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Note 8 - Other Real Estate Investments

12 Months Ended

Dec. 31, 2014

Other Real Estate Investments [Abstract]

Other Real Estate Investments [Text Block]

8. Other Real Estate Investments:

Preferred Equity Capital –

The Company previously provided capital to owners and developers of real estate properties through its Preferred Equity program. As of December 31, 2014, the Company’s net investment under the Preferred Equity program was $229.1 million relating to 443 properties, including 385 net leased properties. For the year ended December 31, 2014, the Company earned $37.2 million from its preferred equity investments, including $18.6 million in profit participation earned from six capital transactions. For the year ended December 31, 2013, the Company’s net investment under the Preferred Equity program was $236.9 million relating to 483 properties, including 392 net leased properties. For the year ended December 31, 2013, the Company earned $43.0 million from its preferred equity investments, including $20.8 million in profit participation earned from 16 capital transactions.

During 2013, the Company amended one of its Canadian preferred equity agreements to restructure its investment into a pari passu joint venture investment in which the Company holds a noncontrolling interest. As a result of the amendment, the Company continues to account for this investment under the equity method of accounting and from the date of the amendment will include this investment in Investments and advances to real estate joint ventures within the Company’s Consolidated Balance Sheets.

During 2013, a preferred equity investment in a portfolio of properties was acquired by the Company. As a result of this transaction, the Company now consolidates this investment. The Company evaluated this transaction pursuant to the FASB’s Consolidation guidance and as such recognized a change in control loss of $9.6 million, from the fair value adjustment associated with the Company’s original ownership. The Company’s estimated fair value relating to the change in control loss was based upon a discounted cash flow model that included all estimated cash inflows and outflows over a specified holding period. The capitalization rate, and discount rate utilized in this model were based upon rates that the Company believes to be within a reasonable range of current market rates.

During 2012, the Company amended one of its preferred equity agreements to restructure its investment into a pari passu joint venture investment in which the Company holds a noncontrolling interest. The Company will continue to account for this investment under the equity method of accounting and from the date of the amendment will include this investment in Investments and advances in real estate joint ventures within the Company’s Consolidated Balance Sheets.

Included in the capital transactions described above for the year ended December 31, 2012, is the sale of three preferred equity investments in which the Company had no investment and recognized promote income of $10.0 million. In connection with this transaction, the Company provided seller financing for $7.5 million, which bore interest at a rate of 7.0% and was paid off in October 2013. The Company evaluated this transaction pursuant to the FASB’s real estate sales guidance and concluded that the criteria for sale recognition was met.

During 2007, the Company invested $81.7 million of preferred equity capital in an entity which was comprised of 403 net leased properties (“Net Leased Portfolio”) which consisted of 30 master leased pools with each pool leased to individual corporate operators. Each master leased pool is accounted for as a direct financing lease. These properties consist of a diverse array of free-standing restaurants, fast food restaurants, convenience and auto parts stores. As of December 31, 2014, the remaining 385 properties were encumbered by third party loans aggregating $317.8 million with interest rates ranging from 5.08% to 10.47% with a weighted-average interest rate of 9.2% and maturities ranging from one to nine years. The Company recognized $14.5 million, $13.2 million and $14.0 million in equity in income from this investment during the years ended December 31, 2014, 2013 and 2012, respectively.

The Company’s maximum exposure to losses associated with its preferred equity investments is primarily limited to its invested capital. As of December 31, 2014 and 2013, the Company’s invested capital in its preferred equity investments approximated $229.1 million and $236.9 million, respectively.

Summarized financial information relating to the Company’s preferred equity investments is as follows (in millions):

	December 31,
	2014		2013
Assets:
Real estate, net	$	456.9	$	571.7
Other assets		666.6		676.1
	$	1,123.5	$	1,247.8
Liabilities and Partners’/Members’ Capital:
Notes and mortgages payable	$	767.6	$	878.1
Other liabilities		21.6		26.1
Partners’/Members’ capital		334.3		343.6
	$	1,123.5	$	1,247.8

	Year Ended December 31,
	2014			2013			2012
Revenues from rental property	$	146.0		$	159.5		$	195.0
Operating expenses		(47.0	)		(34.8	)		(44.7	)
Interest expense		(47.1	)		(55.2	)		(72.0	)
Depreciation and amortization		(19.2	)		(24.0	)		(33.7	)
Impairment charges (a)		-			-			(2.7	)
Other expense, net		(7.2	)		(7.1	)		(8.3	)
Income from continuing operations		25.5			38.4			33.6
Discontinued Operations:
Gain on disposition of properties		31.5			20.8			17.5
Net income	$	57.0		$	59.2		$	51.1

(a)

Represents an impairment charge against one master leased pool due to decline in fair market value.

