10-K 1 kim20151231_10k.htm FORM 10-K kim20151231_10k.htm Table Of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2015

 

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:

 

 

Name of each exchange on

Title of each class  

which registered

     

Common Stock, par value $.01 per share.

 

New York Stock Exchange

     

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

 

New York Stock Exchange

     

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

 

New York Stock Exchange

     

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

 

New York Stock Exchange

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑

 

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

 

 

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

Smaller reporting company

  (Do not check if a smaller reporting company.)    

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $9.0 billion based upon the closing price on the New York Stock Exchange for such equity on June 30, 2015.

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

 

As of February 11, 2016, the registrant had 413,710,579 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III incorporates certain information by reference to the Registrant's definitive proxy statement to be filed with respect to the Annual Meeting of Stockholders expected to be held on April 26, 2016.

 

Index to Exhibits begins on page 36.

 



 

 

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

13

     

4.

Mine Safety Disclosures

13

     

PART II

     

5.

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

14

     

6.

Selected Financial Data

16

     

7.

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

17

     

7A.

Quantitative and Qualitative Disclosures About Market Risk

33

     

8.

Financial Statements and Supplementary Data

34

     

9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

34

     

9A.

Controls and Procedures

34

     

9B.

Other Information

34

     

PART III

     

10.

Directors, Executive Officers and Corporate Governance

34

     

11.

Executive Compensation

35

     

12.

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

35

     

13.

Certain Relationships and Related Transactions, and Director Independence

35

     

14.

Principal Accounting Fees and Services

35

     

PART IV

     

15.

Exhibits, Financial Statement Schedules

35

 

 

FORWARD-LOOKING STATEMENTS

 

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

 

PART I

 

Item 1. Business

 

Background

 

Kimco Realty Corporation, a Maryland corporation, is one of the nation's largest owners and operators of open-air shopping centers.  The terms "Kimco," the "Company," "we," "our" and "us" each refer to Kimco Realty Corporation and our subsidiaries, unless the context indicates otherwise.  The Company is a self-administered real estate investment trust ("REIT") and has owned and operated open-air shopping centers for more than 50 years.  The Company has not engaged, nor does it expect to retain, any REIT advisors in connection with the operation of its properties. As of December 31, 2015, the Company had interests in 605 shopping center properties (the “Combined Shopping Center Portfolio”), aggregating 96.0 million square feet of gross leasable area (“GLA”), located in 38 states, Puerto Rico and Canada. In addition, the Company had 446 other property interests, primarily through the Company’s preferred equity investments and other real estate investments, totaling 7.3 million square feet of GLA. The Company’s ownership interests in real estate consist of its consolidated portfolio and portfolios where the Company owns an economic interest, such as properties in the Company’s investment real estate management programs, where the Company partners with institutional investors and also retains management.  The Company believes its portfolio of open-air 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, 2015, a total of 546 persons were employed by the Company.

 

The Company’s Web site is located at http://www.kimcorealty.com. The information contained on our Web site does not constitute part of this Form 10-K. On the Company’s Web site you can obtain, free of charge, a copy of 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 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.

 

 

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

 

The Company’s initial growth resulted primarily from 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 as well as promoted interests based on achieving certain performance metrics. The Company continued its geographic expansion with investments in Canada, Puerto Rico, Mexico, Chile, Brazil and Peru; however during 2013, based upon a perceived change in market conditions, the Company began its efforts to exit its investments in Mexico and South America. During 2015, the Company began its efforts to exit its investments in Canada. By the fourth quarter of 2015, the Company had substantially liquidated its investments in Mexico and had completely exited South America by liquidating its investments in Chile, Brazil and Peru. The Company’s revenues and equity in income (including gains on sales and impairment losses) from its foreign investments in U.S. dollar equivalents and their respective local currencies are as follows (in millions):

 

   

2015

   

2014

   

2013

 

Revenues (consolidated in USD):

                       

Mexico

  $ 1.9     $ 29.4     $ 49.5  

Brazil

  $ -     $ -     $ 3.2  

Peru

  $ -     $ 0.1     $ 0.4  

Chile

  $ 6.7     $ 8.1     $ 9.2  

Revenues (consolidated in local currencies):

                       

Mexico (Mexican Pesos “MXN”)

    28.2       382.3       673.8  

Brazil (Brazilian Real)

    -       -       6.8  

Peru (Peruvian Nuevo Sol)

    -       0.4       1.2  

Chile (Chilean Pesos “CLP”)

    4,264.9       4,485.9       4,464.7  
                         

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

                       

Canada (2015 includes gains of $373.8 million on disposition of equity interests)

  $ 409.1     $ 49.3     $ 46.6  

Mexico (2014 includes the release of cumulative foreign currency translation adjustment “CTA”)

  $ (1.6 )   $ (3.7 )   $ 98.1  

Chile (2015 includes the release of CTA)

  $ 0.9     $ (0.1 )   $ 4.2  
                         

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

                       

Canada (Canadian dollars) (2015 includes gains of CAD $439.9 million on disposition of equity interests)

    540.1       54.6       48.0  

Mexico (MXN) (2014 includes the release of CTA)

    (24.0 )     (550.8 )     232.3  

Chile (CLP)

    -       (55.3 )     2,141.2  

 

The Company, through its taxable REIT subsidiaries (“TRS”), as permitted by the Tax Relief Extension Act of 1999, has previously engaged in various retail real estate related opportunities, including (i)ground-up development of open-air shopping centers and the subsequent sale thereof upon completion, (ii) retail real estate management and disposition services, which primarily focused on leasing and disposition strategies for real estate property interests of both healthy and distressed retailers and (iii) the Company’s investment in AB Acquisition, LLC, which consists of grocers Safeway, Albertsons, Vons and other banners (collectively “Albertsons”). 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 strategy is to be the premier owner and operator of open-air shopping centers through investments primarily in the U.S..  To achieve this strategy the Company is (i) continuing to transform the quality of its portfolio by disposing of lesser quality assets and acquiring larger higher quality properties in key markets identified by the Company, (ii) simplifying its business by (a) reducing the number of joint venture investments and (b) exiting Mexico, South America and Canada, for which the exit of South America has been completed and Mexico has been substantially completed, (iii) pursuing redevelopment opportunities within its portfolio to increase overall value and (iv) selectively acquiring land parcels for ground-up development projects, consisting of retail and/or mixed use centers, for long-term investment. In addition, the Company may consider other opportunistic investments related to retailer controlled real estate such as, repositioning underperforming retail locations, retail real estate financing and bankruptcy transaction support. The Company has an active capital recycling program which provides for the disposition of certain U.S. properties. If the Company accepts sales prices for any of these assets that are less than their net carrying values, the Company would be required to take impairment charges and such amounts could be material. In order to execute the Company’s strategy, the Company intends to continue to strengthen its balance sheet by pursuing deleveraging efforts over time, providing it the necessary flexibility to invest opportunistically and selectively, primarily focusing on U.S. open-air shopping centers.

 

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

 

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

 

The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its properties and a large tenant base. As of December 31, 2015, no single open-air shopping center accounted for more than 1.8% of the Company's annualized base rental revenues, including the proportionate share of base rental revenues from properties in which the Company has less than a 100% economic interest, or more than 1.5% of the Company’s total shopping center GLA. At December 31, 2015, the Company’s five largest tenants were TJX Companies, The Home Depot, Bed Bath & Beyond, Royal Ahold and Albertsons which represented 3.2%, 2.4%, 2.1%, 1.9% and 1.9%, respectively, of the Company’s annualized base rental revenues, including the proportionate share of base rental revenues from properties in which the Company has less than a 100% economic interest.

 

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

 

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 or changes in federal tax laws, regulations, administrative interpretations or court decisions relating to real estate investment trusts 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.

 

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 taxed as a REIT for four taxable years following the year during which we were disqualified; and

 

we would not be required to make distributions to stockholders.

 

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

 

To maintain our REIT status, we may be forced to borrow funds 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 on the amount we distribute that is 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 expenses of owning and operating properties, which are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the properties;

 

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

 

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

 

the potential risk of functional obsolescence of properties over time.

 

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

 

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

 

 

weakness in the national, regional and local economies;

 

the adverse financial condition of some large retailing companies;

 

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

 

ongoing consolidation in the retail sector; and

 

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

 

In addition, numerous commercial developers and real estate companies compete with us in seeking tenants for our existing properties and properties for acquisition. New regional malls, open-air lifestyle centers or other retail shopping centers with more convenient locations or better rents may attract tenants or cause them to seek more favorable lease terms at or prior to renewal. Retailers at our properties may face increasing competition from other retailers, e-commerce, outlet malls, discount shopping clubs, 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, including anchor 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, including anchor tenants, or a failure by multiple tenants to occupy their premises in a shopping center could result in lease terminations or significant reductions in rent by other tenants in the same shopping centers under the terms of some leases. In that event, we may be unable to re-lease the vacated space at attractive rents or at all, and our rental payments from our continuing tenants could significantly decrease. The occurrence of any of the situations described above, particularly if it involves a substantial tenant with leases in multiple locations, could have a material adverse effect on our financial condition, results of operations and cash flows.

