Kimco Realty Corporation (KIM) Earnings Call Transcript & Summary

I was just going to say welcome to the Kimco Realty call. Kimco is a -- one of the North America's largest publicly traded owners and operators of open-air grocery-anchored centers and mixed-use assets. They have over 400 assets with 85% of the ABR in the top 10 -- top 20 core markets. With us, senior management we have, Conor Flynn, CEO; Ross Cooper, President and CIO; Glenn Cohen, Executive VP, CFO; and David Bujnicki, Senior VP, IR and Strategy. Conor, you have some short opening remarks before Q&A. Go ahead.

Thanks, Craig. Appreciate it. Thanks, everybody, for joining us today for our first actual virtual REITweek. Aside from the virtual format, clearly, a lot has changed in the last few months. COVID-19 has impacted the REIT world in ways no one ever expected. To date, we have learned 2 very valuable lessons as we navigate through these unprecedented times. First and foremost, our thesis to transform the company in preparation of a major economic downturn has been validated, and second, the physical retail store has proven to be more important than ever as both a hub for profitable distribution and as a cog to the social nature of a community. We continue to work hand-in-hand with our tenants, helping them to form a bridge to the other side of this pandemic. Many -- May rent collections came in better-than-anticipated at 58%. And for those tenants that have had to close and are struggling, we're continuing to renegotiate personalized rent deferrals, unique to each tenant's business and financial situation. All of our shopping centers are open and operational, with the total amount of open tenants now at 70%. As the world begins to emerge, our team is working tirelessly to welcome tenants and customers back to our centers, while making them feel safe in a new shopping environment. We have initiated a national Curbside Pickup Program and are exploring ways to support restaurants in our common areas and our sidewalks to maximize their patron occupancy. We have seen the positive response as customers are forming lines around the block to get back into our recently reopened retailers. We are cautiously optimistic that we are on the road to improvement and reopenings will have a direct and positive correlation to rent collections. We continue to fortify our liquidity position and balance sheet. Since our first quarter earnings update, we have fully paid down our line of credit while maintaining approximately $200 million in cash. As noted on our May 20 press release, we will partially monetize our Albertsons' position in conjunction with the grocer sales of convertible preferred stock to Apollo Global Management that will close in the next few weeks. We still maintain the highest liquidity position in the shopping center REIT sector even before the realization of this investment. Finally, we announced on June 1 that we are exploring the opportunity to sponsor a separate investment vehicle, which is focused on raising capital to invest in retail-related opportunities arising from the market disruptions affecting retailers and the retail real estate sector, including the ongoing disruption caused by COVID-19. It's a new world for sure. However, we feel that we have the right assets, the right tenant mix, a strong balance sheet and the entrepreneurial spirit to not only survive this pandemic but to thrive in it. And with that, Craig, I'll turn it back over to you.

Great. Just to start out with, what percent of your tenants are currently open? And the ones that aren't open, is that still because they're impacted by mandates? Or are there other issues keeping them from opening?

We're currently at 70% open right now, Craig, but we think that, that number is going to continue to increase as the reopenings occur across the country. Some of the mandated closures are starting to relax, specifically in the tristate area for the nonessential or the ones that were deemed nonessential. It's been an unfortunate situation for a lot of our retailers because someone made the comment that the coronavirus is extremely smart. They can tell the difference between a TJ Maxx and a Target. And like, right, there's really no reason why some are deemed essential and some are deemed nonessential, and it has created an unfair playing field in a lot of ways where the ones that have been able to be open and operating in this period have really taken a whole bunch of market share.

Yes, Craig, to clarify, I know Conor mentioned it, but 100% of our assets are open. 70% is the percentage of ABR that's currently open in this environment.

Right. Great. And then just what we heard -- I mean there was some concern that the treasure hunt approach of off-price retailing might discourage people, but that there was very active activity as the off-price retailers opened. Is you -- were you experiencing the same?

Yes. We have seen lines around the block, specifically for our off-price retailers that are reopening. Clearly, there's a lot of pent-up demand there, a lot of treasure hunters that want to get back to the store. Clearly, there's been a lot of stimulus put back into the system with both the personal checks as well as the PPP program and others that have launched. So we see that correlating to the shopper coming back to the off-price retailers and other of our retailers that have been reopening across the portfolio.

Okay. And then as we get a little bit further in the reopening, what do you think the trajectory of store closings will be in the third and fourth quarter as we deal with double-digit inflation -- unemployment, rather, sorry?

