ability to react quickly to changing business and market conditions and to enforce compliance with standards and procedures. Since a meaningful portion of our revenues are generated internationally, we must devote substantial resources to managing our international operations.

Our future success will be influenced by our ability to anticipate and effectively manage these and other risks associated with our international operations. Any of these factors could, however, materially adversely affect our international operations and, consequently, our financial condition, results of operations and cash flows.

We cannot predict the impact of laws and regulations affecting our international operations nor the potential that we may face regulatory sanctions.

Our international operations include properties in Canada, Mexico, Chile, Brazil and Peru and are subject to a variety of United States and foreign laws and regulations, including the United States Foreign Corrupt Practices Act (“FCPA”). We have policies and procedures designed to promote compliance with the FCPA and other anti-corruption laws, but we cannot assure you that we will continue to be found to be operating in compliance with, or be able to detect violations of, any such laws or regulations. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject, the manner in which existing laws might be administered or interpreted, or the potential that we may face regulatory sanctions.

We cannot assure you that our employees will adhere to our Code of Conduct or any other of our policies, applicable anti-corruption laws, including the FCPA, or other legal requirements. Failure to comply or violations of any applicable policies, anti-corruption laws, or other legal requirements may subject us to legal, regulatory or other sanctions, including criminal and civil penalties and other remedial measures. We have received a subpoena from the Enforcement Division of the SEC in connection with the SEC’s investigation, In the Matter of Wal-Mart Stores, Inc. (FW-3678), that the SEC Staff is currently conducting with respect to possible violations of the FCPA. See “Item 3. Legal Proceedings,” below. The U.S. Department of Justice and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations, which they may seek to impose against corporations and individuals in appropriate circumstances including, but not limited to, injunctive relief, disgorgement, fines, penalties and modifications to business practices and compliance programs. Any of these remedial measures, if applicable to us, could have a material adverse impact on our business, results of operations, financial condition and liquidity.

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

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

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

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

 
·
we could have great difficulty acquiring or developing properties, which would materially adversely affect our business strategy;
 
·
our liquidity could be adversely affected;
 
·
we may be unable to repay or refinance our indebtedness;
 
·
we may need to make higher interest and principal payments or sell some of our assets on terms unfavorable to us to fund our indebtedness; or
 
·
we may need to issue additional capital stock, which could further dilute the ownership of our existing shareholders.
 
 
9

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

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

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

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

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

 
·
the extent of institutional investor interest in us;
 
·
the reputation of REITs generally and the reputation of REITs with portfolios similar to ours;
 
·
the attractiveness of the securities of REITs in comparison to securities issued by other entities, including securities issued by other real estate companies;
 
·
our financial condition and performance;
 
·
the market’s perception of our growth potential and potential future cash dividends;
 
·
an increase in market interest rates, which may lead prospective investors to demand a higher distribution rate in relation to the price paid for our shares; and
 
·
general economic and financial market conditions.

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

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

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

Our investments in marketable securities are subject to specific risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer, which may result in significant losses to us.  Marketable securities are generally unsecured and may also be subordinated to other obligations of the issuer. As a result, investments in marketable securities are subject to risks of:

 
·
limited liquidity in the secondary trading market;
 
·
substantial market price volatility, resulting from changes in prevailing interest rates;
 
·
subordination to the prior claims of banks and other senior lenders to the issuer;
 
·
the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations; and
 
·
the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic downturn.

These risks may adversely affect the value of outstanding marketable securities and the ability of the issuers to make distribution payments.

In the event of a default by a borrower, it may be necessary for us to foreclose our mortgage or engage in costly negotiations.  Delays in liquidating defaulted mortgage loans and repossessing and selling the underlying properties could reduce our investment returns.  Furthermore, in the event of default, the actual value of the property securing the mortgage may decrease. A decline in real estate values will adversely affect the value of our loans and the value of the mortgages securing our loans.
 
 
10

 

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

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

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

Item 1B. Unresolved Staff Comments

None

Item 2.  Properties

Real Estate Portfolio.  As of December 31, 2012, the Company had interests in 896 shopping center properties (the “Combined Shopping Center Portfolio”) aggregating 131.3 million square feet of gross leasable area (“GLA”) and 829 other property interests, primarily through the Company’s preferred equity investments, other real estate investments and non-retail properties, totaling  26.6 million square feet of GLA, for a grand total of 1,725 properties aggregating 157.9 million square feet of GLA, located in 44 states, Puerto Rico, Canada, Mexico and South America.  The Company’s portfolio includes noncontrolling interests. Neighborhood and community shopping centers comprise the primary focus of the Company's current portfolio.  As of December 31, 2012, the Company’s Combined Shopping Center Portfolio was 94.0% leased.

The Company's neighborhood and community shopping center properties, which are generally owned and operated through subsidiaries or joint ventures, had an average size of 138,518 square feet as of December 31, 2012.  The Company generally retains its shopping centers for long-term investment and consequently pursues a program of regular physical maintenance together with major renovations and refurbishing to preserve and increase the value of its properties. This includes renovating existing facades, installing uniform signage, resurfacing parking lots and enhancing parking lot lighting.  During 2012, the Company capitalized $7.8 million in connection with these property improvements and expensed to operations $25.4 million.

The Company's management believes its experience in the real estate industry and its relationships with numerous national and regional tenants gives it an advantage in an industry where ownership is fragmented among a large number of property owners.  The Company's neighborhood and community shopping centers are usually "anchored" by a national or regional discount department store, supermarket or drugstore.  As one of the original participants in the growth of the shopping center industry and one of the nation's largest owners and operators of shopping centers, the Company has established close relationships with a large number of major national and regional retailers.  Some of the major national and regional companies that are tenants in the Company's shopping center properties include The Home Depot, TJX Companies, Wal-Mart, Sears Holdings, Bed Bath & Beyond, Royal Ahold, Kohl’s, Best Buy, Petsmart and Costco.

A substantial portion of the Company's income consists of rent received under long-term leases.  Most of the leases provide for the payment of fixed-base rentals monthly in advance and for the payment by tenants of an allocable share of the real estate taxes, insurance, utilities and common area maintenance expenses incurred in operating the shopping centers.  Although many of the leases require the Company to make roof and structural repairs as needed, a number of tenant leases place that responsibility on the tenant, and the Company's standard small store lease provides for roof repairs to be reimbursed by the tenant as part of common area maintenance.  The Company's management places a strong emphasis on sound construction and safety at its properties.

Minimum base rental revenues and operating expense reimbursements accounted for 97% and other revenues, including percentage rents, accounted for 3% of the Company's total revenues from rental property for the year ended December 31, 2012.  The Company's management believes that the base rent per leased square foot for many of the Company's existing leases is generally lower than the prevailing market-rate base rents in the geographic regions where the Company operates, reflecting the potential for future growth.

Approximately 15.4% of the Company's leases of consolidated properties also contain provisions requiring the payment of additional rent calculated as a percentage of tenants’ gross sales above predetermined thresholds.  Percentage rents accounted for less than 1% of the Company's revenues from rental property for the year ended December 31, 2012.  Additionally, a majority of the Company’s leases have provisions requiring contractual rent increases. The Company’s leases may also include escalation clauses, which provide for increases based upon changes in the consumer price index or similar inflation indices.
 
 
11

 

As of December 31, 2012, the Company’s consolidated operating portfolio was 93.4% leased and was comprised of 58.9 million square feet of GLA, of which 55.1 million related to properties held in the U.S. and 3.8 million related to properties located in Latin America.  For the period January 1, 2012 to December 31, 2012, the Company increased the average base rent per leased square foot, which includes the impact of tenant concessions, in its U.S. consolidated portfolio of neighborhood and community shopping centers from $11.48 to $12.18, an increase of $0.70.  This increase primarily consists of (i) a $0.16 increase relating to acquisitions, as well as development properties placed into service, (ii) a $0.24 increase relating to new leases signed net of leases vacated and rent step-ups within the portfolio and (iii) a $0.30 increase relating to dispositions or the transfer of properties to various joint venture entities. For the period January 1, 2012 to December 31, 2012, the Company’s average base rent per leased square foot in its Mexican consolidated portfolio of neighborhood and community shopping centers decreased from $9.66 to $9.22, a decrease of $0.44. This decrease is primarily due to higher vacancy levels at certain development sites placed into service, which were included in occupancy in 2012, and new leases signed net of leases vacated and renewals within the portfolio.

The Company has a total of 5,027 leases in the U.S. consolidated operating portfolio, of which 682 leases, comprising 3.7 million square feet of GLA, are scheduled to expire within the next 12 months, assuming available extension options are not exercised.  These expiring leases have an average base rent per square foot of $13.99.  The average rent per square foot on new U.S. leases signed during 2012 was $16.41.  The Company will seek to obtain rents that are higher than these expiring leases, however, there are many variables and uncertainties which can significantly affect the leasing market at any time; as such, the Company cannot guarantee that future leases will continue to be signed for rents that are equal to or higher than current amounts.

Ground-Leased Properties.  The Company has interests in 47 consolidated shopping center properties and interests in 20 shopping center properties in unconsolidated joint ventures that are subject to long-term ground leases where a third party owns and has leased the underlying land to the Company (or an affiliated joint venture) to construct and/or operate a shopping center.  The Company or the joint venture pays rent for the use of the land and generally is responsible for all costs and expenses associated with the building and improvements.  At the end of these long-term leases, unless extended, the land together with all improvements revert to the landowner.

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

Item 3.  Legal Proceedings

The Company is not presently involved in any litigation nor, to its knowledge, is any litigation threatened against the Company or its subsidiaries that, in management's opinion, would result in any material adverse effect on the Company's ownership, management or operation of its properties taken as a whole, or which is not covered by the Company's liability insurance.

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

Item 4.  Mine Safety Disclosures

Not applicable

 
12

 

PART II

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

Market Information  There were no common stock offerings completed by the Company during the three-year period ended December 31, 2012.

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

   
Stock Price
       
Period
 
High
   
Low
   
Dividends
 
2011:
                 
First Quarter
  $ 19.50     $ 16.98     $ 0.18  
Second Quarter
  $ 19.80     $ 17.01     $ 0.18  
Third Quarter
  $ 20.31     $ 14.54     $ 0.18  
Fourth Quarter
  $ 17.93     $ 13.55     $ 0.19 (a)
                         
2012:
                       
First Quarter
  $ 19.90     $ 16.21     $ 0.19  
Second Quarter
  $ 19.96     $ 17.16     $ 0.19  
Third Quarter
  $ 21.16     $ 18.62     $ 0.19  
Fourth Quarter
  $ 20.95     $ 18.11     $ 0.21 (b)

 
(a)
Paid on January 17, 2012, to stockholders of record on January 4, 2012.
 
(b)
Paid on January 15, 2013, to stockholders of record on January 2, 2013.

Holders  The number of holders of record of the Company's common stock, par value $0.01 per share, was 2,815 as of January 31, 2013.

Dividends  Since the IPO, the Company has paid regular quarterly cash dividends to its stockholders. While the Company intends to continue paying regular quarterly cash dividends, future dividend declarations will be paid at the discretion of the Board of Directors and will depend on the actual cash flows of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. The Company’s Board of Directors will continue to evaluate the Company’s dividend policy on a quarterly basis as they monitor sources of capital and evaluate the impact of the economy on operating fundamentals.  The Company is required by the Code to distribute at least 90% of its REIT taxable income. The actual cash flow available to pay dividends will be affected by a number of factors, including the revenues received from rental properties, the operating expenses of the Company, the interest expense on its borrowings, the ability of lessees to meet their obligations to the Company, the ability to refinance near-term debt maturities and any unanticipated capital expenditures.

The Company has determined that the $0.76 dividend per common share paid during 2012 represented 72% ordinary income, a 23% return of capital and 5% capital gain to its stockholders.  The $0.72 dividend per common share paid during 2011 represented 71% ordinary income and a 29% return of capital to its stockholders.