 

A tenant that files for bankruptcy protection may not continue to pay us rent. A bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar all efforts by us to collect pre-bankruptcy debts from the tenant or the lease guarantor, or their property, unless the bankruptcy court permits us to do so. A tenant 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 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.

 

Unsuccessful ground-up development activities or a slowdown in ground-up development activities could have a direct impact on our growth, results of operations and cash flows.

 

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

 

 

We may abandon ground-up development opportunities after expending resources and could lose all or part of our investment in such opportunities, including loss of deposits or failure to recover expenses already incurred;

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

We have certain 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, including changes in applicable laws and regulations in the United States that affect foreign operations;

 

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.

 

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 operate internationally, 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 portion of our revenues are generated internationally, we must devote an appropriate level of 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 included properties in Canada, Mexico, Chile, Brazil and Peru and are subject to a variety of United States and foreign laws and regulations, including the United States Foreign Corrupt Practices Act (“FCPA”). 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. We are cooperating with the SEC investigation and a parallel investigation by the U.S. Department of Justice (“DOJ”). See “Item 3. Legal Proceedings,” below. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations, which they may seek to impose against corporations and individuals in appropriate circumstances including, but not limited to, injunctive relief, disgorgement, fines, penalties and modifications to business practices and compliance programs. Any of these remedial measures, if applicable to us, could have a material adverse impact on our business, results of operations, financial condition and liquidity.

 

 

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

 

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

 

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

 

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

 

 

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

 

our liquidity could be adversely affected;

 

we may be unable to repay or refinance our indebtedness;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

the extent of institutional investor interest in us;

 

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

 

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

 

our financial condition and performance;

 

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

 

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

 

general economic and financial market conditions.

 

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

 

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

 

 

We may not be able to recover our investments in marketable securities, mortgage receivables or other investments, 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.

 

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

 

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

 

 

changes in the national, regional and local economic climate;

 

the adverse financial condition of some large retailing companies;

 

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

 

ongoing consolidation in the retail sector,

 

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

 

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

 

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

 

Item 1B. Unresolved Staff Comments

 

None

 

Item 2. Properties

 

Real Estate Portfolio. As of December 31, 2015, the Company had interests in 605 shopping center properties aggregating 96.0 million square feet of GLA located in 38 states, Puerto Rico and Canada. In addition, the Company had 446 other property interests, primarily through the Company’s preferred equity investments and other real estate investments, totaling 7.3 million square feet of GLA.  The Company’s portfolio includes noncontrolling interests. Open-air shopping centers comprise the primary focus of the Company's current portfolio.  As of December 31, 2015, the Company’s Combined Shopping Center Portfolio was 95.0% leased.

 

 

The Company's open-air shopping center properties, which are generally owned and operated through subsidiaries or joint ventures, had an average size of 158,686 square feet as of December 31, 2015. 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 2015, the Company capitalized $156.0 million in connection with these property improvements and expensed to operations $38.5 million.

 

The Company's management believes its experience in the real estate industry and its relationships with numerous national and regional tenants gives it an advantage in an industry where ownership is fragmented among a large number of property owners. The Company's open-air shopping centers are usually "anchored" by a national or regional discount department store, 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 TJX Companies, The Home Depot, Bed Bath & Beyond, Royal Ahold, Albertsons, Wal-Mart, Kohl’s, Petsmart and Ross Stores.

 

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

 

Minimum base rental revenues and operating expense reimbursements accounted for 98% and other revenues, including percentage rents, accounted for 2% of the Company's total revenues from rental property for the year ended December 31, 2015. 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 31.1% 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, 2015.  Additionally, a majority of the Company’s leases have provisions requiring contractual rent increases. The Company’s leases may also include escalation clauses, which provide for increases based upon changes in the consumer price index or similar inflation indices.

 

As of December 31, 2015, the Company’s consolidated operating portfolio, comprised of 60.5 million square feet of GLA, was 95.7% leased. The consolidated operating portfolio consists entirely of properties located in the U.S., inclusive of Puerto Rico.  For the period January 1, 2015 to December 31, 2015, the Company increased the average base rent per leased square foot, which includes the impact of tenant concessions, in its U.S. consolidated portfolio of open-air shopping centers from $13.50 to $14.36, an increase of $0.86.  This increase primarily consists of (i) a $0.24 increase relating to acquisitions, (ii) a $0.40 increase relating to dispositions, and (iii) a $0.22 increase relating to new leases signed net of leases vacated and rent step-ups within the portfolio.

 

The Company has a total of 6,164 leases in the U.S. consolidated operating portfolio. The following table sets forth the aggregate lease expirations for each of the next ten years, assuming no renewal options are exercised. For purposes of the table, the Total Annual Base Rent Expiring represents annualized rental revenue, excluding the impact of straight-line rent, for each lease that expires during the respective year. Amounts in thousands except for number of lease data:

 

Year Ending December 31,

 

Number of Leases

Expiring

   

Square Feet

Expiring

   

Total Annual Base Rent Expiring

   

% of Gross

Annual Rent

 

(1)

    173       460     $ 8,874       1.1

%

2016

    656       3,822     $ 56,298       6.8

%

2017

    1,002       7,756     $ 116,803       14.1

%

2018

    903       6,507     $ 98,617       11.9

%

2019

    849       6,724     $ 98,130       11.8

%

2020

    808       6,331     $ 93,771       11.3

%

2021

    451       4,985     $ 65,220       7.9

%

2022

    267       3,016     $ 41,558       5.0

%

2023

    248       3,218     $ 44,222       5.3

%

2024

    232       3,004     $ 47,022       5.7

%

2025

    229       2,203     $ 34,715       4.2

%

2026

    141       3,283     $ 39,242       4.7

%

 

(1) Leases currently under month to month lease or in process of renewal

 

 

During 2015, the Company executed 1,016 leases totaling over 6.5 million square feet in the Company’s consolidated operating portfolio comprised of 388 new leases and 628 renewals and options. The leasing costs associated with these leases are estimated to aggregate $54.2 million or $25.38 per square foot. These costs include $42.8 million of tenant improvements and $11.4 million of leasing commissions. The average rent per square foot on new leases was $17.63 and on renewals and options was $15.76. The Company will seek to obtain rents that are higher than amounts within its expiring leases, however, there are many variables and uncertainties which can significantly affect the leasing market at any time; as such, the Company cannot guarantee that future leases will continue to be signed for rents that are equal to or higher than current amounts.

 

Ground-Leased Properties. The Company has interests in 46 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 cooperating with the SEC and the U.S. Department of Justice (“DOJ”), which is conducting a parallel investigation. At this point, we are unable to predict the duration, scope or result of the SEC or DOJ investigation.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

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, 2015.

 

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

 

2014:

                       

First Quarter

  $ 22.70     $ 19.61     $ 0.225  

Second Quarter

  $ 23.63     $ 21.41     $ 0.225  

Third Quarter

  $ 23.82     $ 21.54     $ 0.225  

Fourth Quarter

  $ 26.04     $ 21.56    

$

0.24  (a)
                         

2015:

                       

First Quarter

  $ 28.54     $ 25.20     $ 0.24  

Second Quarter

  $ 27.06     $ 22.48     $ 0.24  

Third Quarter

  $ 25.70     $ 22.07     $ 0.24  

Fourth Quarter

  $ 27.33     $ 23.98    

$

0.255  (b)

 

 

(a)

Paid on January 15, 2015, to stockholders of record on January 2, 2015.

 

(b)

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

 

Holders: The number of holders of record of the Company's common stock, par value $0.01 per share, was 2,412 as of January 31, 2016.

 

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

 

The Company has determined that the $0.96 dividend per common share paid during 2015 represented 100% capital gain to its stockholders. The $0.90 dividend per common share paid during 2014 represented 36% ordinary income, a 36% return of capital and 28% capital gain to its stockholders.

 

In addition to its common stock offerings, the Company has capitalized the growth in its business through the issuance of unsecured fixed and floating-rate medium-term notes, underwritten bonds, unsecured bank debt, mortgage debt and construction loans, convertible preferred stock and perpetual preferred stock. Borrowings under the Company's revolving credit facility have also been an interim source of funds to both finance the purchase of properties and other investments and meet any short-term working capital requirements. The various instruments governing the Company's issuance of its unsecured public debt, bank debt, mortgage debt and preferred stock impose certain restrictions on the Company with regard to dividends, voting, liquidation and other preferential rights available to the holders of such instruments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Footnotes 12, 13 and 16 of the Notes to Consolidated Financial Statements included in this Form 10-K.

