Kimco Realty Corporation (KIM) Earnings Call Transcript & Summary

Welcome to the Kimco Realty Corporation roundtable. From Kimco, we have Conor Flynn, Chief Executive Officer. Also with him are various members of the Kimco team. We also have Alex Pernokas from the retail research team at Bank of America, joining me, Craig Schmidt. Alex will be taking and monitoring questions as they come in through Veracast. [Operator Instructions] Kimco Realty Corporation is a real estate investment trust. The company owns and operates open-air shopping centers with multiple locations, primarily in major markets in the United States. Kimco Realty owns properties, which are usually anchored by a supermarket and big box stores that sell day-to-day necessities. We're going to begin with a short overview of the company from Conor. And keep in mind that if you have a question, enter it and submit it through Veracast. Conor, are you ready?

Thanks, Craig. Appreciate it. Hello, everyone, and thank you for joining us today. I continue to be humbled and impressed with how our team at Kimco has rallied around our strategy to navigate the short-term challenges of the pandemic and continue to keep focus on the long term as we position Kimco for the future. 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 to be a grocery and mixed-use asset portfolio, concentrated in high barrier to entry markets in preparation for a major economic downturn, has been validated. Second, the last-mile retail store has proven to be mission-critical, acting as a hub for profitable distribution and fulfillment in our country's greatest time of need. We continue to work hand-in-hand with our tenants. Helping to form a bridge to the other side of this pandemic. The company continues to see improvement in foot traffic at its shopping centers as additional tenants reopened, which has led to higher rent collections and a reduced need for rent defer agreements. All Kimco shopping centers remain open and operational, with approximately 97% of our tenants currently open, including those that are operating on a limited basis. Collection trends continue to improve as well. Updated collection numbers for Q2 are 71%, and you see the improvement in July of 84% and August at 86%. For those tenants that not only recently reopened, or who are operating on a limited capacity and are struggling, we continue to negotiate personalized rent assistance agreements unique to each tenant's business and financial situation. 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. When faced with the challenge no one could have predicted, Kimco proved to be both nimble and creative. We have initiated a national curbside pickup program and have found ways to support restaurants in our common areas to maximize their patron occupancy. Tenants like Target, Costco, Walmart, Best Buy, Home Depot, Lowe's, Dick's Sporting Goods and many others continue to expand omnichannel programs like buy online, pick up in-store and curbside pickup. These programs have proven the most cost-efficient way to deliver goods to customers while satisfying the customers' desire for quick access to products. We have seen the positive response as customers come back to the shopping centers and tenants report sales metrics. We are cautiously optimistic that we are on a road to improvement and reopenings will have a direct positive correlation to rent collection. We are confident in our portfolio, our improving rent collections, our liquidity position, our balance sheet. And on September 1, 2020, we announced a third quarter cash dividend of $0.10 per common share. Declaring our dividend at this initial level accounts for the dividends already paid in Q1 and Q2 of 2020 and reflects the continued focus on maintaining a strong balance sheet and financial flexibility. The Board will continue to monitor Kimco's financial performance and intends to declare additional dividends on common shares in 2020, as needed, of at least the minimum amount required to maintain compliance with Kimco's REIT taxable income distribution requirements. We expect to establish a more normalized and well-covered dividend level based on our adjusted funds from operations and REIT taxable income in 2021. Our balance sheet is strong. And we are in a remarkable position to play offense as outsized opportunities present themselves. At a time when many are looking to capital markets for new debt to help carry them through this downturn or bolster their liquidity position Kimco's sector-leading liquidity position allows us to refinance our debt, extend our maturities at even better rates. Our ability to monetize our investment in Albertsons is a clear differentiator for our cash flow and will act as a steady infusion, when deemed appropriate, to pay down debt or opportunistically invest. It is a new world for sure. However, we feel 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. With that, I'm happy to turn it back over to you, Craig.

Thank you. Thanks for that overview. I just wondered if you could comment what is unique about Kimco's assets, including the culling process that you went through, that has changed your impact and your performance during the first 6 months of the pandemic outbreak.