In addition to its common stock offerings, the Company has capitalized the growth in its business through the issuance of unsecured fixed and floating-rate medium-term notes, underwritten bonds, mortgage debt and construction loans, convertible preferred stock and perpetual preferred stock.  Borrowings under the Company's revolving credit facility have also been an interim source of funds to both finance the purchase of properties and other investments and meet any short-term working capital requirements.  The various instruments governing the Company's issuance of its unsecured public debt, bank debt, mortgage debt and preferred stock impose certain restrictions on the Company with regard to dividends, voting, liquidation and other preferential rights available to the holders of such instruments.  See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Footnotes 13, 14 and 17 of the Notes to Consolidated Financial Statements included in this Form 10-K.

The Company does not believe that the preferential rights available to the holders of its Class H Preferred Stock, Class I Preferred Stock, Class J Preferred Stock and Class K Preferred Stock, the financial covenants contained in its public bond indentures, as amended, or its revolving credit agreements will have an adverse impact on the Company's ability to pay dividends in the normal course to its common stockholders or to distribute amounts necessary to maintain its qualification as a REIT.

The Company maintains a dividend reinvestment and direct stock purchase plan (the "Plan") pursuant to which common and preferred stockholders and other interested investors may elect to automatically reinvest their dividends to purchase shares of the Company’s common stock or, through optional cash payments, purchase shares of the Company’s common stock.  The Company may, from time-to-time, either (i) purchase shares of its common stock in the open market or (ii) issue new shares of its common stock for the purpose of fulfilling its obligations under the Plan.
 
 
13

 

Issuer Purchases of Equity Securities During the year ended December 31, 2012, the Company repurchased 1,635,823 shares in open-market transactions to offset new issuances of common shares in connection with the exercise of stock options.  The Company expended $30.9 million to repurchase these shares, of which $22.6 million was provided to the Company from stock options exercised.
 
Period
 
Total
Number of
Shares
Purchased
   
Average
Price
Paid per
Share ($)
   
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
   
Approximate
Dollar Value of
Shares that
May Yet Be
Purchased Under the
Plans or Programs
(in millions)
 
January 1, 2012 –-January 31, 2012
    20,233       18.20       -       -  
February 1, 2012 – February 29, 2012
    358,908       18.56       -       -  
March 1, 2012 – March 31, 2012
    1,005,934       18.91       -       -  
April 1, 2012 – April 30, 2012
    41,138       19.23       -       -  
May 1, 2012 - May 31, 2012
    61,211       19.20       -       -  
June 1, 2012 - June 30, 2012
    48,327       18.44       -       -  
July 1, 2012 - July 31, 2012
    -       -       -       -  
August 1, 2012 - August 31, 2012
    100,072       19.84       -       -  
September 1, 2012 - December 31, 2012
    -       -       -       -  
Total
    1,635,823       18.92       -     $ -  

Total Stockholder Return Performance The following performance chart compares, over the five years ended December 31, 2012, the cumulative total stockholder return on the Company’s common stock with the cumulative total return of the S&P 500 Index and the cumulative total return of the NAREIT Equity REIT Total Return Index (the "NAREIT Equity Index") prepared and published by the National Association of Real Estate Investment Trusts ("NAREIT").  Equity real estate investment trusts are defined as those which derive more than 75% of their income from equity investments in real estate assets.  The NAREIT Equity Index includes all tax qualified equity real estate investment trusts listed on the New York Stock Exchange, American Stock Exchange or the NASDAQ National Market System.  Stockholder return performance, presented quarterly for the five years ended December 31, 2012, is not necessarily indicative of future results.  All stockholder return performance assumes the reinvestment of dividends.  The information in this paragraph and the following performance chart are deemed to be furnished, not filed.


 
14

 

Item 6.  Selected Financial Data

The following table sets forth selected, historical, consolidated financial data for the Company and should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K.

The Company believes that the book value of its real estate assets, which reflects the historical costs of such real estate assets less accumulated depreciation, is not indicative of the current market value of its properties.  Historical operating results are not necessarily indicative of future operating performance.

   
Year ended December 31,  (2)
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
    (in thousands, except per share information)  
Operating Data:
                             
Revenues from rental property (1)
  $ 884,782     $ 825,737     $ 786,940     $ 703,348     $ 679,966  
Interest expense (3)
  $ 227,595     $ 223,526     $ 223,032     $ 205,490     $ 209,189  
Early extinguishment of debt charges
  $ -     $ -     $ 10,811     $ -     $ -  
Depreciation and amortization (3)
  $ 249,493     $ 231,712     $ 217,205     $ 209,055     $ 187,762  
Gain on sale of development properties
  $ -     $ 12,074     $ 2,080     $ 5,751     $ 36,565  
Total net gain on transfer or sale of operating properties (3)
  $ 4,299     $ 108     $ 2,377     $ 3,867     $ 1,782  
Benefit for income taxes (4)
  $ -     $ -     $ -     $ 16,400     $ 9,550  
Provision for income taxes (5)
  $ 8,116     $ 21,330     $ 3,208     $ -     $ -  
Impairment charges (6)
  $ 37,111     $ 13,077     $ 32,661     $ 135,688     $ 147,529  
Income from continuing operations (7)
  $ 203,806     $ 147,430     $ 109,004     $ (12,151 )   $ 194,237  
Income/(loss) per common share, from continuing operations:
                                       
Basic
  $ 0.27     $ 0.22     $ 0.14     $ (0.17 )   $ 0.57  
Diluted
  $ 0.27     $ 0.21     $ 0.14     $ (0.17 )   $ 0.57  
Weighted average number of shares of common stock:
                                       
Basic
    405,997       406,530       405,827       350,077       257,811  
Diluted
    406,689       407,669       406,201       350,077       258,843  
Cash dividends declared per common share
  $ 0.78     $ 0.73     $ 0.66     $ 0.72     $ 1.68  

   
December 31,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
(in thousands)
 
Balance Sheet Data:
                             
Real estate, before accumulated depreciation
  $ 8,947,287     $ 8,771,257     $ 8,592,760     $ 8,882,341     $ 7,818,916  
Total assets
  $ 9,740,807     $ 9,628,762     $ 9,833,875     $ 10,183,079     $ 9,397,147  
Total debt
  $ 4,195,317     $ 4,114,385     $ 4,058,987     $ 4,434,383     $ 4,556,646  
Total stockholders' equity
  $ 4,765,160     $ 4,686,386     $ 4,935,842     $ 4,852,973     $ 3,983,698  
                                         
Cash flow provided by operations
  $ 479,054     $ 448,613     $ 479,935     $ 403,582     $ 567,599  
Cash flow (used for)/provided by investing activities
  $ (51,000 )   $ (20,760 )   $ 37,904     $ (343,236 )   $ (781,350 )
Cash flow (used for)/provided by financing activities
  $ (399,061 )   $ (440,125 )   $ (514,743 )   $ (74,465 )   $ 262,429  

(1)
Does not include (i) revenues from rental property relating to unconsolidated joint ventures, (ii) revenues relating to the investment in retail store leases and (iii) revenues from properties included in discontinued operations.
(2)
All years have been adjusted to reflect the impact of operating properties sold during the years ended December 31, 2012, 2011, 2010, 2009 and 2008 and properties classified as held for sale as of December 31, 2012, which are reflected in discontinued operations in the Consolidated Statements of Income.
(3)
Does not include amounts reflected in discontinued operations.
(4)
Does not include amounts reflected in discontinued operations and extraordinary gain.  Amounts include income taxes related to gain on transfer/sale of operating properties.
(5)
Does not include amounts reflected in discontinued operations.  Amounts include income taxes related to gain on transfer/sale of operating properties.
(6)
Amounts exclude noncontrolling interests and amounts reflected in discontinued operations.
(7)
Amounts include gain on transfer/sale of operating properties, net of tax and net income attributable to noncontrolling interests.

 
15

 
 
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in this Form 10-K.  Historical results and percentage relationships set forth in the Consolidated Statements of Income contained in the Consolidated Financial Statements, including trends which might appear, should not be taken as indicative of future operations.

Executive Summary

Kimco Realty Corporation is one of the nation’s largest publicly-traded owners and operators of neighborhood and community shopping centers. As of December 31, 2012, the Company had interests in 896 shopping center properties (the “Combined Shopping Center Portfolio”), aggregating 131.3 million square feet of gross leasable area (“GLA”) and 829 other property interests, primarily through the Company’s preferred equity investments, other real estate investments and non-retail properties, totaling  26.6 million square feet of GLA, for a grand total of 1,725 properties aggregating 157.9 million square feet of GLA, located in 44 states, Puerto Rico, Canada, Mexico, Chile, Brazil and Peru.

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

The Company’s vision is to be the premier owner and operator of shopping centers with its core business operations focusing on owning and operating neighborhood and community shopping centers through investments in North America.  This vision has entailed a shift away from non-retail assets that the Company currently holds. These investments include non-retail preferred equity investments, marketable securities, mortgages on non-retail properties and several urban mixed-use properties.  The Company has been actively selling its non-retail assets and investments.  As of December 31, 2012, these investments had a book value of $398.4 million, which represents less than 3.5% of the Company’s total assets, before depreciation.  In addition, the Company has an active capital recycling program of selling retail assets deemed non-strategic.  If the Company accepts sales prices for these non-retail and/or non-strategic assets that are less than their net carrying values, the Company would be required to take impairment charges.  In order to execute the Company’s vision, the Company’s strategy is to continue to strengthen its balance sheet by pursuing deleveraging efforts over time, providing it the necessary flexibility to invest opportunistically and selectively, primarily focusing on neighborhood and community shopping centers.  In addition, the Company has an institutional management business with domestic and foreign institutional partners for the purpose of investing in neighborhood and community shopping centers.

The following highlights the Company’s significant transactions, events and results that occurred during the year ended December 31, 2012:

Portfolio Information:

 
·
Net income available to common shareholders increased by $63.0 million to $172.7 million for the year ended December 31, 2012, as compared to $109.7 million for the corresponding period in 2011.
 
·
Funds from operations (“FFO”) as adjusted increased from $1.20 for the year ended December 31, 2011 to $1.26 for the year ended December 31, 2012 (see additional disclosure on FFO beginning on page 31).
 
·
Same Property net operating income (“NOI”) increased by $18.8 million or 2.3% for the year ended December 31, 2012, as compared to the corresponding period in 2011; excluding the negative impact of foreign currency fluctuation, this increase would have been $23.6 million or 2.9% (see additional disclosure on NOI beginning on page 32).
 
·
Occupancy rose from 93.3% at December 31, 2011 to 94.0% at December 31, 2012 in the Combined Shopping Center Portfolio.
 
·
Occupancy rose from 93.1% at December 31, 2011 to 93.9% at December 31, 2012 for the U.S. combined shopping center portfolio.
 
·
Recognized U.S. cash-basis leasing spreads of 9.8%; new leases increased 27.8% and renewals/options increased 4.5%.
 
·
Executed 2,678 leases, renewals and options totaling over 10.0 million square feet in the Combined Shopping Center Portfolio.

Acquisition Activity:

 
·
Acquired 24 shopping center properties, five outparcels and 69 net leased parcels comprising an aggregate 3.1 million square feet of GLA, for an aggregate purchase price of $634.5 million including the assumption of $179.2 million of non-recourse mortgage debt encumbering seven of the properties.

Disposition Activity:

 
·
During 2012, the Company monetized non-retail assets of $83.0 million and reduced its non-retail book values by $114.1 million to $398.4 million.
 
·
Included in the monetization above are the disposition of four properties and one land parcel, in separate transactions, for an aggregate sales price of  $40.3 million.  These transactions resulted in an aggregate net gain of $4.8 million, before income taxes.
 
·
Also included in the monetization above is (i) the receipt of $24.8 million from payment of mortgage receivables, (ii) the Company’s receipt of  $14.6 million in distributions from two preferred equity investments and one joint venture investment and (iii) $10.4 million in distributions from two cost method investments.
 
·
Additionally, during 2012, the Company disposed of 59 operating properties, four land parcels and four outparcels, in separate transactions, for an aggregate sales price of $443.0 million. These transactions resulted in an aggregate gain of $91.5 million and impairment charges of $22.5 million, before income taxes and noncontrolling interests.
 
 
16

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

 
·
During 2012, the Company issued 16,000,000 depositary shares of 6.00% Class I Cumulative Redeemable Preferred Stock, 9,000,000 depositary shares of 5.50% Class J Cumulative Redeemable Preferred Stock and 7,000,000 depositary shares of 5.625%  Class K Cumulative Redeemable Preferred Stock resulting in aggregate proceeds after expenses of $774.1 million to the Company.
 