 

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

 

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

 

 

Issuer Purchases of Equity Securities During the year ended December 31, 2015, the Company repurchased 179,696 shares in connection with common shares surrendered or deemed surrendered to the Company to satisfy statutory minimum tax withholding obligations in connection with the vesting of restricted stock awards under the Company’s equity-based compensation plans. The Company expended approximately $4.8 million to repurchase these shares.

 

Period

 

Total

Number of

Shares

Purchased

   

Average

Price

Paid per

Share

   

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

   

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

(in millions)

 
January 1, 2015

January 31, 2015

    6,251     $ 26.32       -     $ -  
February 1, 2015

February 28, 2015

    159,743     $ 26.82       -       -  
March 1, 2015

March 31, 2015

    -     $ -       -       -  
April 1, 2015

April 30, 2015

    -     $ -       -       -  
May 1, 2015

May 31, 2015

    754     $ 24.49       -       -  
June 1, 2015

June 30, 2015

    -     $ -       -       -  
July 1, 2015

July 31, 2015

    366     $ 22.90       -       -  
August 1, 2015

August 31, 2015

    11,858     $ 24.85       -       -  
September 1, 2015

September 30, 2015

    -     $ -       -       -  
October 1, 2015

October 31, 2015

    724     $ 26.32       -       -  
November 1, 2015

November 30, 2015

    -     $ -       -       -  
December 1, 2015

December 31, 2015

    -     $ -       -       -  
Total  

 

    179,696     $ 26.65       -     $ -  

 

Total Stockholder Return Performance The following performance chart compares, over the five years ended December 31, 2015, 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, 2015, 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.

 

 

 

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,  
    2015       2014(2)       2013(2)       2012(2)       2011(2)  
    (in thousands, except per share information)  

Operating Data:

                                       

Revenues from rental properties (1)

  $ 1,144,474     $ 958,888     $ 825,210     $ 755,851     $ 698,211  

Interest expense (3)

  $ 218,891     $ 203,759     $ 212,240     $ 223,736     $ 219,599  

Depreciation and amortization (3)

  $ 344,527     $ 258,074     $ 224,713     $ 214,827     $ 197,956  

Gain on sale of development properties

  $ -     $ -     $ -     $ -     $ 12,074  

Gain on sale of operating properties, net, net of tax (3)

  $ 125,813     $ 389     $ 1,432     $ 4,299     $ 108  

Provision for income taxes, net (4)

  $ 67,325     $ 22,438     $ 32,654     $ 15,603     $ 24,928  

Impairment charges (5)

  $ 45,383     $ 39,808     $ 32,247     $ 10,289     $ 13,077  

Income from continuing operations (6)

  $ 894,190     $ 375,133     $ 276,884     $ 172,760     $ 100,059  

Income per common share, from continuing operations:

                                       

Basic

  $ 2.01     $ 0.77     $ 0.53     $ 0.19     $ 0.10  

Diluted

  $ 2.00     $ 0.77     $ 0.53     $ 0.19     $ 0.10  

Weighted average number of shares of common stock:

                                       

Basic

    411,319       409,088       407,631       405,997       406,530  

Diluted

    412,851       411,038       408,614       406,689       407,669  

Cash dividends declared per common share

  $ 0.975     $ 0.915     $ 0.855     $ 0.78     $ 0.73  

 

   

December 31,

 
   

2015

   

2014

   

2013

   

2012

   

2011

 
   

(in thousands)

 

Balance Sheet Data:

                                       

Real estate, before accumulated depreciation

  $ 11,568,809     $ 10,018,226     $ 9,123,344     $ 8,947,287     $ 8,771,257  

Total assets (7)

  $ 11,344,171     $ 10,261,400     $ 9,644,247     $ 9,731,928     $ 9,604,026  

Total debt (7)

  $ 5,376,310     $ 4,595,970     $ 4,202,018     $ 4,176,011     $ 4,089,649  

Total stockholders' equity

  $ 5,046,300     $ 4,774,785     $ 4,632,417     $ 4,765,160     $ 4,686,386  
                                         

Cash flow provided by operations

  $ 493,701     $ 629,343     $ 570,035     $ 479,054     $ 448,613  

Cash flow provided by/(used for) investing activities

  $ 21,365     $ 126,705     $ 72,235     $ (51,000 )   $ (20,760 )

Cash flow used for financing activities

  $ (512,854 )   $ (717,494 )   $ (635,377 )   $ (399,061 )   $ (440,125 )

 

(1)

Does not include revenues (i) from rental property relating to unconsolidated joint ventures, (ii) relating to the investment in retail store leases and (iii) from properties included in discontinued operations.

 

(2)

Amounts have been adjusted to reflect the impact of operating properties sold during the years ended December 31, 2014, 2013, 2012 and 2011, 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. Amounts include income taxes related to gain on transfer/sale of operating properties.

 

(5)

Amounts exclude noncontrolling interests and amounts reflected in discontinued operations.

 

(6)

Amounts include gain on transfer/sale of operating properties, net of tax and net income attributable to noncontrolling interests.

 

(7)

Beginning in its fiscal year 2015, the Company elected to early adopt Accounting Standards Update (“ASU”) 2015-03 and ASU 2015-15 and appropriately retrospectively applied the guidance to its Notes Payable and Mortgages Payable to all periods presented. Unamortized debt issuance costs are included in Total debt for all periods presented (previously included in Other assets on the Company’s Consolidated Balance Sheets).

 

 

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

 

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

 

Executive Summary

 

Kimco Realty Corporation is one of the nation’s largest publicly-traded owners and operators of open-air shopping centers. As of December 31, 2015, the Company had interests in 605 shopping center properties, aggregating 96.0 million square feet of GLA located in 38 states, Puerto Rico and Canada. In addition, the Company had 446 other property interests, primarily through the Company’s preferred equity investments and other real estate investments, totaling 7.3 million square feet of GLA.

 

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

 

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

 

The following highlights the Company’s significant transactions, events and results that occurred during the year ended December 31, 2015:

 

Portfolio Information:

 

 

Net income available to common shareholders increased by $465.5 million to $831.2 million for the year ended December 31, 2015, as compared to $365.7 million for the corresponding period in 2014.

 

Funds from operations (“FFO”) increased from $596.2 million or $1.45 per diluted share for the year ended December 31, 2014, to $643.2 million or $1.56 per diluted share for the year ended December 31, 2015 (see additional disclosure on FFO beginning on page 30).

 

FFO as adjusted increased from $576.9 million or $1.40 per diluted share for the year ended December 31, 2014, to $603.4 million or $1.46 per diluted share for the year ended December 31, 2015 (see additional disclosure on FFO beginning on page 30).

 

U.S. same property net operating income (“U.S. Same Property NOI”) increased 3.1% for the year ended December 31, 2015, as compared to the corresponding period in 2014 (see additional disclosure on U.S. Same Property NOI beginning on page 32).

 

U.S. pro-rata occupancy rose from 95.7% at December 31, 2014, to 95.8% at December 31, 2015.

 

Executed 1,016 new leases, renewals and options totaling approximately 6.5 million square feet in the Combined Shopping Center Portfolio.

 

Acquisition Activity (see Footnotes 3 and 7 of the Notes to Consolidated Financial Statements included in this Form 10-K):

 

 

Acquired 48 shopping center properties, nine out-parcels and three land parcels comprising an aggregate 7.5 million square feet of GLA, for an aggregate purchase price of $1.8 billion including the assumption of $807.6 million of non-recourse mortgage debt encumbering 38 of the properties. The Company acquired 43 of these properties for an aggregate sales price of $1.6 billion from joint ventures in which the Company previously held noncontrolling ownership interests and recognized an aggregate gain on change in control of interests of $149.2 million from the fair value adjustment.

 

Additionally, during the year ended December 31, 2015, the Company acquired $20.7 million in land related to two existing development projects which will be held as long-term investments. The Company anticipates completing these projects over the next four years.

 

 

Disposition Activity (see Footnotes 4, 5, and 6 of the Notes to Consolidated Financial Statements included in this Form 10-K):

 

 

During 2015, the Company disposed of 90 consolidated operating properties and eight out-parcels, including its remaining property in Chile, in separate transactions, for an aggregate sales price of $543.9 million. These transactions resulted in an aggregate net gain of $125.8 million, after income tax expense, foreign currency translation loss of $19.6 million related to the sale of the remaining Chile property and aggregate impairment charges of $10.2 million, before income tax expense of $2.3 million.