Yes. Nobody has a perfect crystal ball, but we anticipate that it's going to be an issue where the retailers that came into this pandemic that were weak and didn't have a digital strategy are clearly on the chopping block. And then we also focus on our small shop retailers. We feel like they are the ones that have, in the past, anyways, have experienced the hardest hit during downturns. And so that's why we've focused a lot of our programs on helping those small shop tenants. Yes, we launched our Tenant Assistance Program, we call it the TAP, that gives our small shop retailers the opportunity to use outside attorneys to navigate all the different programs that are available to them, both state and nationwide, the PPP programs and others. We've had over 600 small shop tenants sign up to that and gain access to over $20 million of government capital. We've also launched our Curbside Pickup Program because we saw the big nationals take advantage of the curbside and see growth in that of over 200%. So we moved quickly to make sure we had that in place before the nonessential retailers were allowed to open so that they could benefit from it as well and ramp back up quickly. It also serves, I think, as a bridge for the consumers to come back to the shopping center in a way that takes some risk off the table. If they want contactless shopping, Curbside is a nice way to get back into a routine, but may not fully engage within the store.

One other thing to add, Craig, on that. When you think about the consumers, so 40 million people out of work is just a staggering number, but there's a huge difference between this crisis and the Great Financial Crisis. The Great Financial Crisis was a financial crisis in that government was focused on the banks, saving the banks and AIG and every other financial institution so that the financial system didn't crash, but it left the consumer on its own, right? No one got stimulus checks. No one was getting extra money for unemployment. This is a very different situation here, and we are focused on the consumer and the consumers' health, the consumer is actually being bridged by the government. You've seen stimulus checks go out. You've seen unemployment insurance for all these people, plus $600 a week for them. So this crisis, I think the government is actually doing a great job to protect and help the consumer get to the other side because this isn't -- this wasn't started as a financial crisis. It's a health crisis. And the government is really doing things to make sure the consumer comes out on the other end okay, right? You can't foreclose on their homes the way they did in the Great Financial Crisis. So there's some cautious optimism that coming out of this, the consumer is in a better position. Now we don't want 40 million people out of work, but hopefully, as the stores swell up and everything else starts opening, unemployment will come back down fairly quickly. And there is significant pent-up demand. I mean retail deposits, the cash that you and I and everyone else on the phone puts in their bank accounts, retail deposits from the end of February to the end of April are up $2 trillion with a T. I mean it is a big number of capital available for the consumer to be able to go spend once they have a place to go to spend it.

Okay. And I guess following up on the store closures, are you seeing any tenants that are looking to add stores or open new stores. I mean people that were trending well going into the COVID crisis, are they now looking to add stores that may be able to refill some vacancies that you're exposed to?

Yes, that's a good question, Craig. We have seen demand come back. There was about a 30-day pause period to see what things are going to look like. And now that the clouds have started to depart here and reopenings are occurring, we've seen the constant demand forces that we've been experiencing before, whether it's the off-price sector, some of the specialty users have come back and forth. I would say the biggest demand factor that we have seen increase from the pandemic is the grocery sector. We see it from the big box players from Target, Walmart, Costco, to the more traditional grocers, the Albertsons, the Ahold Delhaize, the Krogers of the world as well as the specialty grocers, the Trader Joe's, the Aldi, the Lidl. So, it's an interesting dynamic where, obviously, they have been deemed essential and have been performing incredibly well and see an opportunity to grow their footprint here in a way to continue with that distribution model that we've been talking about earlier.

Okay. And are you undertaking any marketing efforts to try to communicate to the consumers that your assets are safe, given the most consumer stock surveys still show an unease about returning to bricks-and-mortar shopping?

Yes. We have, Craig. I think we take a multi-prong approach with our marketing efforts. And a lot of it is spearheaded by the retailer. The anchor that's in that property is going to be the lead in terms of the marketing efforts, and then we try and enhance their efforts. So whether it's a Target, a Costco, a Walmart, a Home Depot, Grocer, you name it, we have those anchors that are going to lead the way. And then we typically have signage along the entry points to let people know that, "Hey, this -- we're open and operating with a welcoming environment." We have been making sure that all of our assets are sparkling clean so that when they do come, they notice a welcoming and a safe environment. And then they also notice our Curbside Pickup Program. And so in a lot of ways, I think it helps the retailer ramp back up sales quickly.