·
Additionally, during 2012, the Company redeemed all of its outstanding 18,400,000 depositary shares of the Company’s 7.75% Class G Cumulative Redeemable Preferred Stock and all of its outstanding 7,000,000 depositary shares of the Company’s 6.65% Class F Cumulative Redeemable Preferred Stock resulting in aggregate payments of $635.0 million.
 
·
Also during 2012, the Company (i) repaid the $17.0 million outstanding on its 5.98% medium-term notes, which matured in July 2012 and (ii) repaid the $198.9 million outstanding on its 6.00% senior unsecured note, which matured in November 2012.
 
·
The Company also obtained a new $400.0 million unsecured term loan with a consortium of banks, which accrues interest at LIBOR plus 105 basis points.  The term loan is scheduled to mature in April 2014, with three additional one-year options to extend the maturity date, at the Company’s discretion, to April 17, 2017.  

Impairments:

 
·
Real estate market conditions, including capitalization rates, discount rates and vacancies had continued to improve throughout 2012; however, declines in certain real estate markets continued to have a negative effect on transactional activity as it related to dispositions of select real estate assets.  This factor, in addition to the Company’s efforts to market certain assets and management’s assessment as to the likelihood and timing of such potential transactions caused the Company to recognize impairment charges of $59.6 million (including $22.5 million which is classified within discontinued operations), before income tax benefit and noncontrolling interests.  Potential future adverse market and economic conditions could cause the Company to recognize additional impairments in the future (see Footnote 2 of the Notes to Consolidated Financial Statements included in this annual report on Form 10-K).
 
·
In addition to the impairment charges above, various unconsolidated joint ventures in which the Company holds noncontrolling interests recognized impairment charges relating to certain properties during 2012.  The Company’s share of these charges was  $11.1 million, before income taxes (see Footnotes 2 and 8 of the Notes to Consolidated Financial Statements included in this annual report on Form 10-K).

Critical Accounting Policies

The Consolidated Financial Statements of the Company include the accounts of the Company, its wholly-owned subsidiaries and all entities in which the Company has a controlling interest, including where the Company has been determined to be a primary beneficiary of a variable interest entity in accordance with the consolidation guidance of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).  The Company applies these provisions to each of its joint venture investments to determine whether the cost, equity or consolidation method of accounting is appropriate.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and related notes.  In preparing these financial statements, management has made its best estimates and assumptions that affect the reported amounts of assets and liabilities.  These estimates are based on, but not limited to, historical results, industry standards and current economic conditions, giving due consideration to materiality. The most significant assumptions and estimates relate to revenue recognition and the recoverability of trade accounts receivable, depreciable lives, valuation of real estate and intangible assets and liabilities, valuation of joint venture investments and other investments, realizability of deferred tax assets and uncertain tax positions.  Application of these assumptions requires the exercise of judgment as to future uncertainties, and, as a result, actual results could materially differ from these estimates.

The Company is required to make subjective assessments as to whether there are impairments in the value of its real estate properties, investments in joint ventures, marketable securities and other investments.  The Company’s reported net earnings are directly affected by management’s estimate of impairments and/or valuation allowances.
 
 
17

 

Revenue Recognition and Accounts Receivable

Base rental revenues from rental property are recognized on a straight-line basis over the terms of the related leases.  Certain of these leases also provide for percentage rents based upon the level of sales achieved by the lessee.  These percentage rents are recorded once the required sales level is achieved.  Operating expense reimbursements are recognized as earned.  Rental income may also include payments received in connection with lease termination agreements.  In addition, leases typically provide for reimbursement to the Company of common area maintenance, real estate taxes and other operating expenses.

The Company makes estimates of the uncollectability of its accounts receivable related to base rents, straight-line rent, expense reimbursements and other revenues.  The Company analyzes accounts receivable and historical bad debt levels, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts.  In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims.  The Company’s reported net earnings are directly affected by management’s estimate of the collectability of accounts receivable.

Real Estate

The Company’s investments in real estate properties are stated at cost, less accumulated depreciation and amortization.  Expenditures for maintenance and repairs are charged to operations as incurred.  Significant renovations and replacements, which improve and extend the life of the asset, are capitalized.

Upon acquisition of real estate operating properties, the Company estimates the fair value of acquired tangible assets (consisting of land, building, building improvements and tenant improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), assumed debt and redeemable units issued at the date of acquisition, based on evaluation of information and estimates available at that date. Based on these estimates, the Company allocates the estimated fair value to the applicable assets and liabilities. Fair value is determined based on an exit price approach, which contemplates the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  If, up to one year from the acquisition date, information regarding fair value of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments are made to the purchase price allocation on a retrospective basis.  The Company expenses transaction costs associated with business combinations in the period incurred.
 
Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the assets, as follows:

Buildings and building improvements
15 to 50 years
Fixtures, leasehold and tenant improvements
     (including certain identified intangible assets)
Terms of leases or useful
lives, whichever is shorter

The Company is required to make subjective assessments as to the useful lives of its properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to those properties.  These assessments have a direct impact on the Company’s net earnings.

On a continuous basis, management assesses whether there are any indicators, including property operating performance and general market conditions, that the value of the real estate properties (including any related amortizable intangible assets or liabilities) may be impaired.  A property value is considered impaired only if management’s estimate of current and projected operating cash flows (undiscounted and unleveraged) of the property over its remaining useful life is less than the net carrying value of the property.  Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors.  To the extent impairment has occurred, the carrying value of the property would be adjusted to reflect the estimated fair value of the property.

When a real estate asset is identified by management as held-for-sale, the Company ceases depreciation of the asset and estimates the sales price of such asset net of selling costs.  If, in management’s opinion, the net sales price of the asset is less than the net book value of such asset, an adjustment to the carrying value would be recorded to reflect the estimated fair value of the property.

Investments in Unconsolidated Joint Ventures

The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting as the Company exercises significant influence, but does not control, these entities.  These investments are recorded initially at cost and are subsequently adjusted for cash contributions and distributions.  Earnings for each investment are recognized in accordance with each respective investment agreement and, where applicable, are based upon an allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.
 
 
18

 

The Company’s joint ventures and other real estate investments primarily consist of co-investments with institutional and other joint venture partners in neighborhood and community shopping center properties, consistent with its core business.  These joint ventures typically obtain non-recourse third-party financing on their property investments, thus contractually limiting the Company’s exposure to losses to the amount of its equity investment, and, due to the lender’s exposure to losses, a lender typically will require a minimum level of equity in order to mitigate its risk.  The Company’s exposure to losses associated with its unconsolidated joint ventures is primarily limited to its carrying value in these investments.  The Company, on a limited selective basis, obtained unsecured financing for certain joint ventures.  These unsecured financings are guaranteed by the Company with guarantees from the joint venture partners for their proportionate amounts of any guaranty payment the Company is obligated to make.

On a continuous basis, management assesses whether there are any indicators, including property operating performance and general market conditions, that the value of the Company’s investments in unconsolidated joint ventures may be impaired. An investment’s value is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment and such difference is deemed to be other-than-temporary.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.

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

Realizability of Deferred Tax Assets and Uncertain Tax Positions

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

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

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

The Company believes, when evaluating deferred tax assets within its taxable REIT subsidiaries, special consideration should be given to the unique relationship between the Company as a REIT and its taxable REIT subsidiaries.  This relationship exists primarily to protect the REIT’s qualification under the Code by permitting, within certain limits, the REIT to engage in certain business activities in which the REIT cannot directly participate.  As such, the REIT controls which and when investments are held in, or distributed or sold from, its taxable REIT subsidiaries.  This relationship distinguishes a REIT and taxable REIT subsidiary from an enterprise that operates as a single, consolidated corporate taxpayer.

The Company primarily utilizes a twenty year projection of pre-tax book income and taxable income as positive evidence to overcome any negative evidence. Although items of income and expense utilized in the projection are objectively verifiable there is also significant judgment used in determining the duration and timing of events that would impact the projection. Based upon the Company’s analysis of negative and positive evidence the Company will make a determination of the need for a valuation allowance against its deferred tax assets.  If future income projections do not occur as forecasted, the Company will reevaluate the need for a valuation allowance.  In addition, the Company can employ additional strategies to realize its deferred tax assets, including transferring a greater portion of its property management business to the TRS, sale of certain built-in gain assets, and reducing intercompany debt.

The Company recognizes and measures benefits for uncertain tax positions, which requires significant judgment from management.  Although the Company believes it has adequately reserved for any uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different.  The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate.  Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in the Company’s income tax expense in the period in which a change is made, which could have a material impact on operating results (see Footnote 22 of the Notes to Consolidated Financial Statements included in this Form 10-K).
 
 
19

 

Results of Operations

Comparison 2012 to 2011

   
2012
   
2011
   
Increase/
(Decrease)
   
% change
 
   
(amounts in millions)
       
                         
Revenues from rental property (1)
  $ 884.8     $ 825.7     $ 59.1       7.2 %
Rental property expenses: (2)
                               
Rent
  $ 12.8     $ 13.9     $ (1.1 )     (7.9 )%
Real estate taxes
    115.3       108.8       6.5       6.0 %
Operating and maintenance
    118.8       114.1       4.7       4.1 %
    $ 246.9     $ 236.8     $ 10.1       4.3 %
Depreciation and amortization (3)
  $ 249.5     $ 231.7     $ 17.8       7.7 %

(1)
Revenues from rental property increased primarily from the combined effect of (i) the acquisition of operating properties during 2012 and 2011, providing incremental revenues for the year ended December 31, 2012 of $50.9 million, as compared to the corresponding period in 2011, (ii) an increase in revenues relating to the Company’s Latin American portfolio of $8.0 and (iii) the completion of certain development and redevelopment projects, tenant buyouts and overall growth in the current portfolio, providing incremental revenues of  $0.9 million, for the year ended December 31, 2012, as compared to the corresponding period in 2011, partially offset by (iv) a decrease in revenues of  $0.7 million for the year ended December 31, 2012, as compared to the corresponding period in 2011, primarily resulting from the partial sale of certain properties during 2012 and 2011.

(2)
Rental property expenses include (i) rent expense relating to ground lease payments for which the Company is the lessee; (ii) real estate tax expense for consolidated properties for which the Company has a controlling ownership interest and (iii) operating and maintenance expense, which consists of property related costs including repairs and maintenance costs, roof repair, landscaping, parking lot repair, snow removal, utilities, property insurance costs, security and various other property related expenses. Rental property expenses increased for the year ended December 31, 2012, as compared to the corresponding period in 2011, primarily due to (i) an increase in real estate taxes of $6.5 million, primarily due to acquisitions of properties during 2012 and 2011, (ii) an increase in repairs and maintenance costs of $5.5 million, primarily due to acquisitions of properties during 2012 and 2011  (iii) an increase in insurance premiums and claims of $1.7 million and (iv) an increase in utilities of $1.8 million, partially offset by (v) a decrease in snow removal costs of $5.2 million and (vi) a decrease in rent expense of $1.1 million.

(3)
Depreciation and amortization increased for the year ended December 31, 2012, as compared to the corresponding period in 2011, primarily due to (i) operating property acquisitions during 2012 and 2011, (ii) the placement of certain development properties into service and (iii) tenant vacancies, partially offset by (iv) certain operating property dispositions during 2012 and 2011.

Management and other fee income increased $2.2 million to $37.5 million for the year ended December 31, 2012, as compared to $35.3 million for the corresponding period in 2011. This increase is due to an increase in property management fees of $0.8 million, primarily due to the acquisitions of properties within the Company’s joint venture portfolio during 2012 and 2011, and an increase in transaction related fees of $1.4 million recognized during 2012, as compared to 2011.
 
General and administrative costs include employee-related expenses (salaries, bonuses, equity awards, benefits, severance costs and payroll taxes), professional fees, office rent, travel expense, and other company-specific expenses. General and administrative expenses increased $5.6 million to $124.5 million for the year ended December 31, 2012, as compared to $118.9 million for the corresponding period in 2011.  This increase is primarily a result of (i) an increase of $2.6 million in severance costs related to the departure of an executive officer in January 2012, (ii)  an increase in professional and consulting fees of $2.1 million, primarily due to increased transactional activity, and (iii) an increase in other personnel related costs during 2012, as compared to the corresponding period in 2011.