 

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

 

 

During January 2015, the Company entered into a new $650.0 million unsecured term loan (“Term Loan”) which has an initial maturity date in January 2017 (with three one-year extension options at the Company’s discretion) and accrues interest at a spread (currently 95 basis points) to LIBOR or at the Company’s option at a base rate as defined per the agreement (1.37% at December 31, 2015). The proceeds from the Term Loan were used to repay the Company’s $400.0 million term loan, which was scheduled to mature in April 2015 (with two additional one-year extension options) and bore interest at LIBOR plus 105 basis points, and for general corporate purposes.

 

During March 2015, the Company issued $350.0 million of 30-year Senior Unsecured Notes at an interest rate of 4.25% payable semi-annually in arrears which are scheduled to mature in April 2045.

 

During October 2015, the Company issued $500.0 million of seven-year Senior Unsecured Notes at an interest rate of 3.40% payable semi-annually in arrears which are scheduled to mature in November 2022.

 

During November 2015, the Company redeemed all of its outstanding 7,000,000 depositary shares of the Company’s 6.90% Class H Cumulative Redeemable Preferred Stock (the “Class H Preferred Stock”) resulting in an aggregate payment of $175.0 million. In connection with this redemption the Company recorded a non-cash charge of $5.8 million resulting from the difference between the redemption amount and the carrying amount of the Class H Preferred Stock on the Company’s Consolidated Balance Sheets.

 

During 2015, the Company repaid (i) its $100.0 million 4.904% medium term notes, which matured in February 2015, (ii) its $100.0 million 5.250% senior unsecured notes, which matured in September 2015 and (iii) its $150.0 million 5.584% medium term notes, which matured in November 2015.

 

Also during 2015, the Company paid off $557.0 million of mortgage debt (including fair market value adjustment of $1.4 million) that encumbered 27 operating properties.

 

Critical Accounting Policies

 

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

 

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

 

Revenue Recognition and Accounts Receivable

 

Base rental revenues from rental 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, where applicable), assumed debt and redeemable units issued at the date of acquisition, based on evaluation of information and estimates available at that date. Fair value is determined based on an exit price approach, which contemplates the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If, up to one year from the acquisition date, information regarding fair value of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments, if material, 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

 

Terms of leases or useful

(including certain identified intangible assets)

 

lives, whichever is shorter

 

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

 

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

 

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

 

Investments in Unconsolidated Joint Ventures

 

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

 

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

 

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

 

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

 

 

Realizability of Deferred Tax Assets and Uncertain Tax Positions

 

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

 

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

 

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

 

The Company 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 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 positive and negative 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 and sale of certain built-in gain assets.

 

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 21 of the Notes to Consolidated Financial Statements included in this Form 10-K).

 

Results of Operations

 

Comparison 2015 to 2014

 

   

2015

   

2014

   

Change

   

% change

 
   

(amounts in millions)

         
                                 

Revenues from rental properties (1)

  $ 1,144.5     $ 958.9     $ 185.6       19.4 %

Rental property expenses: (2)

                               

Rent

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

Real estate taxes

    147.2       124.7       22.5       18.0 %

Operating and maintenance

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

Depreciation and amortization (3)

  $ 344.5     $ 258.1     $ 86.4       33.5 %

 

(1)

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

 

 

 

(2)

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

 

(3)

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

 

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

 

During the year ended December 31, 2015, the Company recognized impairment charges of $45.5 million, before noncontrolling interests and income taxes, of which $0.1 million is included in discontinued operations. These impairment charges consist of (i) $30.3 million related to adjustments to property carrying values, (ii) $9.0 million relating to a cost method investment, (iii) $5.3 million related to certain investments in other real estate investments and (iv) $0.8 million related to marketable debt securities investments. During the year ended December 31, 2014, the Company recognized impairment charges of $217.8 million, of which $178.0 million, before income tax benefits of $1.7 million, is included in discontinued operations. These impairment charges consist of (i) $118.4 million related to adjustments to property carrying values, (ii) the release of a cumulative foreign currency translation loss of $92.9 million relating to the substantial liquidation of the Company’s investment in Mexico, (iii) $4.8 million related to a cost method investment and (iv) $1.6 million related to a preferred equity investment. The adjustments to property carrying values were recognized in connection with the Company’s efforts to market certain properties and management’s assessment as to the likelihood and timing of such potential transactions and the anticipated hold period for such properties. Certain of the calculations to determine fair value utilized unobservable inputs and as such are classified as Level 3 of the fair value hierarchy. Certain of the calculations to determine fair value utilized unobservable inputs and as such are classified as Level 3 of the fair value hierarchy. For additional disclosure, see Footnote 15 of the Notes to Consolidated Financial Statements included in this Form 10-K.

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

Results of Operations

 

Comparison 2014 to 2013

 

   

2014

   

2013

   

Change

   

% change

 
   

(amounts in millions)

         
                                 

Revenues from rental properties (1)

  $ 958.9     $ 825.2     $ 133.7       16.2 %

Rental property expenses: (2)

                               

Rent

  $ 14.3     $ 13.3     $ 1.0       7.5 %

Real estate taxes

    124.7       108.7       16.0       14.7 %

Operating and maintenance

    119.7       99.4       20.3       20.4 %
    $ 258.7     $ 221.4     $ 37.3       16.8 %

Depreciation and amortization (3)

  $ 258.1     $ 224.7     $ 33.4       14.9 %

 

(1)

Revenues from rental property increased primarily from the combined effect of (i) the acquisition of operating properties during 2014 and 2013, providing incremental revenues for the year ended December 31, 2014, of $110.1 million, as compared to the corresponding period in 2013 and (ii) an overall increase in the consolidated shopping center portfolio occupancy to 95.7% at December 31, 2014, as compared to 94.0% at December 31, 2013, the completion of certain redevelopment projects, tenant buyouts and net growth in the current portfolio, providing incremental revenues for the year ended December 31, 2014, of $23.6 million, as compared to the corresponding period in 2013.

 

(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, 2014, as compared to the corresponding period in 2013, primarily due to acquisitions of properties during 2014 and 2013, resulting in (i) an increase in real estate taxes of $16.0 million, (ii) an increase in repairs and maintenance costs of $6.8 million, (iii) an increase in snow removal costs of $3.4 million, (iv) an increase in property services of $3.7 million, (v) an increase in utilities expense of $1.8 million and (vi) an increase in insurance expense of $3.9 million, due to an increase in insurance claims.

 

(3)

Depreciation and amortization increased for the year ended December 31, 2014, as compared to the corresponding period in 2013, primarily due to operating property acquisitions during 2014 and 2013.

 

General and administrative costs include employee-related expenses (salaries, bonuses, equity awards, benefits, severance costs and payroll taxes), professional fees, office rent, travel expense, and other company-specific expenses. General and administrative expenses decreased $5.3 million to $122.2 million for the year ended December 31, 2014, as compared to $127.5 million for the corresponding period in 2013. This decrease is primarily due to a decrease in professional fees of $3.4 million in connection with the Company’s response to a subpoena from the Enforcement Division of the SEC and a parallel investigation by the DOJ in connection with the investigation of Wal-Mart Stores, Inc. with respect to the Foreign Corrupt Practices Act (see Item 3) and a decrease in personnel related costs of $1.8 million for the year ended December 31, 2014, as compared to the corresponding period in 2013.

 

 

During the year ended December 31, 2014, the Company recognized impairment charges of $217.8 million, of which $178.0 million, before income tax benefits of $1.7 million, is included in discontinued operations. These impairment charges consist of (i) $118.4 million related to adjustments to property carrying values, (ii) the release of a cumulative foreign currency translation loss of $92.9 million relating to the substantial liquidation of the Company’s investment in Mexico, (iii) $4.8 million related to a cost method investment and (iv) $1.6 million related to a preferred equity investment. The adjustments to property carrying values were recognized in connection with the Company’s efforts to market certain properties and management’s assessment as to the likelihood and timing of such potential transactions and the anticipated hold period for such properties. During the second quarter ended June 30, 2014, the Company implemented a plan to accelerate its disposition of certain properties. This plan effectively shortened the Company’s anticipated hold period for these properties and as a result the Company recognized impairment charges on various operating properties. Certain of the calculations to determine fair value utilized unobservable inputs and as such are classified as Level 3 of the fair value hierarchy. For additional disclosure, see Footnote 15 of the Notes to Consolidated Financial Statements included in this Form 10-K.

