Despite significant exposure to bankrupt Kmart’s leases, Kimco Realty Corp. recently announced second-quarter net income rose 2.9% to $61.1 million from $59.4 million for the same period last year.

The company also reported that funds from operations rose 10.5% to $79.2 million, from $71.7 million for the same period last year.

Wall Street is pleased with these numbers, especially considering the New Hyde Park, N.Y.-based REIT saw Kmart reject a total of 27 leases at its centers. Kmart’s difficulties caused occupancy in Kimco’s core portfolio to drop to 85% from 86.6% at March 31 and 92% a year ago. But the company did manage to release 10 of the dark Kmart stores. Kimco also expects to sell four Kmart stores and one ground lease by June 30, 2003.

But Kimco should keep a wary eye on the struggling discounter if it doesn’t want to be burned even further, says Salomon Smith Barney analyst Jonathan Litt. "While Kimco appears to be handling the Kmart situation well, we note that 5.7% of base rents in the core are still derived from Kmart," Litt wrote in a report the company’s earnings announcement this morning. "Thus, Kimco may need to repeat this drill in 2003 or 2004 if Kmart is unable to emerge from Chapter 11 or rejects more leases."

Salomon Smith Barney reports that Kimco signed 120 new leases year-to-date at rents averaging $8.64 per sq. ft. This compares to 123 leases signed in the first half of 2001 at rents averaging $10.87. Kimco did not disclose spreads, but its average portfolio rent is currently $8.12 per sq. ft.