During year ended December 31, 2012, the Company recognized impairment charges of $59.6 million ($22.5 million of which is included in discontinued operations) before income tax benefit and noncontrolling interest.  During the year ended December 31, 2011, the Company recognized impairment charges of $32.8 million ($19.7 million of which is included in discontinued operations) before income tax benefit and noncontrolling interest.  These impairments were primarily calculated based on the usage of estimated sales prices and comparable sales information as inputs. The Company determined that its valuation in these assets was classified within Level 3 of the FASB’s fair value hierarchy. These impairment charges resulted from the Company’s efforts to market certain assets and management’s assessment as to the likelihood and timing of such potential transactions.

Interest, dividends and other investment income decreased $14.4 million to $2.2 million for the year ended December 31, 2012, as compared to $16.6 million for the corresponding period in 2011. This decrease is primarily due to (i) the Company’s sale of its investment in Valad notes during 2011, resulting in a decrease in interest income of $6.2 million, (ii) a decrease in other investment income of $6.4 million relating to the receipt of cash distributions during 2011 in excess of the Company’s carrying value of a cost method investment, (iii) a reduction in interest income of $0.5 million due to repayments of notes in 2012 and 2011 and (iv) a decrease in gains on sales of securities of $0.5 million.
 
 
20

 

Other expense, net increased $3.3 million to $8.0 million for the year ended December 31, 2012, as compared to $4.7 million for the corresponding period in 2011.  This change is primarily due to (i) an increase in acquisition related costs of $3.1 million relating to an increase in transactional activity, (ii) a decrease in gains on foreign currency of $2.4 million relating to changes in foreign currency exchange rates, partially offset by (iii) an increase of $2.5 million in gains on land sales during 2012, as compared to the corresponding period in 2011.

Interest expense increased $4.1 million to $227.6 million for the year ended December 31, 2012, as compared to $223.5 million for the corresponding period in 2011.  This increase is primarily related to a decrease in capitalization of interest due to the placement of certain development and redevelopment properties into service during 2012, as compared to the corresponding period in 2011.

During 2011, the Company sold a merchant building property to an unconsolidated joint venture in which the Company has a noncontrolling interest for a sales price of  $37.6 million resulting in a pretax gain of  $12.1 million after a deferral of  $2.1 million due to the Company’s continued involvement in the property.

Provision for income taxes, net decreased by  $17.4 million to $3.9 million for the year ended December 31, 2012, as compared to $21.3 million for the corresponding period in 2011. This decrease is primarily due to (i) an increase in income tax benefit of  $10.2 million related to impairments taken during the year ended December 31, 2012, as compared to the corresponding period in 2011, (ii) a decrease in the income tax provision expense of  $5.7 million in connection with a gain on sale of a development property during 2011, (iii) a decrease in tax provision of $2.8 million resulting from the receipt of a cash distribution during 2011 in excess of the Company’s carrying value of a cost method investment and (iv) a decrease in tax provision of $2.7 million resulting from a decrease in equity in income recognized in connection with the Albertson’s investment during 2012, as compared to 2011, partially offset by (v) an increase in foreign withholding taxes of  $5.4 million primarily resulting from an unrealized foreign exchange gains recognized for Mexican tax purposes on U.S. denominated mortgage debt within the Company’s Latin American property portfolio.
 
Equity in income of joint ventures, net increased $49.4 million to $112.9 million for the year ended December 31, 2012, as compared to $63.5 million for the corresponding period in 2011.  This increase is primarily the result of (i) an increase in gains on sale and promote income recognized of $12.6 million, (ii) the recognition of $7.5 million in income on the sale of certain air rights at a property within one of the Company’s joint venture investments in Canada, (iii) an increase in equity in income of $5.9 million from the Company’s InTown Suites investment primarily resulting from increased operating profitability, (iv) the recognition of $2.1 million in income resulting from cash distributions received in excess of the Company’s carrying value of its investment in an unconsolidated joint venture, (v) a decrease in impairment charges of $3.2 million resulting from fewer impairment charges recognized against certain joint venture properties during the year ended December 31, 2012, as compared to the corresponding period in 2011, (vi) a decrease in equity in loss of $4.0 million resulting from the disposition of a portfolio of properties during 2011, (vii) an increase in equity in income of $6.0 million from the Company’s joint venture investments in Canada (viii) an increase in equity in income of $3.7 million from the Company’s joint venture investments in Mexico and (ix) incremental earnings due to increased profitability from properties within the Company’s joint venture program.

During 2012, the Company acquired four properties from joint ventures in which the Company had noncontrolling interests.  The Company recorded an aggregate gain on change in control of interests of $15.6 million related to the fair value adjustment associated with its original ownership.  During 2011, the Company acquired one property from a joint venture in which the Company had a noncontrolling interest.  The Company recorded an aggregate gain on change in control of interests of $0.6 million related to the fair value adjustment associated with its original ownership.

During 2012, the Company disposed of 62 operating properties and two outparcels, in separate transactions, for an aggregate sales price of $418.9 million. These transactions resulted in an aggregate gain of $85.9 million and impairment charges of $22.5 million, before income taxes, which is included in Discontinued operations in the Company’s Consolidated Statements of Income.

During 2011, the Company disposed of 27 operating properties, one development property and one outparcel, in separate transactions, for an aggregate sales price of  $124.9 million. These transactions resulted in an aggregate gain of  $17.3 million and aggregate impairment charges of $16.9 million, before income taxes, which is included in Discontinued operations in the Company’s Consolidated Statements of Income.

During 2011, a consolidated joint venture in which the Company had a preferred equity investment disposed of a property for a sales price of  $6.1 million.  As a result of this capital transaction, the Company received  $1.4 million of profit participation, before noncontrolling interest of  $0.1 million.  This profit participation has been recorded as Income from other real estate investments and is reflected in Income from discontinued operating properties in the Company’s Consolidated Statements of Income.

During 2012, the Company sold a previously consolidated operating property to a newly formed unconsolidated joint venture in which the Company has a 20% noncontrolling interest for a sales price of $55.5 million.  This transaction resulted in a pre-tax gain of $10.0 million, of which the Company deferred $2.0 million due to its continued involvement.  This gain has been recorded as Gain on sale of operating properties, net of tax in the Company’s Consolidated Statements of Income.
 
 
21

 

Net income attributable to the Company increased $97.0 million to $266.1 million for the year ended December 31, 2012, as compared to $169.1 million for the corresponding period in 2011.  On a diluted per share basis, net income attributable to the Company was $0.42 for 2012, as compared to net income of $0.27 for 2011.  These increases are primarily attributable to (i) additional incremental earnings due to increased profitability from the Company’s operating properties and the acquisition of operating properties during 2012 and 2011, (ii) an increase in gains on disposition of operating properties and change in control of interests, (iii) an increase in equity in income of joint ventures, net primarily due to gains on sales of operating properties sold within various joint venture portfolios during 2012 and (iv) a decrease in provision for income taxes, partially offset by (v) an increase in impairment charges recognized during the year ended December 31, 2012, as compared to the corresponding period in 2011, (vi) a decrease in interest, dividends and other investment income resulting primarily from the sale of certain marketable securities during 2011 and (vii) a decrease in gain on sale of development properties recognized during 2012, as compared to 2011.  The 2012 diluted per share results were decreased by a reduction in net income available to common shareholders of $21.7 million resulting from the deduction of original issuance costs associated with the redemption of the Company’s 6.65% Class F Cumulative Redeemable Preferred Stock and 7.75% Class G Cumulative Redeemable Preferred Stock.

Comparison 2011 to 2010

   
2011
   
2010
   
Increase
   
% change
 
   
(amounts in millions)
       
                         
Revenues from rental property (1)
  $ 825.7     $ 786.9     $ 38.8       4.9 %
Rental property expenses: (2)
                               
Rent
  $ 13.9     $ 13.7     $ 0.2       1.5 %
Real estate taxes
    108.8       105.3       3.5       3.3 %
Operating and maintenance
    114.1       108.4       5.7       5.3 %
    $ 236.8     $ 227.4     $ 9.4       4.1 %
Depreciation and amortization (3)
  $ 231.7     $ 217.2     $ 14.5       6.7 %

(1)
Revenues from rental property increased primarily from the combined effect of (i) the acquisition of operating properties during 2011 and 2010, providing incremental revenues for the year ended December 31, 2011 of $35.7 million, as compared to the corresponding period in 2010 and (ii) the completion of certain development and redevelopment projects, tenant buyouts and overall growth in the current portfolio, providing incremental revenues of  $4.2 million, for the year ended December 31, 2011, as compared to the corresponding period in 2010, which was partially offset by (iii) a decrease in revenues of  $1.1 million for the year ended December 31, 2011, as compared to the corresponding period in 2010, primarily resulting from the partial sale of certain properties during 2011 and 2010.

(2)
Rental property expenses include (i) rent expense relating to ground lease payments for which the Company is the lessee; (ii) real estate tax expense for consolidated properties for which the Company has a controlling ownership interest and (iii) operating and maintenance expense, which consists of property related costs including repairs and maintenance costs, roof repair, landscaping, parking lot repair, snow removal, utilities, property insurance costs, security and various other property related expenses.  Rental property expenses increased primarily due to (i) operating property acquisitions during 2011 and 2010, and (ii) the placement of certain development properties into service, which resulted in lower capitalization of carrying costs.

(3)
Depreciation and amortization increased primarily due to (i) operating property acquisitions during 2011 and 2010, (ii) the placement of certain development properties into service and (iii) tenant vacancies.

Management and other fee income decreased $4.6 million to $35.3 million for the year ended December 31, 2011, as compared to $39.9 million for the corresponding period in 2010. This decrease is primarily due to a decrease in property management fees of $2.4 million recognized during 2011, as compared to 2010, primarily due to the disposition of properties during 2011 and 2010 and a decrease in transaction related fees of $2.2 million recognized during 2011, as compared to 2010.

General and administrative costs include employee-related expenses (salaries, bonuses, equity awards, benefits, severance costs and payroll taxes), professional fees, office rent, travel expense, and other company-specific expenses.  General and administrative expenses increased $9.9 million to $118.9 million for the year ended December 31, 2011, as compared to $109.0 million for the corresponding period in 2010.  This change is primarily a result of an increase in equity awards expense related to grants issued during 2011 and 2010 and an increase in other personnel related costs during 2011, as compared to the corresponding periods in 2010.

During 2011, the Company recognized aggregate impairment charges of $32.2 million ($19.7 million of which is included in discontinued operations), before income taxes and noncontrolling interest, relating to adjustments to property carrying values, investments in other real estate investments, investment in real estate joint ventures and other investments.  The Company’s estimated fair values relating to these impairment assessments were based upon their respective estimated sales prices.  Based on these inputs, the Company determined that its valuation in these investments was classified within Level 3 of the FASB fair value hierarchy. These impairment charges resulted from the Company’s efforts to market certain assets and management’s assessment as to the likelihood and timing of such potential transactions.  Additionally, during 2011, the Company recorded impairment charges of $0.6 million due to the decline in value of certain marketable securities that were deemed to be other-than-temporary.

 
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During 2010, the Company recognized impairment charges of  $34.5 million ($6.5 million of which is included in discontinued operations), before income taxes and noncontrolling interest, relating to adjustments to property carrying values, real estate under development, investments in other real estate investments and other investments.  The Company’s estimated fair values relating to these impairment assessments were based upon estimated sales prices and discounted cash flow models that included all estimated cash inflows and outflows over a specified holding period.  These cash flows are comprised of unobservable inputs which include contractual rental revenues and forecasted rental revenues and expenses based upon market conditions and expectations for growth. Capitalization rates and discount rates utilized in these models were based upon observable rates that the Company believes to be within a reasonable range of current market rates for the respective properties.  Based on these inputs, the Company determined that its valuation in these investments was classified within Level 3 of the FASB fair value hierarchy.   Additionally, during 2010, the Company recorded impairment charges of $4.6 million due to the decline in value of certain marketable securities that were deemed to be other-than-temporary.