 

During the year ended December 31, 2013, the Company recognized impairment charges of $190.2 million of which $158.0 million, before noncontrolling interests and income tax, is included in discontinued operations. These impairment charges consist of (i) $175.6 million related to adjustments to property carrying values, (ii) $10.4 million related to a cost method investment, (iii) $1.0 million related to certain joint venture investments and (iv) $3.2 million related to a preferred equity investment. Certain of the calculations to determine fair value utilized unobservable inputs and as such are classified as Level 3 of the fair value hierarchy. For additional disclosure, see Footnote 15 of the Notes to Consolidated Financial Statements included in this Form 10-K.

 

Interest, dividends and other investment income decreased $15.8 million to $1.0 million for the year ended December 31, 2014, as compared to $16.8 million for the corresponding period in 2013. This decrease is primarily due to (i) a decrease in realized gains of $12.1 million resulting from the sale of certain marketable securities during the year ended December 31, 2013, (ii) a decrease in excess cash distributions related to cost method investments of $2.8 million for the year ended December 31, 2013 and (iii) a decrease in dividend income of $1.2 million resulting from the sale of certain marketable securities during the year ended December 31, 2013.

 

Other income/(expense), net changed $9.7 million to an expense of $8.5 million for the year ended December 31, 2014, as compared to income of $1.2 million for the corresponding period in 2013. This change is primarily due to a decrease in gains from land sales of $8.0 million and an increase in acquisition related costs of $1.4 million related to an increase in acquisitions during 2014 as compared to 2013.

 

Interest expense decreased $8.4 million to $203.8 million for the year ended December 31, 2014, as compared to $212.2 million for the year ended December 31, 2013.  This decrease is primarily related to lower effective interest rates and reduced borrowing levels during 2014, as compared to 2013.

 

Provision for income taxes, net decreased $10.3 million to $22.4 million for the year ended December 31, 2014, as compared to $32.7 million for the corresponding period in 2013. This change is primarily due to (i) a decrease in foreign tax expense of $9.5 million primarily relating to the sale of certain unconsolidated properties during 2013 within the Company’s Latin American portfolio which were subject to foreign taxes at a consolidated reporting entity level offset by an increase in other foreign uncertain tax positions of $5.5 million, (ii) a decrease in tax provision of $9.1 million relating to a change in control gain recognized during the year ended December 31, 2013, (iii) a decrease in tax provision of $3.4 million related to gains on land sales during 2013, and (iv) a decrease in tax provision of $2.4 million related to gains on sale of certain marketable securities during 2013, partially offset by (v) a partial release of the deferred tax valuation allowance of $8.7 million during the year ended December 31, 2013 related to the Company’s FNC Realty Corp. (“FNC”) portfolio based on the Company’s estimated future earnings of FNC and (vi) a decrease in tax benefit of $4.3 million relating to equity losses recognized in connection with the Company’s Albertson’s investment.

 

Equity in income of joint ventures, net decreased $49.1 million to $159.6 million for the year ended December 31, 2014, as compared to $208.7 million for the corresponding period in 2013. This decrease is primarily the result of (i) the release of a cumulative foreign currency translation loss of $47.3 million relating to the substantial liquidation of the Company’s investment in Mexico, (ii) a decrease in gains of $21.7 million resulting from the sale of properties within various joint venture investments and interests in joint ventures primarily located in Latin America during 2013, (iii) a decrease in equity in income of $1.4 million due to the sale of the InTown portfolio in 2013 and (iv) a decrease of equity in income of $7.5 million related to the sale of various joint ventures within the Company’s Latin American portfolio during 2014, partially offset by (v) an increase in equity in income of $15.6 million primarily resulting from a cash distribution received in excess of the Company’s carrying basis during 2014, and (vi) a decrease in impairment charges of $8.2 million relating to various joint venture properties primarily located in Mexico taken during the year ended 2013, as compared to 2014.

 

 

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

 

During 2013, the Company acquired four properties from joint ventures in which the Company had noncontrolling interests.  The Company recorded an aggregate net gain on change in control of interests of $21.7 million related to the fair value adjustment associated with its original ownership of these properties.

 

Equity in income from other real estate investments, net increased $6.9 million to $38.0 million for the year ended December 31, 2014, as compared to $31.1 million for the corresponding period in 2013. This increase is primarily due to an increase of $10.7 million in equity in income, resulting from lower net losses in the Albertson’s joint venture during the year ended December 31, 2014, as compared to the corresponding period in 2013, partially offset by a decrease of $5.8 million in earnings from the Company’s Preferred Equity Program primarily resulting from the sale of the Company’s interests in certain preferred equity investments during 2014 and 2013.

 

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

 

During 2013, the Company disposed of 36 consolidated operating properties and three out-parcels in separate transactions, for an aggregate sales price of $279.5 million. These transactions, which are included in Discontinued operations on the Company’s Consolidated Statements of Income, resulted in an aggregate gain of $25.4 million and impairment charges of $61.9 million, before income tax.

 

Additionally, during 2013, the Company sold eight consolidated properties in its Latin American portfolio for an aggregate sales price of $115.4 million. These transactions, which are included in Discontinued operations on the Company’s Consolidated Statements of Income, resulted in an aggregate gain of $23.3 million, before income taxes, and aggregate impairment charges of $26.9 million (including the release of a cumulative foreign currency translation loss of $7.8 million associated with the sale of the Company’s interest in two properties within Brazil, which represents a full liquidation of the Company’s investment in Brazil), before income taxes.

 

Net income attributable to the Company increased $187.7 million to $424.0 million for the year ended December 31, 2014, as compared to $236.3 million for the corresponding period in 2013. On a diluted per share basis, net income attributable to the Company was $0.89 for 2014, as compared to net income attributable to the Company of $0.43 for 2013. These changes are primarily attributable to (i) incremental earnings due to the acquisition of operating properties during 2014 and 2013 and increased profitability from the Company’s operating properties, (ii) an increase in gains on sale of operating properties, (iii) an increase in gain on change in control of interests, (iv) a decrease in tax provision relating to decreased gains on sales from joint venture properties during 2014, and (v) an increase in equity in income of other real estate investments, net, partially offset by, (vi), a decrease in equity in income of joint ventures, net, including the release of a cumulative foreign currency translation loss relating to the substantial liquidation of the Company’s Mexican Portfolio (vii) a decrease in interest, dividends and other investment income, (viii) a decrease in other income/(expense), net and (ix) an increase in impairment charges, including the release of a cumulative foreign currency translation loss relating to the substantial liquidation of the Company’s Mexican Portfolio, during the year ended December 31, 2014, as compared to the corresponding period in 2013.

 

Liquidity and Capital Resources

 

The Company’s capital resources include accessing the public debt and equity capital markets, mortgage and construction loan financing, borrowings under term loans and immediate access to an unsecured revolving credit facility with bank commitments of $1.75 billion which can be increased to $2.25 billion through an accordion feature.

 

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

 

   

Year Ended December 31,

 
   

2015

   

2014

   

2013

 

Net cash flow provided by operating activities

  $ 493.7     $ 629.3     $ 570.0  

Net cash flow provided by investing activities

  $ 21.4     $ 126.7     $ 72.2  

Net cash flow used for financing activities

  $ (512.9 )   $ (717.5 )   $ (635.4 )

 

 

Operating Activities

 

The Company anticipates that cash on hand, borrowings under its revolving credit facility, issuance of equity and public debt, as well as other debt and equity alternatives, will provide the necessary capital required by the Company.  Net cash flows provided by operating activities for the year ended December 31, 2015, were $493.7 million, as compared to $629.3 million for the comparable period in 2014. The change of $135.6 million is primarily attributable to (i) a decrease in operational distributions from the Company’s joint venture programs due to the sale of certain joint ventures during 2015 and 2014 and (ii) changes in accounts and notes receivable and operating assets and liabilities due to timing of receipts and payments, partially offset by (iii) cash flow from the diverse portfolio of rental properties, (iv) the acquisition of operating properties during 2015 and 2014 and (v) new leasing, expansion and re-tenanting of core portfolio properties.

 

Investing Activities

 

Cash flows provided by investing activities for the year ended December 31, 2015, was $21.4 million, as compared to $126.7 million for the comparable period in 2014. This change of $105.3 million resulted primarily from (i) an increase in acquisition of operating real estate of $276.6 million, (ii) an increase in investment in other real estate investments of $190.3 million related to the Company’s KRS AB Acquisition, LLC joint venture investment in Safeway, Inc., (iii) a decrease in proceeds from the sale of operating properties of $175.7 million, (iv) a decrease in reimbursements of investments and advances to real estate joint ventures of $128.5 million, (v) an increase in improvements to operating real estate of $34.9 million and (vi) an increase in improvements to real estate under development of $16.4 million, partially offset by (vii) an increase in distributions from liquidation of real estate joint ventures of $373.8 million, (viii) an increase in return on investment from liquidation of real estate joint ventures of $88.7 million, (ix) an increase in proceeds from sale/repayments of marketable securities of $72.4 million, (x) a decrease in investment in mortgage loans receivable of $50.0 million, (xi) a decrease in acquisitions of real estate under development of $49.4 million, (xii) an increase in collection of mortgage loans receivable of $46.8 million, (xiii) an increase in reimbursements of investments and advances to other real estate investments of $24.2 million and (xiv) a decrease in investment in marketable securities of $11.2 million.