Craig, I think our portfolio being repositioned in trade areas with high barriers to entry gives us the advantage of that last-mile logistics center. And so when you look at how we've really done a heavy lift of selling over $5.5 billion of real estate in secondary and tertiary markets and focusing on where there's a balance of supply and demand, you're seeing that we benefit from those locations because retailers deem them to be mission-critical and have invested in omnichannel approaches to utilize those stores, not only for, really, shopping in store, but also fulfillment purposes. And with now our curbside pickup program installed nationwide, we really believe we've enhanced the offerings and our retailers are recognizing Kimco as a partner of choice because we really are a partner. We help those retailers through the worst of the pandemic. We've given them the ability to have a light at the end of the tunnel to make sure that they can force their way through this and be able to keep operating in challenging times, especially for our small shops that we believe are in need of more assistance as we navigate through this.

Okay. And then you mentioned about your improving rent collections. What are your expectations for the coming months? And how has the deferred rental process changed as we're in the sixth month of the COVID crisis?

We are pleasantly surprised with the trajection. So we -- the trajectory has been strong. When you look at July and August at 84% and 86%, it is tightly correlated to the opening percentage, where 96% of our tenants are now open and operating. So as the more impacted categories have allowed to reopen, with some capacity constraints, but are now open, those being fitness and entertainment in some of the restaurants, that will hopefully continue to improve the collections going forward. However, there is some pretty significant hurdles on the horizon. When you look at back-to-school and what that would look like, as well as the flu season coming up and the holidays, we recognize that there's a lot of uses that are probably going to need a vaccine to really come back to full strength. But being an open-air shopping center, we have a number of essential goods and services that have actually been beneficiaries in this time.

Okay. And then according to our numbers, we're experiencing a record high number of bankruptcy and store closings through mid-September. What do you expect the trajectory of store closings will be in the next 3.5 months of this year?

So we have our bankruptcy specialist, Ray Edwards, on the line. I will tell you that so far, what we have seen is really sort of what we anticipated. We had our watchlist tenants that we deemed to be at risk, and those were the ones that filed bankruptcy and, obviously, have been impacted by the pandemic. Ray, it might be helpful for you to comment on what you see in the future and on the horizon.

Sure. Thanks, Conor. Well, first, I just want to kind of backtrack also. With regard to the tenants that were in our watchlist that did file for bankruptcy, I would think in April, May, we probably would have thought most of them were in a liquidation. What we're finding is that many of them are reorganizing, and we're expecting probably up to 2/3 of our leases will be affirmed by the company as part of the reorganization. So I think back in April, May, we would have thought it would have been worse for us because we would've thought, within liquidation, we would have gotten many more leases back than we are going to get back. And I really think that the mid-June through mid-August was really the high point in bankruptcies for retailers who basically tried to work through COVID, they couldn't do it for a variety of reasons, whether it's debt or because they were closed. Where I think that we're seeing that a number of our retailers that were on our watchlist back in the early part of the year, like Party City or JOANN Fabrics, or Petco are ones that have actually done very well during the pandemic and have worked sometimes, like with Party City and AMC, they restructured their debt to get themselves in a much better place going forward. So we're not seeing any near-term bankruptcies for our top 75 to 100 tenants because of what's happened with strengthening their balance sheet for some of these guys that were on our watchlist. So our watch list for some -- has gone down partly from bankruptcies that are filed, and we think it's taken a couple off because they've improved their balance sheet and their operations actually over the last 6 months.

Ray, I was wondering, in a typical year, I would think that we would have fewer store closings after Labor Day just because they would wait to get through the holiday season. Does that still apply here? I mean I would even think if you were thinking about liquidation, you'd rather take advantage of the better sales environment that comes with holiday and then revisit. What are your thoughts on that given the pandemic is in place?

I really -- what's interesting is that liquidations, sometimes the benefit of a liquidation is diminished in this environment because of the shopping, especially in the malls, is down. And you saw what happened early on in April and May, those tenants like Pier 1 and Modell's that had filed for bankruptcy before the pandemic, they actually paused their GOB sales because they couldn't run through that. So the economics for a liquidation and the value that you get from the liquidation actually comes down. So it makes it harder for -- I know hard is probably the wrong word, but it makes the banks, who are the lenders, really think twice and say that it might be more value for them to help them make it through the next few months versus go through a liquidation. So I think with regard to the filings we had in those 2 or 3 months, that -- they did that. I think you're going to see few bankruptcies because of that in the near term.