Kimsouth -

Kimsouth Realty Inc. (“Kimsouth”) is a wholly-owned subsidiary of the Company that holds a 13.6% noncontrolling interest in a joint venture which owns a portion of Albertson’s Inc. During the year ended December 31, 2013, the Company funded an aggregate $70.8 million as its participation in a transaction with Supervalu, Inc. (“SVU”) through a consortium led by Cerberus Capital Management, L.P. (“Cerberus”). This investment included a contribution of $22.3 million to acquire 414 Albertsons locations from SVU through the Company’s existing joint venture in Albertsons. The Company recorded this additional investment in Other real estate investments on the Company’s Consolidated Balance Sheets and will continue to account for its investment in this joint venture under the equity method of accounting. During the years ended December 31, 2014 and 2013, the Company recorded equity losses from operations in this joint venture of $5.8 million and $16.5 million, respectively, which is included in Equity in income from other real estate investments, net on the Company’s Consolidated Statements of Income. As such, the Company’s investment in its Albertsons joint venture as of December 31, 2014 and 2013, was $0.0 million and $5.8 million, respectively. Also included in this $70.8 million aggregate funding is the Company’s contribution of $14.9 million to fund its 15% noncontrolling investment in NAI Group Holdings Inc., a C-corporation, to acquire four grocery banners (Shaw’s, Jewel-Osco, Acme and Star Market) totaling 456 locations from SVU. The Company recorded this investment in Other assets on the Company’s Consolidated Balance Sheets and accounts for this investment under the cost method of accounting. Additionally, as part of this overall funding, the Company acquired 8.2 million shares of SVU common stock for $33.6 million, which is recorded in Marketable securities on the Company’s Consolidated Balance Sheets.

During 2012, the Albertsons joint venture distributed $50.3 million of which the Company received $6.9 million, which was recognized as income from cash received in excess of the Company’s investment, before income tax, and is included in Equity in income from other real estate investments, net on the Company’s Consolidated Statements of Income.

In January 2015, the Company invested an additional $85.3 million of new equity in the Company’s Albertsons joint venture to facilitate the acquisition of Safeway Inc. by the Cerberus lead consortium. As a result, Kimco now holds a 9.8% ownership interest in the combined company which operates 2,230 stores across 34 states.

Leveraged Lease -

During June 2002, the Company acquired a 90% equity participation interest in an existing leveraged lease of 30 properties. The properties are leased under a long-term bond-type net lease whose primary term expires in 2016, with the lessee having certain renewal option rights. The Company’s cash equity investment was $4.0 million. This equity investment is reported as a net investment in leveraged lease in accordance with the FASB’s lease guidance.

As of December 31, 2014, 19 of these properties were sold, whereby the proceeds from the sales were used to pay down $32.3 million in mortgage debt and the remaining 11 properties remain encumbered by third-party non-recourse debt of $11.2 million that is scheduled to fully amortize during the primary term of the lease from a portion of the periodic net rents receivable under the net lease.

As an equity participant in the leveraged lease, the Company has no recourse obligation for principal or interest payments on the debt, which is collateralized by a first mortgage lien on the properties and collateral assignment of the lease. Accordingly, this obligation has been offset against the related net rental receivable under the lease.

At December 31, 2014 and 2013, the Company’s net investment in the leveraged lease consisted of the following (in millions):

	2014			2013
Remaining net rentals	$	8.3		$	15.9
Estimated unguaranteed residual value		30.3			30.3
Non-recourse mortgage debt		(10.1	)		(16.1	)
Unearned and deferred income		(12.9	)		(19.9	)
Net investment in leveraged lease	$	15.6		$	10.2