 

Acquisitions of Operating Real Estate

 

During the years ended December 31, 2015 and 2014, the Company expended $661.4 million and $384.8 million, respectively, towards the acquisition of operating real estate properties. The Company’s strategy is to continue to transform its operating portfolio through its capital recycling program by acquiring what the Company believes are high quality U.S. retail properties and disposing of lesser quality assets. The Company anticipates acquiring approximately $450.0 million to $550.0 million of operating properties during 2016. The Company intends to fund these acquisitions with proceeds from property dispositions, cash flow from operating activities, assumption of mortgage debt, if applicable, and availability under the Company’s revolving line of credit.

 

Improvements to Operating Real Estate

 

During the years ended December 31, 2015 and 2014, the Company expended $166.7 million and $131.8 million, respectively, towards improvements to operating real estate. These amounts are made up of the following (in thousands):

 

   

Year Ended December 31,

 
   

2015

   

2014

 

Redevelopment/renovations

  $ 125,994     $ 86,639  

Tenant improvements/tenant allowances

    30,127       40,060  

Other

    10,549       5,096  

Total

  $ 166,670     $ 131,795  

 

Additionally, during the years ended December 31, 2015 and 2014, the Company capitalized interest of $5.6 million and $2.4 million, respectively, and capitalized payroll of $3.6 million and $3.4 million, respectively, in connection with the Company’s improvements of real estate.

 

During the years ended December 31, 2015 and 2014, the Company capitalized personnel costs of $13.9 million and $15.5 million, respectively, relating to deferred leasing costs.

 

The Company has an ongoing program to redevelop and re-tenant its properties to maintain or enhance its competitive position in the marketplace. The Company is actively pursuing redevelopment opportunities within its operating portfolio which it believes will increase the overall value by bringing in new tenants and improving the assets’ value. The Company has identified three categories of redevelopment, (i) large scale redevelopment, which involves demolishing and building new square footage, (ii) value creation redevelopment, which includes the subdivision of large anchor spaces into multiple tenant layouts, and (iii) creation of out-parcels and pads which are located in the front of the shopping center properties. The Company anticipates its capital commitment toward these redevelopment projects and re-tenanting efforts during 2016 will be approximately $175.0 million to $225.0 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.

 

 

Ground-Up Development

 

The Company is engaged in select ground-up development projects, which will be held as long-term investments by the Company. As of December 31, 2015, the Company had in progress a total of five ground-up development projects located in the U.S.. The Company anticipates its capital commitment toward these development projects during 2016 will be approximately $75.0 million to $125.0 million. The funding of these capital requirements will be provided by cash flow from operating activities and availability under the Company’s revolving line of credit. The Company anticipates costs to complete these projects to be approximately $260.0 million to $270.0 million. Additionally, during the year ended December 31, 2015, the Company capitalized interest of $2.6 million and capitalized payroll of $0.6 million, in connection with these ground-up development projects.

 

Investments and Advances to Real Estate Joint Ventures

 

During the year ended December 31, 2015, the Company expended $91.6 million for investments and advances to real estate joint ventures, primarily related to the repayment of mortgage debt and received $94.1 million from reimbursements of investments and advances to real estate joint ventures. In addition, the Company received proceeds of $462.5 million from the liquidation of real estate joint ventures, including refinancing of debt, sales of properties, and return of investment from liquidation (see Footnote 7 of the Notes to Consolidated Financial Statements included in this Form 10-K).

 

Financing Activities

 

Cash flow used for financing activities for the year ended December 31, 2015, was $512.9 million, as compared to $717.5 million for the comparable period in 2014. This change of $204.6 million resulted primarily from (i) an increase in proceeds from unsecured term loan/notes of $1.0 billion and (ii) an increase in contributions from noncontrolling interest, net of $104.2 million, primarily relating to the joint venture investment in Safeway, partially offset by (iii) an increase in repayments under unsecured term loan/notes of $379.2 million, (iv) an increase in principal payments of $233.5 million, (v) an increase in redemption of preferred stock of $175.0 million, (vi) an increase in redemption of noncontrolling interests of $52.6 million, (vii) an increase in dividends paid of $28.0 million, (viii) a decrease in proceeds from mortgage loan financings of $15.7 million and (ix) an increase in repayments/proceeds under the unsecured revolving credit facility, net of $5.6 million.

 

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

 

Debt maturities for 2016 consist of: $776.5 million of consolidated debt; $1.1 billion of unconsolidated joint venture debt; and $68.8 million of debt on properties included in the Company’s Preferred Equity Program, assuming the utilization of extension options where available.  The 2016 consolidated debt maturities are anticipated to be repaid with operating cash flows, borrowings from the Company’s revolving credit facility (which at December 31, 2015, had $1.75 billion available) and debt refinancing.  The 2016 debt maturities on properties in the Company’s unconsolidated joint ventures and Preferred Equity Program are anticipated to be 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 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 $10.7 billion.  Proceeds from public capital market activities have been used for the purposes of, among other things, repaying indebtedness, acquiring interests in open-air shopping centers, funding ground-up development projects, expanding and improving properties in the portfolio and other investments.

 

During February 2015, the Company filed a shelf registration statement on Form S-3, which is effective for a term of three years, for the future unlimited offerings, from time-to-time, of debt securities, preferred stock, depositary shares, common stock and common stock warrants. The Company, pursuant to this shelf registration statement may, from time-to-time, offer for sale its senior unsecured debt for any general corporate purposes, including (i) funding specific liquidity requirements in its business, including property acquisitions, development and redevelopment costs and (ii) managing the Company’s debt maturities. (See Footnote 12 of the Notes to Consolidated Financial Statements included in this Form 10-K.)

 

 

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

 

Preferred Stock –

 

On October 26, 2015, the Company called for the redemption of all of its outstanding 7,000,000 depositary shares of the Company’s 6.90% Class H Cumulative Redeemable Preferred Stock, $1.00 par value per share . The aggregate redemption amount of $175.0 million plus accumulated and unpaid dividends of $1.3 million, was paid on November 25, 2015. Upon redemption, the Company recorded a non-cash charge of $5.8 million resulting from the difference between the redemption amount and the carrying amount of the Class H Preferred Stock on the Company’s Condensed Consolidated Balance Sheets in accordance with the FASB’s guidance on Distinguishing Liabilities from Equity. This $5.8 million charge was subtracted from net income to arrive at net income available to common shareholders and used in the calculation of earnings per share for the year ended December 31, 2015.

 

Medium Term Notes (“MTN”) and Senior Notes -

 

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

 

Covenant

 

Must Be

 

As of 12/31/15

Consolidated Indebtedness to Total Assets

 

<65%

 

40%

Consolidated Secured Indebtedness to Total Assets

 

<40%

 

12%

Consolidated Income Available for Debt Service to Maximum Annual Service Charge

 

>1.50x

 

6.7x

Unencumbered Total Asset Value to Consolidated Unsecured Indebtedness

 

>1.50x

 

2.7x

 

For a full description of the various indenture covenants refer to the Indenture dated September 1, 1993; the First Supplemental Indenture dated August 4, 1994; the Second Supplemental Indenture dated April 7, 1995; the Third Supplemental Indenture dated June 2, 2006; the Fourth Supplemental Indenture dated April 26, 2007; the Fifth Supplemental Indenture dated as of September 24, 2009; the Sixth Supplemental Indenture dated as of May 23, 2013; the Seventh Supplemental Indenture dated as of April 24, 2014; the Indenture dated April 21, 2005; the Second Supplemental Indenture dated August 16, 2006; the Third Supplemental Indenture dated April 13, 2010; and the Fourth Supplemental Indenture dated July 22, 2013, as filed with the SEC. See the Exhibits Index for specific filing information.

 

During March 2015, the Company issued $350.0 million of 30-year Senior Unsecured Notes at an interest rate of 4.25% payable semi-annually in arrears which are scheduled to mature in April 2045. The Company used the net proceeds from the issuance of $342.7 million, after the underwriting discount and related offering costs, for general corporate purposes including to pre-fund near-term debt maturities and partially reduce borrowings under the Company’s Credit Facility.

 

During October 2015, the Company issued $500.0 million of seven-year Senior Unsecured Notes at an interest rate of 3.40% payable semi-annually in arrears which are scheduled to mature in November 2022. The Company used the net proceeds from the issuance of $493.0 million, after the underwriting discount and related offering costs, for general corporate purposes including to pre-fund near-term debt maturities and partially reduce borrowings under the Company’s Credit Facility.