Great. And I'm wondering, are you guys hearing more about retailers who want to use retail stores for last-mile distribution?

Yes. No doubt about that, Craig. You're seeing a lot of the stores that we have be the leaders of retail in the new world of retail. If you look at what Home Depot, Best Buy, Target, Walmart, Costco, Amazon, have all done is started to lean into their brick-and-mortar locations to utilize those last-mile stores as both distribution and fulfillment. And there's a number of different ways they can do it, but the store that's closest to the consumer has shined in this environment because it really is the most convenient way to either deliver the goods to the home or for the customer to come and pick them up, since it's such a short distance away from where they live or where they work. Grocery, I would say, has changed pretty dramatically. I think that the Best Buys and the Home Depots and some of the others had already embraced omnichannel. I think the grocery side has really embraced it now in this time, and you're starting to see why. And it really does allow the retailer to have higher margins by driving traffic to their store, by adding that amenity to say, buy it online and come pick it up in store. And usually, once they walk into the store, they make an impulse buy and an additional purchase. And so because they're not having to pay for that delivery cost, it improves their margin as well. And so we do see that as the future of these locations becoming more valuable to the ecosystem of the retailer.

Great. Thank you. At this point, Alex, let me see if there are any questions from the field.

Right. Craig, I don't see any questions at this time.

Okay. I was wondering, as you look at the third and fourth quarter, will national or small shops be more challenged in this period?

We do believe the small shops will be the ones that are most impacted, mainly because a lot of them don't have rainy day funds for this type of event. And so what we have done as an organization is really prioritize what we can do to help those small shops in their time of need. We did launch a tenant assistance program very early in the pandemic. We hired outside attorneys to help them navigate the PPP funding to get their documents in order and help them with regional banks that may have -- be quicker to the table with assistance. We did see that over 600 of our small shops engaged that program, and we're beneficiaries of over $20 million of PPP funding. We continue to work with them, especially and listen to their challenges and their needs. I think it's pretty critical to try and maintain that small shop identity in our shopping centers. Because I'm a big believer that it's a differentiator. It's a connection to the community. Many times, it's a generational business. It's someone that is a part of the fabric of the neighborhood. And so if they were strong operators coming into this pandemic, we're going to do everything in our power to keep their lights on and make sure they make it to the other side.

Great. And then what are you seeing in terms of the transaction market? Is it starting to return or recover? And what are your thoughts about being opportunistic, considering the $50 million to $100 million separate investment vehicle?

I know Ross is on the call. So I'll let Ross -- go ahead, Ross.

Yes. Appreciate it. Thanks, Conor. Yes, I'm happy to jump in on that. I would say that we are seeing certain very select transactions occurring, but they continue to be few and far between. I think I mentioned on our prior earnings call that the year-over-year transaction volume was down between 80% and 90% each month from April through July. That number has continued through August, so we really haven't seen a significant uptick. But selectively, particularly those assets that are essential retailer anchored, there are some deals that are getting through. The reality is that we do think that there's going to be opportunities that bubble up. We're starting to see that come to fruition. But until there's a forced event, whether it be via the lender or additional capital that's needed for the asset that the owner does not have at that current time, most groups are electing to try and hold on or kick the can for as long as possible before having to make a sale decision on an asset. So we do think that as the year progresses and as we enter into '21, some of those opportunities will continue or start to really showcase themselves. The 2 avenues where we're starting to see opportunities now are really with our existing retailers that own real estate, whether it be sale-leaseback or other ways, to utilize their real estate as collateral and make some investments that are appropriate for the tenant as well as for Kimco. And where there is existing owners that need capital, whether it's because their loans are coming due and they're having a tougher time with refinancing, or if there's capital that's needed to enhance the asset with redevelopment or repositioning, there -- we're seeing opportunities. We're having conversations with groups that are looking for, whether it be preferred equity or mezz debt, that could be attractive in some high-quality real estate. So we did mention the opportunistic vehicle that we've been looking at. We continue to have significant conversations with potential partners or institutional capital that wants to take advantage of the dislocation in this environment. What we've seen is that it is very challenging to come up with a structure that kind of captures everything that we're seeing out there. There's not really one size that fits all for these opportunities. As I mentioned, it could be sale leasebacks, it could be preferred equity, it can be mezz debt. So we are evaluating each deal individually at the moment. We have lots of different partners that would like to do things with us. So we'll make sure that we find the appropriate fit in the structure for each deal as they come. So stay tuned on that. But again, we do think that as we get towards the latter part of this year and into the beginning of the next, that there's just going to be more and more opportunity for us to put capital to work accretively.