Okay. And then just what are your thoughts about the California Bill 939? And I guess New Jersey is trying to start their own kind of version of that.

It's a very slog bill, as you know. It would break down an ecosystem that is responsible for employing 1 out of every 4 people in this country. And so I think it's a very short-term focused type bill that doesn't really have much momentum. So we're watching it closely as most are. California is pretty good. It's throwing a lot of things up in the air, but clearly, obviously, this is something that I don't think is going to gain much traction.

Great. And then I know you had mentioned it in your opening comments, but what was it that sparked your interest in starting up the $50 million to $100 million investment vehicle to invest in retail real estate opportunity?

Yes. So Craig, we've had a PLUS business inside Kimco for decades. And as you know, we've been very successful over the years, but it's been lumpy and it's been event-driven, typically by dislocations as when we see opportunities that we pounced on. And so we figured for a REIT model to really get a valuation credit or a multiple on that business, we wanted to set up something that would create a recurring income stream to Kimco. And so we recognize that there's going to be significant opportunities due to this dislocation, and we wanted to set up a structure that really would benefit Kimco shareholders by, in essence, completing the simplification of Kimco. This is probably the last step of our simplification program. You've known over the past few years, how much heavy lifting we've done to get back to what we do best, and we believe setting up a separate vehicle like this to go after disruption will allow us to create the type of vehicle that will create a recurring income stream back to Kimco.

Okay. And then just along as we're on the PLUS business, do you have any updates or comments on the Albertsons' situation?

Well, you saw the press release with the Apollo deal that should be closing in the next few weeks. We're obviously enthused about that because it sets a marker of valuation for the company at $10 billion. It does lower our ownership stake to $7.5 million, but obviously, we get a lot of proceeds for that sale. And then it sets them up, hopefully to be in a position to go public. They have the S-1 on file. It will be updated with the Apollo transaction. You probably noticed that the S-1 has a preferred in that. So Apollo, obviously, took the preferred option. So that it removed a little bit of an overhang, I think, in terms of the ownership structure of when it goes public. So we're cautiously optimistic that if you keep on this trajectory of a grocery providing everyday goods and services, that might be the right recipe for something to go public in this environment because it's been so essential.

Okay. And then maybe at this point, I just remind people that if they have a question, you can enter it, and Dave Bujnicki is the gatekeeper here. Dave, do we have any questions that have come in, right?

We do have 2 questions. The first one is, why do you think the medical and medical supply rent collections decreased? And what I could tell you is most of the -- when we're talking about the medical and the supply category, it's more focused around dental offices, chiropractors as well as optometry offices that have still, for the most part, remain closed in those areas that are still enforcing shelter-in-place restrictions. That's really what's driving that.

I would just comment on that, too, that the majority of folks that have been closed over these past 2 months have indicated to us that with the light at the end of the tunnel here and the reopenings coming in June that they have indicated that they're going to pay June rent, even the toughest of characters that we've been negotiating with.

We have another question, which is asking about our outlook for REIT M&A consolidation? And where do you see the shopping center business looking like 5 years from now?

Yes. I think this question always comes up. We've been a consolidator in the past. We bought 5 public companies. We've been laser-focused on making sure the transformation of Kimco is on track, and we've really been working hard to be sure that all these efforts, in a lot of ways, we've been positioning for a downturn. So hopefully, we're in a position to shine and showcase the transformation at a time like this. Consolidation, I guess, is a constant question that we get. It's clear that there's a lot of publicly traded shopping centers, some of that are quite small, but for us, we need to continue to execute. We believe in our thesis. We believe in our strategy. We think that the markets that we've picked are the right ones that are going to hold up with diverse economies, multiple demand sources, and we think that if there's a fit for us that can continue on our strategy, then we would consider it, but the last thing we want to do is go back to 5-plus years ago and start acquiring things that will pull us in a direction that we don't want to go in. So we're mindful of the fact that we're all trading at pretty significant discounts as well. And I think an exchange ratio in this type of environment will be very tricky to negotiate.

I do have one more question, and it's more around our dividend policy after we made mention of temporarily suspending our dividend. So if we could elaborate on how we see our dividend policy going forward?

Sure. In our earnings release, we did say that we're going to have recurring monthly meetings with our Board, and that was on purpose because we have a lot of things in the hopper that could change the trajectory of our taxable income. We did say that we are going to reinstate the dividend before the end of the year because of the need to cover our taxable income, but due to the number of items that we've already discussed, the Apollo deal, the Albertsons IPO, some of the other transactions that may occur in the year, we have a constant dialogue with our Board to showcase that we're going to be mindful of the fact that taxable income is a moving target right now. And once we get our arms around what that looks like, then we can reinstate the dividend at the appropriate time.