Mortgage financing income decreased $2.1 million to $7.3 million for the year ended December 31, 2011, as compared to $9.4 million for the corresponding period in 2010. This decrease is primarily due to a decrease in interest income resulting from the repayment of certain mortgage receivables during 2011 and 2010.

Interest, dividends and other investment income decreased  $4.6 million to $16.6 million for the year ended December 31, 2011, as compared to $21.2 million for the corresponding period in 2010. This decrease is primarily due to the sale of Valad notes resulting in a decrease in interest income of  $13.5 million, partially offset by (i) an increase in bank interest income of  $1.1 million during 2011, as compared to the corresponding period in 2010, primarily resulting from the change in cash balances during 2011 and (ii) an income distribution of  $7.4 million from a cost method investment during 2011.

During the year ended December 31, 2010, the Company incurred early extinguishment of debt charges aggregating  $10.8 million in connection with the optional make-whole provisions of notes that were repaid prior to maturity and prepayment penalties on five mortgages that the Company paid prior to their maturity.

During 2011, the Company sold a merchant building property to an unconsolidated joint venture in which the Company has a noncontrolling interest for a sales price of  $37.6 million resulting in a pretax gain of  $12.1 million after a deferral of  $2.1 million due to the Company’s continued involvement in the property.

During 2010, the Company disposed of a land parcel for a sales price of  $0.8 million resulting in a gain of  $0.4 million.  Additionally, the Company recognized  $1.7 million in income on previously sold development properties during the year ended December 31, 2010.

 Provision for income taxes, net increased by $18.1 million to $21.3 million for the year ended December 31, 2011, as compared to $3.2 million for the corresponding period in 2010. This change is primarily due to (i) a decrease in income tax benefit of  $10.3 million related to fewer impairments taken during the year ended December 31, 2011, as compared to the corresponding period in 2010, (ii) an increase in the income tax provision expense of  $4.8 million in connection with gains on sale of development properties during 2011, as compared to 2010, (iii) a decrease in tax benefit of  $4.9 million as a result of reduced interest expense for the Company’s taxable REIT subsidiaries, (iv) a tax provision of  $2.7 million resulting from the receipt of a cash distribution in excess of the Company’s carrying value of a cost method investment during 2011 and (v) a tax provision of  $1.4 million resulting from incremental earnings due to increased profitability from properties within the Company’s taxable REIT subsidiaries, partially offset by (vi) a decrease in foreign taxes of  $6.8 million primarily resulting from an unrealized foreign exchange loss recognized for Mexican tax purposes on U.S. denominated mortgage debt within the Company’s Latin American property portfolio.

Equity in income of joint ventures, net increased $28.9 million to $63.5 million for the year ended December 31, 2011, as compared to $34.6 million for the corresponding period in 2010.  This increase is primarily the result of (i) a decrease in impairment charges of  $10.0 million resulting from fewer impairment charges recognized against certain joint venture properties during the year ended December 31, 2011, as compared to the corresponding period in 2010, (ii) an increase in equity in income of  $4.2 million from the Company’s InTown Suites investment primarily resulting from increased operating profitability, (iii) an increase in equity in income of  $2.3 million from the Company’s joint venture investments in Canada primarily resulting from the Company increasing its noncontrolling ownership interest in certain Canadian portfolios, (iv) an increase in equity in income of  $2.1 million from the Company’s joint venture investments in Latin America primarily resulting from lease-up activities at properties that were placed into service, (v) a decrease of  $7.2 million in equity in loss from a joint venture in which the Company no longer has an equity basis and is therefore no longer required to record equity losses, (vi) an increase in gains on sales of  $4.4 million for 2011, as compared to 2010 and (vii) incremental earnings due to increased profitability from properties within the Company’s joint venture program, partially offset by (viii) the recognition of  $8.0 million in income resulting from cash distributions received in excess of the Company’s carrying value of its investment in an unconsolidated limited liability partnership during the year ended December 31, 2010.

Equity in income from other real estate investments, net decreased $9.0 million to $51.8 million for the year ended December 31, 2011, as compared to $60.8 million for the corresponding period in 2010.  This decrease is primarily due to a decrease of  $7.2 million in equity in income from the Albertson’s joint venture resulting from lower cash distributions received in excess of the Company’s investment during 2011, as compared to the corresponding period during 2010 and a decrease of  $2.7 million in equity in earnings including profit participation earned from the Company’s Preferred Equity Program during 2011, as compared to the corresponding period in 2010.
 
 
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During 2011, the Company disposed of 27 operating properties, one development property and one outparcel, in separate transactions, for an aggregate sales price of  $124.9 million. These transactions, which are included in Discontinued Operations, resulted in an aggregate gain of $17.3 million and aggregate impairment charges of $16.9 million, before income taxes.

Additionally, during 2011, a consolidated joint venture in which the Company had a preferred equity investment disposed of a property for a sales price of $6.1 million.  As a result of this capital transaction, the Company received $1.4 million of profit participation, before noncontrolling interest of  $0.1 million.  This profit participation has been recorded as Income from other real estate investments and is reflected in Income from discontinued operating properties in the Company’s Consolidated Statements of Income.

During 2010, the Company (i) sold seven operating properties, which were previously consolidated, to two new joint ventures in which the Company holds noncontrolling equity interests for an aggregate sales price of  $438.1 million including the assignment of $159.9 million of non-recourse mortgage debt encumbering three of the properties and (ii) disposed of, in separate transactions, seven operating properties for an aggregate sales price of $100.5 million including the assignment of $81.0 million of non-recourse mortgage debt encumbering one of the properties.  These transactions resulted in aggregate gains of  $4.4 million and aggregate losses/impairments of  $5.0 million.

Additionally, during 2010, the Company disposed of (i) three properties, in separate transactions, for an aggregate sales price of  $23.8 million and (ii) five properties from a consolidated joint venture in which the Company had a preferred equity investment for a sales price of  $40.8 million.  These transactions resulted in an aggregate profit participation of  $20.8 million, before income tax of  $1.0 million and noncontrolling interest of  $4.9 million.  This profit participation has been recorded as Income from other real estate investments and is reflected in Income from discontinued operating properties, net of tax in the Company’s Consolidated Statements of Income.
 
Net income attributable to the Company increased  $26.2 million to $169.1 million for the year ended December 31, 2011, as compared to $142.9 million for the corresponding period in 2010.  On a diluted per share basis, net income attributable to the Company was $0.27 for 2011, as compared to net income of $0.22 for 2010.  These increases are primarily attributable to (i) additional incremental earnings due to increased profitability from the Company’s operating properties and the acquisition of operating properties during 2011 and 2010, (ii) an increase in gain on sale of development properties recognized during 2011, as compared to 2010, (iii) increased equity in income of joint ventures, net primarily due to incremental earnings from increased profitability within the joint venture portfolios and fewer impairment charges recognized against certain joint venture properties during the year ended December 31, 2011, as compared to the corresponding period in 2010 and (iv) early extinguishment of debt charges recognized during 2010, aggregating  $10.8 million, partially offset by (v) an increase in provision for income taxes.
 
Liquidity and Capital Resources

The Company’s capital resources include accessing the public debt and equity capital markets, mortgage and construction loan financing and immediate access to an unsecured revolving credit facility with bank commitments of $1.75 billion.

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

   
Year Ended December 31,
 
   
2012
   
2011
   
2010
 
Net cash flow provided by operating activities
  $ 479.1     $ 448.6     $ 479.9  
Net cash flow (used for)/provided by investing activities
  $ (51.0 )   $ (20.8 )   $ 37.9  
Net cash flow used for financing activities
  $ (399.1 )   $ (440.1 )   $ (514.7 )

Operating Activities

The Company anticipates that cash on hand, operating cash flows, borrowings under its revolving credit facility, issuance of equity and public debt, as well as other debt and equity alternatives, will provide the necessary capital required by the Company.  Net cash flow provided by operating activities for the year ended December 31, 2012, was primarily attributable to (i) cash flow from the diverse portfolio of rental properties, (ii) the acquisition of operating properties during 2012 and 2011, (iii) new leasing, expansion and re-tenanting of core portfolio properties and (iv) distributions from the Company’s joint venture programs.

Cash flow provided by operating activities for the year ended December 31, 2012, was $479.1 million, as compared to $448.6 million for the comparable period in 2011.  The change of $30.5 million is primarily attributable to higher operational income, increased distributions from joint ventures and other real estate investments and changes in accounts and notes receivable due to timing of receipts.
 
 
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Investing Activities

Cash flow used for investing activities for the year ended December 31, 2012, was $51.0 million, as compared to $20.8 million for the comparable period in 2011.  This change of $30.2 million resulted primarily from (i) an increase in acquisition of and improvements to operating real estate of $209.2 million, (ii) a decrease in proceeds from the sale/repayments of marketable securities of $187.8 million, (iii) an increase in investments and advances to real estate joint ventures of $48.2 million, (iv) a decrease in reimbursements of investments and advances to other real estate investments and other investments of $43.7 million and (v) investment in mortgage loans receivable of $16.0 million, partially offset by, (vi) an increase in proceeds from the sale of operating and development properties of $269.4 million, (vii) an increase in reimbursements of investments and advances to real estate joint ventures of $124.3 million, (viii) an increase in collections of mortgage receivables of $44.5 million and (ix) a decrease in acquisition of and improvements to real estate under development of $35.4 million.

Acquisitions of and Improvements to Operating Real Estate

During the year ended December 31, 2012, the Company expended $552.5 million towards acquisition of and improvements to operating real estate including $78.9 million (inclusive of $2.4 million in capitalized costs) expended in connection with redevelopments and re-tenanting projects.  (See Footnote 4 of the Notes to the Consolidated Financial Statements included in this Form 10-K.)

The Company has an ongoing program to reformat and re-tenant its properties to maintain or enhance its competitive position in the marketplace.  The Company anticipates its capital commitment toward these reformatting and re-tenanting efforts and other redevelopment projects during 2013 will be approximately $90.0 million to $100.0 million.  The funding of these capital requirements will be provided by cash flow from operating activities and availability under the Company’s revolving line of credit.

Investments and Advances to Real Estate Joint Ventures

During the year ended December 31, 2012, the Company expended $219.9 million for investments and advances to real estate joint ventures and received $187.9 million from reimbursements of investments and advances to real estate joint ventures, primarily due to the refinance of debt and sales of properties.  (See Footnote 8 of the Notes to the Consolidated Financial Statements included in this Form 10-K.)

Acquisitions of and Improvements to Real Estate Under Development

The Company is engaged in ground-up development projects which will be held as long-term investments by the Company.  The ground-up development projects generally have significant pre-leasing prior to the commencement of construction. As of December 31, 2012, the Company had a total of three ground-up development projects, consisting of two projects located in the U.S. and one project located in Peru.

The Company anticipates its capital commitment during 2013 toward these and other development projects will be approximately $15.0 million to $25.0 million.  The funding of these capital requirements will be provided by cash flow from operating activities and availability under the Company’s revolving line of credit.

Dispositions and Transfers

During the year ended December 31, 2012, the Company received net proceeds of  $449.5 million relating to the sale of various operating properties.  (See Footnotes 5 and 7 of the Notes to the Consolidated Financial Statements included in this Form 10-K.)

Financing Activities

Cash flow used for financing activities for the year ended December 31, 2012, was $399.1 million, as compared to $440.1 million for the comparable period in 2011. This change of $41.0 million resulted primarily from (i) the redemption of the Company’s 6.65% Class F Preferred Stock and 7.75% Class G Preferred Stock of $635.0 million, (ii) an increase in principal payments of $221.5 million, (iii) an increase in the repayment of unsecured term loan/notes of $123.3 million, (iv) a decrease of $103.6 million in net borrowings under unsecured revolving credit facility, (v) an increase in dividends paid of $29.0 million due to the issuance of the Company’s 6.00% Class I Preferred Stock and 5.50% Class J Preferred Stock and (vi) an increase in repurchases of common stock of $24.9 million, partially offset by (vii) an increase of $790.2 million from the issuance of stock, primarily relating to the issuance of the Company’s 6.00% Class I Preferred Stock, 5.50% Class J Preferred Stock and 5.625% Class K Preferred Stock and (viii) an increase of $400.0 million in proceeds from the unsecured term loan.
 