 

During 2015, the Company repaid (i) its $100.0 million 4.904% medium term notes, which matured in February 2015, (ii) its $100.0 million 5.250% senior unsecured notes, which matured in September 2015 and (iii) its $150.0 million 5.584% medium term notes, which matured in November 2015.

 

Credit Facility -

 

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 March 2018 with two additional six month options to extend the maturity date, at the Company’s discretion, to March 2019. The Credit Facility, which can be increased to $2.25 billion through an accordion feature, accrues interest at a rate of LIBOR plus 92.5 basis points (1.35% as of December 31, 2015) on drawn funds. In addition, the Credit Facility includes a $500 million sub-limit which provides the Company the opportunity to borrow in alternative currencies including Canadian Dollars, British Pounds Sterling, Japanese Yen or Euros. Pursuant to the terms of the 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, 2015, the Credit Facility had no outstanding balance and $0.9 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 12/31/15

Total Indebtedness to Gross Asset Value (“GAV”)

 

<60%

 

43%

Total Priority Indebtedness to GAV

 

<35%

 

12%

Unencumbered Asset Net Operating Income to Total Unsecured Interest Expense

 

>1.75x

 

4.47x

Fixed Charge Total Adjusted EBITDA to Total Debt Service

 

>1.50x

 

2.50x

 

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

 

Term Loan –

 

During January 2015, the Company entered into a new $650.0 million unsecured term loan (“Term Loan”) which has an initial maturity in January 2017, with three one-year extension options at the Company’s discretion, and accrues interest at a spread (currently 95 basis points) to LIBOR or at the Company’s option at a base rate as defined per the agreement (1.37% at December 31, 2015). The proceeds from the Term Loan were used to repay the Company’s $400.0 million term loan, which was scheduled to mature in April 2015 with two additional one-year extension options and bore interest at LIBOR plus 105 basis points, and for general corporate purposes. Pursuant to the terms of the credit agreement for the Term Loan, the Company, among other things, is subject to covenants requiring the maintenance of (i) maximum indebtedness ratios and (ii) minimum interest and fixed charge coverage ratios. The term loan covenants are similar to the Credit Facility covenants described above.

 

Mortgages Payable –

 

During 2015, the Company (i) assumed $835.2 million of individual non-recourse mortgage debt relating to the acquisition of 38 operating properties, including an increase of $27.6 million associated with fair value debt adjustments and (ii) paid off $557.0 million of mortgage debt (including fair market value adjustment of $1.4 million) that encumbered 27 operating properties.

 

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, 2015, the Company had over 350 unencumbered property interests in its portfolio.

 

Other –

 

In connection with its intention to continue to qualify as a REIT for federal income tax purposes, the Company expects to continue paying regular dividends to its stockholders. These dividends will be paid from operating cash flows. The Company’s Board of Directors will continue to evaluate the Company’s dividend policy on a quarterly basis as the Board of Directors monitors sources of capital and evaluates the impact of the economy and capital markets availability on operating fundamentals.  Since cash used to pay dividends reduces amounts available for capital investment, the Company generally intends to maintain a conservative dividend payout ratio, reserving such amounts as it considers necessary for the expansion and renovation of shopping centers in its portfolio, debt reduction, the acquisition of interests in new properties and other investments as suitable opportunities arise and such other factors as the Board of Directors considers appropriate.  Cash dividends paid were $455.8 million in 2015, $427.9 million in 2014 and $400.4 million in 2013.

 

Although the Company receives substantially all of its rental payments on a monthly basis, it generally intends to continue paying dividends quarterly. Amounts accumulated in advance of each quarterly distribution will be invested by the Company in short-term money market or other suitable instruments. On November 3, 2015, the Company’s Board of Directors declared an increased quarterly cash dividend of $0.255 per common share, an annualized increase of 6.3%, payable to shareholders of record on January 4, 2016, which was paid on January 15, 2016. Additionally, on February 2, 2016, the Company’s Board of Directors declared a quarterly cash dividend of $0.255 per common share payable to shareholders of record on April 5, 2016, which is scheduled to be paid on April 15, 2016.

 

The Company is subject to taxes on its activities in Canada, Puerto Rico, Mexico, and Chile.  In general, under local country law applicable to the structures the Company has in place and applicable treaties, the repatriation of cash to the Company from its subsidiaries and joint ventures in Canada, Puerto Rico and Mexico generally are not subject to withholding tax. The Company is subject to withholding taxes in Chile on sale transactions. As a result, the Company will incur a withholding tax on the repatriation of sale proceeds associated with the sale of the Company’s remaining property in Chile. The Company has determined this withholding tax to be $0.5 million. The Company is subject to and also includes in its tax provision non-U.S. income taxes on certain investments located in jurisdictions outside the U.S.. These investments are held by the Company at the REIT level and not in the Company’s taxable REIT subsidiary. Accordingly, the Company does not expect a U.S. income tax impact associated with the repatriation of undistributed earnings from the Company’s foreign subsidiaries.

 

 

Contractual Obligations and Other Commitments

 

The Company has debt obligations relating to its revolving credit facility, term loan, MTNs, senior notes and mortgages with maturities ranging from less than one year to 29 years. As of December 31, 2015, the Company’s total debt had a weighted average term to maturity of 5.3 years. In addition, the Company has non-cancelable operating leases pertaining to its shopping center portfolio. As of December 31, 2015, the Company has 46 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 seven non-cancelable operating leases pertaining to its retail store lease portfolio. The following table summarizes the Company’s debt maturities (excluding extension options, unamortized debt issuance costs of $34.6 million and fair market value of debt adjustments aggregating $42.6 million) and obligations under non-cancelable operating leases as of December 31, 2015 (in millions):

 

   

Payments due by period

         

Contractual Obligations:

 

2016

   

2017

   

2018

   

2019

   

2020

   

Thereafter

   

Total

 

Long-Term Debt-Principal (1)

  $ 790.5     $ 1,512.4     $ 545.2     $ 314.4     $ 243.5     $ 1,962.3     $ 5,368.3  

Long-Term Debt-Interest (2)

  $ 210.0     $ 155.4     $ 109.0     $ 98.3     $ 78.4     $ 441.0     $ 1,092.1  

Operating Leases:

                                                       

Ground Leases (3)

  $ 10.6     $ 10.5     $ 10.6     $ 10.6     $ 10.1     $ 193.1     $ 245.5  

Retail Store Leases

  $ 2.1     $ 1.8     $ 1.4     $ 0.6     $ 0.6     $ 0.5     $ 7.0  

 

 

(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, 2015.

 

(3)

For leases which have inflationary increases, future ground rent expense was calculated using the rent as of December 31, 2015.

 

The Company has accrued $4.3 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, 2015. 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 $300.0 million of medium term notes and $472.3 million of secured debt scheduled to mature in 2016. 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, 2015, these letters of credit aggregate $25.6 million.

 

On a select basis, the Company has provided guarantees on interest bearing secured debt held within real estate joint ventures. The Company had the following outstanding guarantees as of December 31, 2015 (amounts in millions):

 

Name of Joint Venture

 

Amount of Guarantee

 

Interest rate

Maturity, with extensions

Terms

Type of debt

Anthem K-12, LP (4 property loans)

  $ 31.2  

Various (1)

Various (1)

Jointly and severally with partner

Promissory note

 

(1)

As of December 31, 2015, the interest rates range from 3.62% to 4.97% and maturity dates with extensions range from July 2016 to August 2022.

 

In connection with the construction of its development/redevelopment projects and related infrastructure, certain public agencies require posting of performance and surety bonds to guarantee that the Company’s obligations are satisfied. These bonds expire upon the completion of the improvements and infrastructure. As of December 31, 2015, the Company had $25.4 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, has obtained unsecured financing for certain joint ventures (see guarantee table above). As of December 31, 2015, the Company did not guarantee any joint venture unsecured debt. Non-recourse mortgage debt is generally defined as debt whereby the lenders’ sole recourse with respect to borrower defaults is limited to the value of the property collateralized by the mortgage. The lender generally does not have recourse against any other assets owned by the borrower or any of the constituent members of the borrower, except for certain specified exceptions listed in the particular loan documents (see Footnote 7 of the Notes to Consolidated Financial Statements included in this Form 10-K). As of December 31, 2015, these investments include the following joint ventures:

 

Venture

 

Kimco

Ownership

Interest

   

Number of

Properties

   

Total GLA

(in thousands)

   

Non-Recourse Mortgages Payable

(in millions)

   

Number of Encumbered

Properties

   

Average

Interest

Rate

   

Weighted

Average

Term

(months)

 

KimPru (a)

    15.0 %     53       9,576     $ 777.1       33       5.54 %     12.6  

KIR (b)

    48.6 %     47       10,773     $ 781.9       45       4.73 %     63.1  

CPP (c)

    55.0 %     7       2,425     $ 109.9       2       5.25 %     3.5  

RioCan Venture (d)

    50.0 %     13       2,396     $ 87.5       8       5.02 %     11.0  

 

 

(a)

Represents the Company’s joint ventures with Prudential Real Estate Investors.