Okay. And then maybe you can tell us what the retail real estate transaction market looks like right now and what you think it might look like as we get into the third quarter?

Sure. I'm happy to jump into that question, Craig. So as I mentioned on the last earnings call, I mean, there really hasn't been a whole lot of transactional data or TOMS to look to. As you would imagine, in the midst of the pandemic, I think a lot of companies were taking a breather. Even though there's pent-up demand and capital, everyone is waiting to see how things play out. The challenge being difficulty in underwriting NOI cash flow today. That being said, we have started to see a few data points, and I think that there is a bit of a dethawing happening as the openings are starting to occur in parts of the country. We've had a lot of positive anecdotes from our shopping centers in the South, in Texas as well as other markets. So as we see additional data points with store openings and sales performance, it gives a much greater level of comfort as to what that NOI and the sustainability of that is. There was one portfolio that was just recently announced this week that closed on a 7-property grocery-anchored portfolio. So we did see a decent-size portfolio of about $90 million closing. That was something that was in the works pre-COVID, and -- but my estimates are that there was about a 15% price adjustment from pre-COVID to post, but clearly, there's still investor capital demanding that. And then one other data point that I could point to in the Philadelphia MSA, there was an asset that just recently priced, anchored by ShopRite, CVS and Verizon. So really bread and butter down the fairway, 3 essential retailers that are paying their rent currently. The whisper pricing was about a 6.25% cap rate, and there were multiple bids that pushed that pricing up and the cap rate down to about a 6%. So I think for those assets with essential retailers, everyday goods and services, where there's a clear visibility in the collectibility of the income stream, there's still clearly capital looking to be placed in those assets.

Great. And then regarding The Boulevard, your redevelopment on new Hylan. I see it was deemed an essential project, and you're continuing to work on it. Do you still think that can be stabilized in 2020? And maybe tell us what the work is that's being done on The Boulevard.

Happy to do that. We had an incredible team effort there to -- obviously, construction was shut down in New York, but the team rallied around the opportunity to get this project deemed essential. So within a week's time, we were able to get the waivers to continue to work on the project. And you saw we didn't change the dates on our supplemental because we feel like we really can deliver this project still on time this year. And clearly, this is going to be a flagship for Kimco. ShopRite came into this project thinking that they're going to do $100 million of volume out of the store. I think that, that assumption now is probably pretty light considering what the offering is that they're going to bring to the table here with all the bells and whistles of their new prototype. And so we're cautiously optimistic that the program is -- that this project is nearing completion with a lot of pent-up demand, hopefully able to open to a welcoming community.

Super. And then I'm wondering, are retailers looking for anything new in terms of leases? We hear some chatter about variable leases versus a fixed minimum and shorter lease terms and possible control issues. What are you hearing from the retailers in terms of anything that may have changed on the structure of the lease?

Yes. The structure hasn't changed all that much in the negotiations that we're in. I would say that the big issue out there that we're still wrestling with is pandemic insurance type of clauses, right? So if COVID were to come back or a new type of virus emerges in the future, what does that look like? And this sort of dates back to the Terrorism Insurance Act that the government backstopped not too long ago. And so -- and you're starting to see it make its rounds in D.C., where that was called TRIA, this is called PRIA for pandemic insurance. So we think that, that program probably will get off the ground in the not-too-distant future, and then we can come up with some language that both the tenant and the landlord are comfortable with, making sure that, obviously, the asset is still financeable and still the leases is enforceable.

Great. And then are you doing anything different regarding cleaning your assets in terms of a deep clean or anything on that front?

We are doing multiple deep cleans on a more regular basis than we were in the past. I mentioned it earlier, we want our assets to sparkle. And that's something, I think, is part of our welcoming plan and reopening plan that we put a lot of focus on, and we're partnering with our retailers on that. Now we can control the common areas and make sure they're sparkling, but the retailers have to control inside their 4 walls on what they do. And so we're doing everything we possibly can to make sure that the consumer feels comfortable coming back to the shopping center, and there's a lot of different things we can do. There's a lot of new initiatives, and we're being nimble. We're trying to be creative and being mindful of the fact that the consumer, obviously, has gone through a lot, and we need to be careful and cognizant of what we can do to embrace them.