The Company continually evaluates its debt maturities, and, based on management’s current assessment, believes it has viable financing and refinancing alternatives that will not materially adversely impact its expected financial results. The credit environment has improved and the Company continues to pursue borrowing opportunities with large commercial U.S. and global banks, select life insurance companies and certain regional and local banks.  The Company has noticed a continuing trend that although pricing remains dependent on specific deal terms, generally spreads for non-recourse mortgage financing are gradually compressing from levels a year ago.  The unsecured debt markets are functioning well and credit spreads are at manageable levels.  The Company continues to assess 2013 and beyond to ensure the Company is prepared if the current credit market conditions deteriorate.
 
 
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Debt maturities for 2013 consist of:  $640.5 million of consolidated debt; $570.6 million of unconsolidated joint venture debt; and $98.2 million of preferred equity debt, assuming the utilization of extension options where available.  The 2013 consolidated debt maturities are anticipated to be extended, refinanced or repaid with operating cash flows and borrowings from the Company’s credit facility, which at December 31, 2012, the Company had  $1.5 billion available.  The 2013 unconsolidated joint venture and preferred equity debt maturities are anticipated to be extended or repaid through debt refinancing and partner capital contributions, as deemed appropriate.

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

Since the completion of the Company’s IPO in 1991, the Company has utilized the public debt and equity markets as its principal source of capital for its expansion needs. Since the IPO, the Company has completed additional offerings of its public unsecured debt and equity, raising in the aggregate over $8.7 billion.  Proceeds from public capital market activities have been used for the purposes of, among other things, repaying indebtedness, acquiring interests in neighborhood and community shopping centers, funding ground-up development projects, expanding and improving properties in the portfolio and other investments.  The Company will continue to access these markets, as available.

The Company has a $1.75 billion unsecured revolving credit facility (the “Credit Facility”) with a group of banks, which is scheduled to expire in October 2015 and has a one-year extension option.  This credit facility, provides funds to finance general corporate purposes, including (i) property acquisitions, (ii) investments in the Company’s institutional management programs, (iii) development and redevelopment costs and (iv) any short-term working capital requirements. Interest on borrowings under the Credit Facility accrues at LIBOR plus 1.05% and fluctuates in accordance with changes in the Company’s senior debt ratings and has a facility fee of 0.20% per annum.  As part of this Credit Facility, the Company has a competitive bid option whereby the Company could auction up to $875.0 million of its requested borrowings to the bank group.  This competitive bid option provides the Company the opportunity to obtain pricing below the currently stated spread.  In addition, as part of the Credit Facility, the Company has a $500.0 million sub-limit which provides it the opportunity to borrow in alternative currencies such as Canadian Dollars, British Pounds Sterling, Japanese Yen or Euros. Pursuant to the terms of the Credit Facility, the Company, among other things, is subject to covenants requiring the maintenance of (i) maximum leverage ratios on both unsecured and secured debt and (ii) minimum interest and fixed coverage ratios.  As of December 31, 2012, the Credit Facility had a balance of $249.9 million outstanding and $27.3 million appropriated for letters of credit.

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

Covenant
 
Must Be
 
As of 12/31/12
Total Indebtedness to Gross Asset Value (“GAV”)
 
<60%
  44 %
Total Priority Indebtedness to GAV
 
<35%
  9 %
Unencumbered Asset Net Operating Income to Total Unsecured Interest Expense
 
>1.75x
  3.23 x
Fixed Charge Total Adjusted EBITDA to Total Debt Service
 
>1.50x
  2.17 x

For a full description of the Credit Facility’s covenants refer to the Credit Agreement dated as of October 27, 2011 filed in the Company’s Current Report on Form 8-K dated November 2, 2011.

During April 2012, the Company obtained a $400.0 million unsecured term loan with a consortium of banks, which accrues interest at LIBOR plus 105 basis points.  The term loan is scheduled to mature in April 2014, with three additional one-year options to extend the maturity date, at the Company’s discretion, to April 17, 2017.  Pursuant to the terms of the Credit Agreement, the Company, among other things is subject to covenants requiring the maintenance of (i) maximum indebtedness ratios and (ii) minimum interest and fixed charge coverage ratios.  Proceeds from this term loan were used for general corporate purposes including the repayment of debt.  The term loan covenants are similar to the Credit Facility covenants described above.

During March 2008, the Company obtained a Mexican peso (“MXN”) 1.0 billion term loan, which bears interest at a rate of 8.58%, subject to change in accordance with the Company’s senior debt ratings, and is scheduled to mature in March 2013.  The Company utilized proceeds from this term loan to fully repay the outstanding balance of a MXN 500.0 million unsecured revolving credit facility, which was terminated by the Company.  Remaining proceeds from this term loan were used for funding MXN denominated investments. As of December 31, 2012, the outstanding balance on this term loan was MXN 1.0 billion (USD $76.9 million).  The Mexican term loan covenants are similar to the Credit Facility covenants described above.  During December 2012,  the lender agreed to extend this term loan for an additional five years at an interest rate of TIIE (Equilibrium Interbank Interest Rate) plus 1.35%, which will be effective subsequent to the scheduled maturity in March 2013.  The Company has the option to swap this rate to a fixed rate at any time during the term of the loan.
 
 
26

 

During April 2012, the Company filed a shelf registration statement on Form S-3, which is effective for a term of three years, for the future unlimited offerings, from time-to-time, of debt securities, preferred stock, depositary shares, common stock and common stock warrants.  The Company, pursuant to this shelf registration statement may, from time-to-time, offer for sale its senior unsecured debt for any general corporate purposes, including (i) funding specific liquidity requirements in its business, including property acquisitions, development and redevelopment costs and (ii) managing the Company’s debt maturities. (See Footnote 13 of the Notes to Consolidated Financial Statements included in this Form 10-K.)

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

Covenant
 
Must Be
 
As of 12/31/12
Consolidated Indebtedness to Total Assets
 
<60%
  38 %
Consolidated Secured Indebtedness to Total Assets
 
<40%
  9 %
Consolidated Income Available for Debt Service to Maximum Annual Service Charge
 
>1.50x
  4.2 x
Unencumbered Total Asset Value to Consolidated Unsecured Indebtedness
 
>1.50x
  2.8 x

For a full description of the various indenture covenants refer to the Indenture dated September 1, 1993, First Supplemental Indenture dated August 4, 1994, the Second Supplemental Indenture dated April 7, 1995, the Third Supplemental Indenture dated June 2, 2006, the Fifth Supplemental Indenture dated as of September 24, 2009, the Fifth Supplemental Indenture dated as of October 31, 2006 and First Supplemental Indenture dated October 31, 2006, as filed with the SEC.  See Exhibits Index on page 38, for specific filing information.

During 2012, the Company (i) repaid the $17.0 million outstanding on its 5.98% medium-term notes, which matured in July 2012, (ii) repaid the $198.9 million outstanding on its 6.00% senior unsecured note, which matured in November 2012, (iii) assumed  $185.3 million of individual non-recourse mortgage debt relating to the acquisition of seven operating properties, including an increase of  $6.1 million associated with fair value debt adjustments, (iv) paid off $284.8 million of mortgage debt that encumbered 19 operating properties and (v) assigned five mortgages aggregating $17.1 million in connection with property dispositions.

During March 2012, the Company issued 16,000,000 Depositary Shares (the "Class I Depositary Shares"), each representing a one-thousandth fractional interest in a share of the Company's 6.00% Class I Cumulative Redeemable Preferred Stock, $1.00 par value per share (the "Class I Preferred Stock"). Dividends on the Class I Depositary Shares are cumulative and payable quarterly in arrears at the rate of 6.00% per annum based on the $25.00 per share initial offering price, or $1.50 per annum.  The Class I Depositary Shares are redeemable, in whole or part, for cash on or after March 20, 2017, at the option of the Company, at a redemption price of $25.00 per depositary share, plus any accrued and unpaid dividends thereon.  The Class I Depositary Shares are not convertible or exchangeable for any other property or securities of the Company.  The net proceeds received from this offering of $387.2 million were used for general corporate purposes, including the reduction of borrowings outstanding under the Company’s revolving credit facility and the redemption of shares of the Company’s preferred stock.

During July 2012, the Company issued 9,000,000 Depositary Shares (the "Class J Depositary Shares"), each representing a one-thousandth fractional interest in a share of the Company's 5.50% Class J Cumulative Redeemable Preferred Stock, $1.00 par value per share (the "Class J Preferred Stock"). Dividends on the Class J Depositary Shares are cumulative and payable quarterly in arrears at the rate of 5.50% per annum based on the $25.00 per share initial offering price, or $1.375 per annum.  The Class J Depositary Shares are redeemable, in whole or part, for cash on or after July 25, 2017, at the option of the Company, at a redemption price of $25.00 per depositary share, plus any accrued and unpaid dividends thereon.  The Class J Depositary Shares are not convertible or exchangeable for any other property or securities of the Company.  The net proceeds received from this offering of $217.8 million were used for the redemption of all the outstanding depositary shares representing the Company’s Class F preferred stock, which redemption occurred on August 15, 2012, as discussed below, with the remaining proceeds used towards the redemption of outstanding depositary shares representing the Company’s Class G preferred stock, which redemption occurred on October 10, 2012, as discussed below, and general corporate purposes.

On August 15, 2012, the Company redeemed of all of its outstanding 7,000,000 depositary shares of the Company’s 6.65% Class F Cumulative Redeemable Preferred Stock, $1.00 par value per share (the “Class F Preferred Stock”) for $175.0 million, before payment of accrued and unpaid dividends of $1.0 million.  In connection with this redemption the Company recorded a charge of $6.2 million resulting from the difference between the redemption amount and the carrying amount of the Class F Preferred Stock on the Company’s Consolidated Balance Sheets in accordance with the FASB’s guidance on Distinguishing Liabilities from Equity.   The $6.2 million was subtracted from net income to arrive at net income available to common shareholders and is used in the calculation of earnings per share for the year ended December 31, 2012.
 
 
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On October 10, 2012, the Company redeemed all of its outstanding 18,400,000 depositary shares of the Company’s 7.75% Class G Cumulative Redeemable Preferred Stock, $1.00 par value per share (the “Class G Preferred Stock”) for $460.0 million, before payment of accrued and unpaid dividends of $8.5 million.  In connection with this redemption the Company recorded a non-cash charge of $15.5 million resulting from the difference between the redemption amount and the carrying amount of the Class G Preferred Stock on the Company’s Consolidated Balance Sheets in accordance with the FASB’s guidance on Distinguishing Liabilities from Equity.   The $15.5 million was subtracted from net income to arrive at net income available to common shareholders and is used in the calculation of earnings per share for the year ended December 31, 2012.

During November 2012, the Company issued 7,000,000 Depositary Shares (the "Class K Depositary Shares"), each representing a one-thousandth fractional interest in a share of the Company's 5.625% Class K Cumulative Redeemable Preferred Stock, $1.00 par value per share (the "Class K Preferred Stock"). Dividends on the Class K Depositary Shares are cumulative and payable quarterly in arrears at the rate of 5.625% per annum based on the $25.00 per share initial offering price, or $1.40625 per annum.  The Class K Depositary Shares are redeemable, in whole or part, for cash on or after December 7, 2017, at the option of the Company, at a redemption price of $25.00 per depositary share, plus any accrued and unpaid dividends thereon.  The Class K Depositary Shares are not convertible or exchangeable for any other property or securities of the Company.  The net proceeds received from this offering of $169.1 million, after expenses, were used for general corporate purposes, including funding towards the repayment of maturing Senior Unsecured Notes.

The Company, from time to time, repurchases shares of its common stock in amounts that offset new issuances of common shares in connection with the exercise of stock options or the issuance of restricted stock awards. These share repurchases may occur in open market purchases, privately negotiated transactions or otherwise, subject to prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.  During the year ended December 31, 2012, the Company repurchased 1.6 million shares of the Company’s common stock for  $30.9 million, of which $22.6 million was provided to the Company from stock options exercised.

In addition to the public equity and debt markets as capital sources, the Company may, from time-to-time, obtain mortgage financing on selected properties and construction loans to partially fund the capital needs of its ground-up development projects.  As of December 31, 2012, the Company had over 400 unencumbered property interests in its portfolio.