Thank you for that, Ross. And maybe a little bit on new leasing. Who are the new retailers that are looking to take space during this COVID? And are they -- are we looking at market rents getting reset with these new leases?

Yes, Craig, I'm happy to take that one. So when you look at the demand forces, clearly, grocery is one of the biggest beneficiaries of the pandemic. And they have come out and really been aggressive on new store expansions. And it's across the board. So if you think about the box sizes, you have the big box players, the Costcos, the Walmarts, the Targets, they have been back on offense and looking for locations. Then you've got the traditional grocers that are more in that 50,000-square foot sweet spot. Those are the Ahold Delhaize, the Krogers, the Albertsons that are continuing to look for space as well. Then you've got the specialty grocers like Whole Foods and Amazon Fresh and Trader Joe's, again, looking for spaces. And then you have the value players like all the Aldi and Lidl and the dollar stores that are very aggressive as well. So that category is about as strong as I've ever seen it. And we have some real opportunity to retrofit some of our assets into grocery-anchored centers that are not currently grocery-anchored, and compress cap rate and create some value there. The other categories that are continuing to expand, you see the off-price segment actually come back and look for space, TJX, Ross, Burlington, being the top 3. They all have multiple banners and are looking for expansion opportunities. Burlington has more of a flexible format these days, so they're going into more locations because they have that flexible square footage. TJX has all their banners that are doing quite well. HomeGoods being a big beneficiary of the pandemic, and they're looking for more locations. Ross as well with Ross and dd's, they continue to try and take advantage of this. One other interesting category that I found is sporting goods, you've seen Dick's with their reporting and how strong they have been through this pandemic. Academy has been a beneficiary as well. They're looking for potential new locations and may even go public. Fitness is an interesting one. We came into this pandemic with health and wellness being one of the biggest demand drivers. And we continue to see a lot of players looking to take market share from 24-hour fitness. So on the high end, you're seeing Life Time. On the sort of mid-tier, you're seeing LA Fitness and UFC. On the value side of it, you're seeing Planet Fitness continue to look for opportunities even in the midst of a pandemic. You're seeing a lot in beauty also continue to want to expand and do quite well. Sephora is a big new entrant for us. They have been very aggressive in looking to expand in open-air shopping centers and are a good operator that we like. The dollar stores, I mentioned before, Five Below is a growing concept that we like a lot. That's continuing to grow. Home improvement continues to be an all-time shiner today, with Home Depot and now Lowe's coming in. Lowe's has a newer concept as well, a smaller format, that we are looking at as well for new opportunities. The home market, At Home has been a winner as well. So there's actually some pretty strong demand drivers on the anchor side across all the different categories. So we're enthused about that, and with our transformed portfolio, we actually think we'll get an opportunity here to upgrade our tenant base and potentially drive more traffic across the different categories.

Okay. Let me try Alex again. Alex, are there any questions from the field?

Yes. I've got a few questions here. First one is, are you looking to restructure centers to accommodate the new world we're going into, for example, increasing storage space for inventory?

So it is a good question. We're starting to see a lot of people experiment with micro fulfillment centers. And it probably will be exactly that, an experiment to see how it plays out. We're seeing our grocery stores looking for potential bolt-on micro fulfillment centers where they can have maybe an expansion of 10,000 to 15,000 at the back of the grocery store to help them fulfill and distribute from the actual location. We haven't actually signed any of those deals yet but we're looking at it. It's very tricky because many times, square footage out the back is restricted because of the truck drive aisles and some of the other restrictions on parking ratios. So we're looking at ways to do that as a potential evolution of the store. We haven't seen it where any of our retailers have come to us and say, "Hey, we're going to transform 25% of our store to a distribution facility." What we've seen is just the actual store is being picked by, whether it's the Instacart or the fulfillers, and they're using the store at that point but are not changing the format of it.