Craig, I do have another question. Some suspect a trend away from densely populated cities towards suburbs. Do you anticipate this? And what would be the impact?

Yes. It's a good question. I think you're starting to see it with the New York, call it first and second-ring suburbs already. You're seeing a lot of people looking to move out of the downtown areas and look to explore what the suburbs are offering. And that may be sort of a short-term trend, but again, there may be a lasting trend there as well. Obviously, Kimco's portfolio is well positioned around those dense urban areas, where usually first or second-ring suburb that is a strongly populated area with good demographics and strong income. So we might see some benefit from that, but we'll have to wait and see, obviously, and we continue to think that our portfolio is refined with the eye of making sure we have areas that have diverse economies, strong demand forces, high barriers to entry. So really, there's no new supply coming online. And I think another differentiator for us is there's not going to be a whole lot of landlords with the amount of capital like we do to reinvest in their assets coming out of this. And so we see a lot of disruption coming specifically from the over-levered private players, the CMBS players. And so I think there's going to be some -- not only acquisition opportunities, but ways for our asset base to outshine the competition at a time like this.

Okay. I understand that the entire Kimco team is now working from home, congratulations on that conversion, but also, is that going to have any longer-term impacts in terms of maybe having a portion of your workforce, employees work from home after the COVID crisis is over?

Yes. We are very proud of the investments we've been making over the years in our technology to allow us to quickly flip the switch and go full remote. It's been incredible. I mean the team has gone above and beyond. I can't say enough good things about the entire team at Kimco. They've embraced and risen to the occasion. There were obviously some very tough times that we had to go above and beyond and deal with this type of crisis. I think the future is very fluid. I think we're recognizing the fact that we are very efficient. I would say actually even communication has increased in a time like this. We have all-employee weekly calls with the entire organization. We have multiple calls every day with the organization of making sure that the focus and the strategy is being implemented and executed. I think there's a place though for the office and a place for a community gathering because you do have that natural social event of exchanging ideas at the water cooler that you don't necessarily get over the Zoom or whatever program you're using. So we're in an environment where clearly we've been forced into this type of situation, and we're learning a lot through it. We're learning what we can and can't do. We're learning the opportunities that it presents itself, and so we might be able to have a workforce that's obviously enabled to work remotely, but I still think there's a place for the office at Kimco.

Great. And then Dave, just checking with you to see if there's any other questions from the field?

We're good right now.

Great. And then I guess, maybe a question to end on. And please, anyone who has some thoughts, please weigh in on this. I mean, obviously, there's a lot of negatives and concerns about the issues surrounding the COVID crisis, but what have you seen or what gives you the most optimism of what you're seeing today?

I'm really proud of -- the silver lining in all of this is how proud I am of not only our team but of our retailers rising to the occasion to service communities in a way that many of them never fathom they would have to. Clearly, there's been a lot of accelerated trends of people forced to stay in their homes and forced to shop online. I think the big takeaway, though, is that the lion's share of what's being shopped online is actually being delivered from the store. Even this week where I was talking with my family and my wife said that I'm going to start shopping at Target more because it delivers faster than Amazon. Look, it's clear that they're utilizing their store base to differentiate themselves. And I think that's a big takeaway in this type of environment, as a lot of our retailers who are the best-in-class and omnichannel are positioning themselves to make sure that they are everything the consumer wants, whether it's shop online, have it delivered to your home, buy online pick up in store, buy online curbside pickup or coming into the store, it is very clear to me that the store base is going to be used as a distribution point from now on, and the lion's share of our retailers are already adopting that.

Yes. And also in terms of some cautious optimism, as I mentioned earlier, I think the consumer is going to come out of this in better shape than they might have been if the government hadn't been so supportive of the consumer itself. And I think there is real pent-up demand. I mean people are definitely tired of sitting in their homes. And there is a -- I know a lot of people that want to just sit in a restaurant and have a meal with a good bottle of wine and not keep ordering it in from their local places. And just the desire just to be in a green setting somewhere along the way. And we've activated the properties in a way that we think between the curbside pickup, activating green spaces in the centers that it will allow for people to continue shopping and social distancing at the same time.

Okay. Thank you for that. I think we're out of time for the presentation, but I just want to thank everyone who's dialed in, and I especially want to thank the Kimco management team for making themselves available for this call, and wish you the best of luck in the rest of 2020 and in your NAREIT Conference.

Thanks.

Thanks, Craig.