In connection with its intention to continue to qualify as a REIT for federal income tax purposes, the Company expects to continue paying regular dividends to its stockholders. These dividends will be paid from operating cash flows. The Company’s Board of Directors will continue to evaluate the Company’s dividend policy on a quarterly basis as they monitor sources of capital and evaluate the impact of the economy and capital markets availability on operating fundamentals.  Since cash used to pay dividends reduces amounts available for capital investment, the Company generally intends to maintain a conservative dividend payout ratio, reserving such amounts as it considers necessary for the expansion and renovation of shopping centers in its portfolio, debt reduction, the acquisition of interests in new properties and other investments as suitable opportunities arise and such other factors as the Board of Directors considers appropriate.  Cash dividends paid were $382.7 million in 2012, $353.8 million in 2011 and $307.0 million in 2010.

Although the Company receives substantially all of its rental payments on a monthly basis, it generally intends to continue paying dividends quarterly.  Amounts accumulated in advance of each quarterly distribution will be invested by the Company in short-term money market or other suitable instruments.  The Company’s Board of Directors declared a quarterly cash dividend of $0.21 per common share payable to shareholders of record on January 2, 2013, which was paid on January 15, 2013. Additionally, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per common share payable to shareholders of record on April 3, 2013, which is scheduled to be paid on April 15, 2013.

The Company is subject to taxes on its activities in Canada, Mexico, Brazil, Chile, and Peru.  During 2012, less than $0.1 million of withholding and transaction taxes were withheld from distributions related to foreign activities.  In general, under local country law applicable to the structures the Company has in place and applicable treaties, the repatriation of cash to the Company from its subsidiaries and joint ventures in Canada, Mexico and Brazil generally are not subject to withholding tax.  The Company does not anticipate the need to repatriate foreign funds from Chile, Peru or Brazil to provide for its cash flow needs in the U.S. and, as such, no significant withholding or transaction taxes are expected in the foreseeable future.

Contractual Obligations and Other Commitments

The Company has debt obligations relating to its revolving credit facility, MTNs, senior notes, mortgages and construction loans with maturities ranging from less than one year to 23 years.  As of December 31, 2012, the Company’s total debt had a weighted average term to maturity of  3.4 years.  In addition, the Company has non-cancelable operating leases pertaining to its shopping center portfolio.  As of December 31, 2012, the Company has 47 shopping center properties that are subject to long-term ground leases where a third party owns and has leased the underlying land to the Company to construct and/or operate a shopping center.  In addition, the Company has 10 non-cancelable operating leases pertaining to its retail store lease portfolio.  The following table summarizes the Company’s debt maturities (excluding extension options and fair market value of debt adjustments aggregating $10.6 million) and obligations under non-cancelable operating leases as of December 31, 2012 (in millions):
 
 
28

 

   
Payments due by period
       
Contractual Obligations:
 
2013
   
2014
   
2015
   
2016
   
2017
   
Thereafter
   
Total
 
Long-Term Debt-Principal(1)
  $ 659.7     $ 900.7     $ 731.2     $ 553.1     $ 468.9     $ 871.1     $ 4,184.7  
Long-Term Debt-Interest(2)
  $ 197.8     $ 152.8     $ 131.6     $ 96.9     $ 67.3     $ 107.2     $ 753.6  
Operating Leases:
                                                       
  Ground Leases
  $ 12.6     $ 12.2     $ 11.1     $ 10.3     $ 9.9     $ 172.6     $ 228.7  
  Retail Store Leases
  $ 2.3     $ 1.7     $ 1.3     $ 1.0     $ 0.5     $ 0.1     $ 6.9  

(1)   Maturities utilized do not reflect extension options, which range from one to five years.
(2)   For loans which have interest at floating rates, future interest expense was calculated using the rate as of December 31, 2012.

The Company has accrued $16.9 million of non-current uncertain tax benefits and related interest under the provisions of the authoritative guidance that addresses accounting for income taxes, which are included in Other liabilities on the Company’s Consolidated Balance Sheets at December 31, 2012. These amounts are not included in the table above because a reasonably reliable estimate regarding the timing of settlements with the relevant tax authorities, if any, cannot be made.

The Company has $100.0 million of medium term notes, $175.0 million of unsecured notes, $201.3 million of Canadian unsecured notes, a $76.9 million Mexican term loan, $2.2 million of unsecured debt and $85.1 million of secured debt scheduled to mature in 2013.  The Company anticipates satisfying these maturities with a combination of operating cash flows, its unsecured revolving credit facility, exercise of extension options, where available, and new debt issuances.

The Company has issued letters of credit in connection with completion and repayment guarantees for loans encumbering certain of the Company’s redevelopment projects and guarantee of payment related to the Company’s insurance program. As of December 31, 2012, these letters of credit aggregate $33.6 million.

On a select basis, the Company provides guarantees on interest bearing debt held within real estate joint ventures in which the Company has noncontrolling ownership interests.  The Company is often provided with a back-stop guarantee from its partners.  The Company had the following outstanding guarantees as of December 31, 2012 (amounts in millions):

Name of Joint Venture
 
Amount of Guarantee
 
Interest rate
 
Maturity, with extensions
 
Terms
Type of debt
InTown Suites Management, Inc. (1)
  $ 145.2  
LIBOR plus 1.15%
    2015  
25% partner back-stop
Unsecured credit facility
Hillsborough
  $ 2.8  
LIBOR plus 1.05%
    2013  
Jointly and severally with partner
Promissory note
Victoriaville
  $ 5.1  
3.92%
    2020  
Jointly and severally with partner
Promissory note

(1)    During October 2012, a purchase and sale agreement was executed to sell the InTown Suites company and related real estate assets for a gross sales price of $735 million, including $617 million of existing debt.  The sale is contingent upon satisfactorily completing a due diligence process and other closing conditions, including lender approvals. The Company expects to complete this transaction in the first half of 2013. If the transaction is completed, the Company has agreed to maintain $145.2 million in preexisting guarantees of outstanding debt to be assumed by the buyer.

In connection with the construction of its development projects and related infrastructure, certain public agencies require posting of performance and surety bonds to guarantee that the Company’s obligations are satisfied.  These bonds expire upon the completion of the improvements and infrastructure.  As of December 31, 2012, the Company had  $20.7 million in performance and surety bonds outstanding.

Off-Balance Sheet Arrangements

Unconsolidated Real Estate Joint Ventures

The Company has investments in various unconsolidated real estate joint ventures with varying structures.  These joint ventures primarily operate shopping center properties or are established for development projects.  Such arrangements are generally with third-party institutional investors, local developers and individuals. The properties owned by the joint ventures are primarily financed with individual non-recourse mortgage loans, however, the Company, on a selective basis, obtains unsecured financing for certain joint ventures.  These unsecured financings are guaranteed by the Company with guarantees from the joint venture partners for their proportionate amounts of any guaranty payment the Company is obligated to make (see guarantee table above).  Non-recourse mortgage debt is generally defined as debt whereby the lenders’ sole recourse with respect to borrower defaults is limited to the value of the property collateralized by the mortgage. The lender generally does not have recourse against any other assets owned by the borrower or any of the constituent members of the borrower, except for certain specified exceptions listed in the particular loan documents (See Footnote 8 of the Notes to Consolidated Financial Statements included in this Form 10-K).  These investments include the following joint ventures:
 
 
29

 

Venture
 
Kimco Ownership
Interest
   
Number of
Properties
   
Total GLA
(in thousands)
   
Non-Recourse Mortgage Payable
(in millions)
   
Recourse Notes Payable
(in millions)
   
Number of Encumbered
Properties
   
Average Interest
Rate
   
Weighted Average Term
(months)
 
KimPru (c)
    15.0 %     61       10,694     $ 1,010.2     $ -       41       5.54 %     44.5  
                                                                 
RioCan Venture (k)
    50.0 %     45       9,307     $ 923.2     $ -       37       5.16 %     41.2  
                                                                 
KIR (d)
    45.0 %     58       12,417     $ 914.6     $ -       43       5.22 %     78.6  
                                                                 
KUBS (e)
    17.9 %(a)     40       5,741     $ 691.9     $ -       40       5.40 %     39.1  
                                                                 
InTown Suites (j)
 
(l)
      138       N/A     $ 469.2     $ 145.2 (b)     138       4.46 %     46.1  
                                                                 
BIG Shopping Centers (f)
    37.7 %(a)     22       3,627     $ 443.8     $ -       18       5.52 %     45.5  
                                                                 
SEB Immobilien (h)
    15.0 %     13       1,800     $ 243.8     $ -       13       5.11 %     55.3  
                                                                 
CPP (g)
    55.0 %     6       2,424     $ 141.5     $ -       3       5.19 %     31.0  
                                                                 
Kimco Income Fund (i)
    15.2 %     12       1,522     $ 161.4     $ -       12       5.45 %     20.7  
 
(a)
Ownership % is a blended rate.
(b)
See Contractual Obligations and Other Commitments regarding guarantees by the Company and its joint venture partners.
(c)
Represents the Company’s joint ventures with Prudential Real Estate Investors.
(d)
Represents the Kimco Income Operating Partnership, L.P., formed in 1998.
(e)
Represents the Company’s joint ventures with UBS Wealth Management North American Property Fund Limited.
(f)
Represents the Company’s joint ventures with BIG Shopping Centers (TLV:BIG), an Israeli public company.
(g)
Represents the Company’s joint ventures with The Canadian Pension Plan Investment Board (CPPIB).
(h)
Represents the Company’s joint ventures with SEB Immobilien Investment GmbH.
(i)
Represents the Kimco Income Fund, formed in 2004.
(j)
Represents the Company’s joint ventures with Westmont Hospitality Group.
(k)
Represents the Company’s joint ventures with RioCan Real Estate Investment Trust.
(l)
The Company’s share of this investment is subject to fluctuation and is dependent upon property cash flows.
 
The Company has various other unconsolidated real estate joint ventures with varying structures.  As of December 31, 2012, these other unconsolidated joint ventures had individual non-recourse mortgage loans aggregating  $1.9 billion and unsecured notes payable aggregating  $2.8 million.  The aggregate debt as of December 31, 2012, of all of the Company’s unconsolidated real estate joint ventures is  $7.1 billion, of which the Company’s proportionate share of this debt is $2.8 billion.  As of December 31, 2012, these loans had scheduled maturities ranging from one month to 10 years and bear interest at rates ranging from 1.21% to 10.50%.  Approximately $570.6 million of the aggregate outstanding loan balance matures in 2013, of which the Company’s proportionate share is  $274.1 million.  These maturing loans are anticipated to be repaid with operating cash flows, debt refinancing and partner capital contributions, as deemed appropriate. (See Footnote 8 of the Notes to Consolidated Financial Statements included in this Form 10-K).

Other Real Estate Investments

The Company previously provided capital to owners and developers of real estate properties through its Preferred Equity program. The Company accounts for its preferred equity investments under the equity method of accounting.  As of December 31, 2012, the Company’s net investment under the Preferred Equity Program was $157.2 million relating to 107 properties. As of December 31, 2012, these preferred equity investment properties had individual non-recourse mortgage loans aggregating  $694.3 million. Due to the Company’s preferred position in these investments, the Company’s share of each investment is subject to fluctuation and is dependent upon property cash flows. The Company’s maximum exposure to losses associated with its preferred equity investments is primarily limited to its invested capital.

Additionally, during July 2007, the Company invested $81.7 million of preferred equity capital in a portfolio comprised of 403 net leased properties which are divided into 30 master leased pools with each pool leased to individual corporate operators.  These properties consist of a diverse array of free-standing restaurants, fast food restaurants, convenience and auto parts stores.  As of December 31, 2012, the remaining 397 properties were encumbered by third party loans aggregating $358.9 million, not including  $63.7 million in net fair market value of debt adjustments, with interest rates ranging from 5.08% to 10.47%, a weighted average interest rate of 9.3% and maturities ranging from one to 10 years.