 

(b)

Represents the Company’s joint ventures with certain institutional investors. As of December 31, 2015, KIR also had an unsecured credit facility with an outstanding balance of $30.0 million, which is scheduled to mature in June 2018, with a one-year extension option at the joint venture’s discretion, and bore interest at a rate equal to LIBOR plus 1.75% (2.18% at December 31, 2015).

 

(c)

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

 

(d)

Represents the Company’s joint ventures with RioCan Real Estate Investment Trust.

 

The Company has various other unconsolidated real estate joint ventures with varying structures. As of December 31, 2015, these other unconsolidated joint ventures had individual non-recourse mortgage loans aggregating $1.0 billion. The aggregate debt as of December 31, 2015, of all of the Company’s unconsolidated real estate joint ventures is $2.8 billion, of which the Company’s proportionate share of this debt is $1.1 billion. As of December 31, 2015, these loans had scheduled maturities ranging from one month to 14 years and bear interest at rates ranging from 2.01% to 7.88%. Approximately $1.1 billion of the aggregate outstanding loan balance matures in 2016, of which the Company’s proportionate share is $275.7 million. These maturing loans are anticipated to be repaid with operating cash flows, debt refinancing and partner capital contributions, as deemed appropriate (see Footnote 7 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, 2015, the Company’s net investment under the Preferred Equity Program was $199.9 million relating to 421 properties, including 385 net leased properties. As of December 31, 2015, these preferred equity investment properties had individual non-recourse mortgage loans aggregating $523.0 million. These loans have scheduled maturities ranging from five months to 18 years and bear interest at rates ranging from 4.08% to 10.47%. Due to the Company’s preferred position in these investments, the Company’s share of each investment is subject to fluctuation and is dependent upon property cash flows. The Company’s maximum exposure to losses associated with its preferred equity investments is limited to its invested capital.

 

Funds From Operations

 

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

 

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

 

 

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, 2015 and 2014 is as follows (in thousands, except per share data):

 

   

Three Months Ended

   

Year Ended

 
   

December 31,

   

December 31,

 
   

2015

   

2014

   

2015

   

2014

 

Net income available to common shareholders

  $ 360,020     $ 38,207     $ 831,215     $ 365,707  

Gain on disposition of operating property, net, net of tax and noncontrolling interests

    (38,451 ) (3)     (71,152 )     (124,165 ) (3)     (189,572 )

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

    (282,021 ) (3)     (56,262 )     (504,356 ) (3)     (193,791 )

Depreciation and amortization - real estate related

    82,732       70,878       333,840       263,885  

Depreciation and amortization - real estate joint ventures, net of noncontrolling interests

    14,360       21,113       66,937       92,343  

Impairments of operating properties, net of tax and noncontrolling interests

    6,539       153,937  (2)     39,774       257,660  (2)

FFO

    143,179       156,721       643,245       596,232  

Transactional (income)/expense:

                               

Profit participation from other real estate investments

    (48 )     (13,627 )     (11,522 )     (16,426 )

Transactional losses from other real estate investments

    -       -       -       3,497  

(Gains)/loss from land sales, net of tax

    (798 )     436       (6,772 )     (2,550 )

Acquisition costs, net of tax

    2,546       2,172       4,410       7,033  

Severance costs – Canada and Mexico

    1,974       -       1,974       2,869  

Distributions in excess of Company’s investment basis

    (282 )     (2,168 )     (3,456 )     (17,691 )

Gain on sale of marketable securities

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

Impairments on other investments, net of tax and noncontrolling interest

    5,407       1,621       13,898       6,494  

Preferred stock redemption costs

    5,816       -       5,816       -  

Other income, net

    (3,358 )     (513 )     (4,303 )     (2,567 )

Total transactional expense/( income), net

    9,892       (12,079 )     (39,808 )     (19,341 )

FFO as adjusted

  $ 153,071     $ 144,642     $ 603,437     $ 576,891  

Weighted average shares outstanding for FFO calculations:

                               

Basic

    411,667       409,740       411,319       409,088  

Units

    860       1,531       791       1,536  

Dilutive effect of equity awards

    1,481       3,171       1,414       3,139  

Diluted

    414,008  (1)     414,442  (1)     413,524  (1)     413,763  (1)
                                 

FFO per common share – basic

  $ 0.35     $ 0.38     $ 1.56     $ 1.46  

FFO per common share – diluted

  $ 0.35  (1)   $ 0.38  (1)   $ 1.56  (1)   $ 1.45  (1)

FFO as adjusted per common share – basic

  $ 0.37     $ 0.35     $ 1.47     $ 1.41  

FFO as adjusted per common share – diluted

  $ 0.37  (1)   $ 0.35  (1)   $ 1.46  (1)   $ 1.40  (1)

 

 

(1)

Reflects the potential impact if certain units were converted to common stock at the beginning of the period, which would have a dilutive effect on FFO. FFO would be increased by $217 and $795 for the three months ended December 31, 2015 and 2014, respectively, and $781 and $3,033 for the years ended December 31, 2015 and 2014, respectively. The effect of other certain convertible units would have an anti-dilutive effect upon the calculation of Income from continuing operations per share.  Accordingly, the impact of such conversion has not been included in the determination of diluted earnings per share calculations.

 

(2)

Includes cumulative foreign currency translation loss of $134.3 million due to the substantial liquidation of the Company's Mexican Portfolio.

 

(3)

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

 

 

Combined Same Property Net Operating Income (“Combined same property NOI”)

 

Combined 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. Combined same property NOI is considered by management to be an important performance measure of the Company’s operations and management believes that it is frequently used by securities analysts and investors as a measure of the Company’s operating performance because it includes only the net operating income of properties that have been owned for the entire current and prior year reporting periods including those properties under redevelopment and excludes properties under development and pending stabilization. Properties are deemed stabilized at the earlier of (i) reaching 90% leased or (ii) one year following a projects inclusion in operating real estate. Combined 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.

 

Combined same property NOI is calculated using revenues from rental properties (excluding straight-line rents, lease termination fees, above/below market rents and includes charges for bad debt) less operating and maintenance expense, real estate taxes and rent expense and the effect of foreign currency exchange rate movements plus the Company’s proportionate share of Combined same property NOI from unconsolidated real estate joint ventures, calculated on the same basis. The effect of foreign currency exchange rate movements is determined by using the current period exchange rate to translate from local currency into U.S. dollars for both periods.

 

Additionally, the Company presents U.S. Same Property NOI, which excludes the impact of foreign currency exchange rates and the Company’s Canadian operations from Combined same property NOI. The Company provides U.S. Same Property NOI because it believes such measure is frequently used by securities analysts and investors as a valuable measure of period-to-period U.S. operating performance.

 

The Company’s method of calculating Combined same property NOI and U.S. Same Property NOI may differ from methods used by other REITs and, accordingly, may not be comparable to such other REITs.

 

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

 

   

Three Months Ended December 31,

   

Year Ended December 31,

 
   

2015

   

2014

   

2015

   

2014

 

Income from continuing operations

  $ 339,117     $ 74,466     $ 774,405     $ 384,506  

Adjustments:

                               

Management and other fee income

    (4,369 )     (8,764 )     (22,295 )     (35,009 )

General and administrative expenses

    33,413       27,675       122,735       122,201  

Impairment charges

    17,475       11,420       45,383       39,808  

Depreciation and amortization

    86,095       72,767       344,527       258,074  

Other expense, net

    52,525       53,153       174,656       208,208  

Provision for income taxes, net

    48,297       7,735       60,230       22,438  

Gain on change in control of interests, net

    (3,091 )     (23,462 )     (149,234 )     (107,235 )

Equity in income of other real estate investments, net

    (4,854 )     (21,638 )     (36,090 )     (38,042 )

Non same property net operating income

    (28,483 )     (20,777 )     (142,606 )     (97,277 )

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

    (297,489 )     61,987       (245,379 )     148,918  

Impact from foreign currency

    -       (1,644 )     -       (6,120 )

Combined same property NOI

    238,636       232,918       926,332       900,470  

Canadian same property NOI

    (8,913 )     (9,416 )     (38,397 )     (39,188 )

U.S. Same Property NOI

  $ 229,723     $ 223,502     $ 887,935