At December 31, 2012, the Company had a 90% equity participation interest in an existing leveraged lease of 11 properties, which is reported as a net investment in leveraged lease in accordance with the FASB’s Lease guidance.  The properties are leased under a long-term bond-type net lease whose primary term expires in 2016, with the lessee having certain renewal option rights. These 11 properties were encumbered by third-party non-recourse debt of  $21.1 million that is scheduled to fully amortize during the primary term of the lease from a portion of the periodic net rents receivable under the net lease. As an equity participant in the leveraged lease, the Company has no recourse obligation for principal or interest payments on the debt, which is collateralized by a first mortgage lien on the properties and collateral assignment of the lease.  Accordingly, this debt has been offset against the related net rental receivable under the lease.
 
 
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Funds from Operations

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

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

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

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

The Company’s reconciliation of net income available to common shareholders to FFO and FFO as adjusted for the three months and years ended December 31, 2012 and 2011 is as follows (in thousands, except per share data):

   
Three Months Ended
   
Year Ended
 
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Net income available to common shareholders
  $ 59,231     $ 31,556     $ 172,673     $ 109,688  
Gain on disposition of operating property, net of noncontrolling interests
    (49,023 )     (11,398 )     (84,828 )     (19,444 )
Gain on disposition of joint venture operating properties
    (4,914 )     (819 )     (27,927 )     (4,050 )
Depreciation and amortization - real estate related
    63,246       60,561       257,278       246,746  
Depreciation and amortization - real estate joint ventures, net of noncontrolling interests
    32,228       34,529       133,734       138,482  
Remeasurement of derivative instrument
    -       -       -       4,287  
Impairments of operating properties, net of tax and noncontrolling interests
    26,440       21,014       59,510       42,043  
FFO
    127,208       135,443       510,440       517,752  
Transactional (income)/charges:
                               
     Promote income from other real estate investments
    (10,996 )     (9,715 )     (20,746 )     (9,829 )
     Promote income from real estate joint ventures
    (1,151 )     (2,403 )     (5,072 )     (2,675 )
     Gains from development/land sales, net of tax
    (14 )     (3,699 )     (8,309 )     (5,317 )
     Income from other real estate investments
    -       -       -       (1,311 )
     Foreign currency exchange gains
    -       -       -       (839 )
     Acquisition costs
    701       1,143       9,160       5,466  
     Charge off of assets relating to sales
    3,785       1,032       3,785       1,032  
     Executive severance costs
    -       -       2,472       -  
     Excess distribution from a cost method investment
    (398 )     (287 )     (398 )     (13,116 )
     Gain on sale of marketable securities
    -       (778 )     -       (4,895 )
     Impairments on other investments, net of tax and noncontrolling interest
    -       3,002       -       4,463  
     Preferred stock redemption costs
    15,490       -       21,703       -  
     Other expense/(income), net
    143       227       1,166       (951 )
Total transactional charges/(income), net
    7,560       (11,932 )     3,761       (27,972 )
FFO as adjusted
  $ 134,768     $ 123,511     $ 514,201     $ 489,780  
Weighted average shares outstanding for FFO calculations:
                               
Basic
    406,345       406,554       405,997       406,530  
    Units
    1,522       1,532       1,455       1,528  
    Dilutive effect of equity awards
    1,829       787       2,106       1,140  
Diluted (1)
    409,696       408,873       409,558       409,198  
                                 
FFO per common share – basic
  $ 0.31     $ 0.33     $ 1.26     $ 1.27  
FFO per common share – diluted (1)
  $ 0.31     $ 0.33     $ 1.25     $ 1.27  
FFO as adjusted per common share – basic
  $ 0.33     $ 0.30     $ 1.26     $ 1.20  
FFO as adjusted per common share – diluted (1)
  $ 0.33     $ 0.30     $ 1.26     $ 1.20  
 
 
31

 
 
 
(1)
For the three and twelve months ended December 31, 2012 and 2011, the effect of certain convertible units would have an anti-dilutive effect upon the calculation of Income from continuing operations per share.  Accordingly, the impact of such conversion has not been included in the determination of diluted earnings per share calculations.  
 
Same Property Net Operating Income

Same Property Net Operating Income (“Same Property NOI”) is a supplemental non-GAAP financial measure of real estate companies’ operating performance. Same Property NOI is considered by management to be an important performance measure of the Company’s operations and management believes that it is helpful to investors as a measure of the Company’s operating performance because it includes only the net operating income of properties that have been owned for the entire current and prior year reporting periods and excludes properties under development and pending stabilization. As such, Same Property NOI assists in eliminating disparities in net income due to the development, acquisition or disposition of properties during the particular period presented, and thus provides a more consistent performance measure for the comparison of the Company's properties.

Same Property NOI is calculated using revenues from rental properties (excluding straight-line rents, lease termination fees and above/below market rents) less operating and maintenance expense, real estate taxes and rent expense, plus the Company’s proportionate share of Same Property NOI from unconsolidated real estate joint ventures, calculated on the same basis. Same Property NOI includes all properties that are owned for the entire current and prior year reporting periods and excludes properties under development and properties pending stabilization. Properties are deemed stabilized at the earlier of (i) reaching 90% leased or (ii) one year following a projects inclusion in operating real estate (two years for Latin American properties).

Same Property NOI is a supplemental non-GAAP financial measure of real estate companies’ operating performance and should not be considered an alternative to net income in accordance with GAAP or as a measure of liquidity.  Our method of calculating Same Property NOI may differ from methods used by other REITs and, accordingly, may not be comparable to such other REITs.

 
32

 
 
The following is a reconciliation of the Company’s Income from continuing operations to Same Property NOI (in thousands):

   
Three Months Ended December 31,
   
Year Ended December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Income from continuing operations
  $ 45,887     $ 44,961     $ 211,978     $ 158,977  
Adjustments:
                               
     Management and other fee income
    (10,469 )     (8,494 )     (37,522 )     (35,320 )
     General and administrative expenses
    29,166       28,689       124,480       118,873  
     Impairment of property carrying values
    18,463       5,320       37,111       13,077  
     Depreciation and amortization
    64,070       58,307       249,493       231,712  
     Other income
    54,601       42,883       223,441       188,468  
     (Benefit)/provision for income taxes, net
    (802 )     6,968       3,939       21,330  
     Gains on change in control of interests
    (1,399 )     -       (15,555 )     (569 )
     Equity in income of other real estate investments, net
    (18,057 )     (16,690 )     (53,397 )     (51,813 )
     Non same property net operating income
    (38,057 )     (32,434 )     (171,115 )     (128,991 )
     Non operational expense from joint ventures
    77,357       84,797       289,234       328,804  
     Net operating income from noncontrolling interests
    (2,239 )     (2,971 )     (10,255 )     (11,565 )
Same Property NOI
  $ 218,521     $ 211,336     $ 851,832     $ 832,983  
 
Same Property NOI increased by $7.2 million or 3.4% for the three months ended December 31, 2012, as compared to the corresponding period in 2011. This increase is primarily the result of (i) an increase of $4.7 million related to lease-up and rent commencements, (ii) an increase of $2.0 million in other property and ancillary income, and (iii) the impact from changes in foreign currency exchange rates of $0.5 million.
 
Same Property NOI increased by $18.8 million or 2.3% for the year ended December 31, 2012, as compared to the corresponding period in 2011. This increase is primarily the result of (i) an increase of $15.8 million related to lease-up and rent commencements and (ii) an increase of $7.8 million in other property and ancillary income, partially offset by, (iii) the negative impact from changes in foreign currency exchange rates of $4.8 million.

Effects of Inflation

Many of the Company's leases contain provisions designed to mitigate the adverse impact of inflation.  Such provisions include clauses enabling the Company to receive payment of additional rent calculated as a percentage of tenants' gross sales above pre-determined thresholds, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses often include increases based upon changes in the consumer price index or similar inflation indices.  In addition, many of the Company's leases are for terms of less than 10 years, which permits the Company to seek to increase rents to market rates upon renewal. Most of the Company's leases require the tenant to pay an allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation.  The Company periodically evaluates its exposure to short-term interest rates and foreign currency exchange rates and will, from time-to-time, enter into interest rate protection agreements and/or foreign currency hedge agreements which mitigate, but do not eliminate, the effect of changes in interest rates on its floating-rate debt and fluctuations in foreign currency exchange rates.

Market and Economic Conditions; Real Estate and Retail Shopping Sector

In the U.S., economic and market conditions have improved. Credit conditions have continued to allow increased access and availability to secured mortgage debt and the unsecured bond and equity markets. However, there remains concern over high unemployment rates in the U.S. and concerns over uncertain economic conditions in Europe.  These conditions have contributed to slow growth in the U.S. and international economies.

Historically, real estate has been subject to a wide range of cyclical economic conditions that affect various real estate markets and geographic regions with differing intensities and at different times. Different regions of the United States have and may continue to experience varying degrees of economic growth or distress. Adverse changes in general or local economic conditions could result in the inability of some tenants of the Company to meet their lease obligations and could otherwise adversely affect the Company’s ability to attract or retain tenants. The Company’s shopping centers are typically anchored by two or more national tenants who generally offer day-to-day necessities, rather than high-priced luxury items. In addition, the Company seeks to reduce its operating and leasing risks through ownership of a portfolio of properties with a diverse geographic composition and tenant base.
 
 
33

 

The Company monitors potential credit issues of its tenants, and analyzes the possible effects to the financial statements of the Company and its unconsolidated joint ventures. In addition to the collectability assessment of outstanding accounts receivable, the Company evaluates the related real estate for recoverability as well as any tenant related deferred charges for recoverability, which may include straight-line rents, deferred lease costs, tenant improvements, tenant inducements and intangible assets.

The retail shopping sector overall has continued to steadily improve during 2012, however select markets, which experienced rapid expansion prior to the economic recession, such as Nevada, Arizona and select portions of California are experiencing slower growth. If growth in the retail shopping sector does not continue, the Company may experience tenants delaying lease commencements or declining to extend or renew leases upon expiration.   These conditions also have forced some weaker retailers, in some cases, to declare bankruptcy and/or close stores. Certain retailers have announced store closings even though they have not filed for bankruptcy protection. However, any of these particular store closings affecting the Company often represent a small percentage of the Company’s overall gross leasable area and the Company does not currently expect store closings to have a material adverse effect on the Company’s overall performance.

New Accounting Pronouncements

See Footnote 1 of the Company’s Consolidated Financial Statements included in this Form 10-K.

 
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Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary market risk exposure is interest rate risk.  The following table presents the Company’s aggregate fixed rate and variable rate domestic and foreign debt obligations outstanding as of December 31, 2012, with corresponding weighted-average interest rates sorted by maturity date.  The table does not include extension options where available.  Amounts include fair value purchase price allocation adjustments for assumed debt. The information is presented in U.S. dollar equivalents, which is the Company’s reporting currency.  The instruments’ actual cash flows are denominated in U.S. dollars, Canadian dollars (CAD), Mexican pesos (MXN) and Chilean Pesos (CLP) as indicated by geographic description ($USD equivalent in millions).

   
2013
   
2014
   
2015
   
2016
   
2017
   
Thereafter
   
Total
   
Fair Value
 
U.S. Dollar Denominated
                                               
Secured Debt
                                               
Fixed Rate
  $ 85.1     $ 192.0     $ 128.9     $ 256.6     $ 184.4     $ 88.4     $ 935.4     $ 995.7  
Average Interest Rate
    5.99 %     6.47 %     5.43 %     6.69 %     6.15 %     6.80 %     6.31 %        
                                                                 
Variable Rate
  $ -     $ -     $ 6.0     $ -     $ -     $ 21.5     $ 27.5     $ 26.9  
Average Interest Rate
    -       -       0.17 %     -       -       3.06 %     2.43 %        
                                                                 
Unsecured Debt
                                                               
Fixed Rate
  $ 275.0     $ 294.8     $ 350.0     $ 300.0     $ 290.9     $ 600.0     $ 2,110.7     $ 2,346.0  
Average Interest Rate
    5.40 %     5.20 %     5.29 %     5.78 %     5.70 %     5.59 %     5.50 %        
                                                                 
Variable Rate
  $ 2.2     $ 400.0     $ 250.0     $ -     $ -     $ -     $ 652.2     $ 629.8  
Average Interest Rate
    5.50 %     1.26 %     1.25 %     -       -       -       1.27 %        
                                                                 
CAD Denominated