Kimco Realty Corporation (KIM) Earnings Call Transcript & Summary

Hi. This is Richard Hill. I'm Head of U.S. Commercial Real Estate Research at Morgan Stanley. I'm very excited to be joined by Conor Flynn, who's CEO of Kimco Realty. I'm going to give a quick introduction of who Kimco is and then I'll turn it over to Conor for more information, but Kimco is one of the largest owners of retail real estate in the United States. They focus on primarily shopping centers. Before I turn it over to Conor to give more of an introduction, though, a brief disclaimer: This presentation is only for institutional investors. If you are a member of the media, please drop off. Furthermore, if you need further disclosure, please go to the Morgan Stanley website. So Conor, maybe we can just start off with a quick introduction of who Kimco is, for those that might not be as familiar.

Sure. Happy to do that. And thanks for having me today. Kimco Realty is one of the founding fathers, I would say, of the REIT universe today. We were founded in '91 by Milton Cooper and is -- really the dawn of the REIT era. We're an open-air, grocery-anchored shopping center owner, one of the largest in the U.S., in the world. We have over 400 assets, primarily concentrated in the top 20 major metropolitan markets. We have predominantly grocery-anchored shopping centers. We're actually 77% grocery anchored, and we have a portfolio that's pretty diverse when you look at both the geographic diversity as well as the tenant diversity. Our #1 tenant is TJX, followed by Home Depot; and then a number of grocers after that, Kroger, Ahold Delhaize, Whole Foods, Albertsons. So we have a nice diversity of tenant mix. A lot of our tenants are actually experiencing, I guess, some bonuses from the pandemic where they're utilizing their store base as a distribution and fulfillment point. And the trend of omnichannel has actually grown exponentially through this pandemic. And we're seeing our retailers lay the blueprint down for the future of retail, which is really to identify your customer, how they shop and how to best serve them conveniently and focusing on value. The portfolio has held up quite well through this pandemic. We are seeing it stabilize throughout the portfolio. Collections now are over 90%, trending -- continuing to improve. The total portfolio is open, with 98% of our retailers open and operating. The occupancy has remained relatively steady at 94.6%. We're seeing demand come back, which I think is a big boost and something that may surprise some folks. We have a pretty big pipeline of deals pending, very similar to levels that we saw pre COVID, predominantly led by the folks that are deemed essential that have been benefiting through this pandemic, grocers being the one of the most active categories up and down the spectrum of big box traditional grocer and more of the niche grocers or the specialty grocers. We continue to think our assets are well located. Richard knows us well. We went through a massive transformation selling over $6 billion worth of retail to get to where we think the future of retail is headed, which is that last-mile location in "high barrier to entry" markets where it's difficult to develop. And those are the stores that are most in demand. And that's why we're seeing, I think, a good surge of demand and a lack of new supply coming in our corridors where we think we have the best and brightest.

Yes. So Conor, I want to stick on that point that you just ended with. I don't think the market fully -- maybe for many of the people that are thus familiar with Kimco that are on the webcast, they're not really as familiar with how much you've transformed your portfolio since 2010, so maybe can we talk about where you were prior to the financial crisis and where you are today and drill down on why did you move from owning a lot of assets to a much smaller portfolio? And are you really comfortable with what you own right now?

Sure. I mean, looking back, we had over 1,000 assets. We were actually one of the largest landlords in Canada, Mexico, Peru, Brazil, in addition to the United States. And we really had a -- we didn't have a concentrated portfolio. We had a [ shock on shell ] approach, I would say, to the U.S. and to other countries. And managing the West Coast through the Great Financial Crisis, I learned a valuable lesson. And that was really it's all about scale if you have efficiencies of scale, but if you have scale and you're drawn in too many different directions, it can actually be a negative. And so because we had maybe 1 asset in almost every market across the U.S., we didn't have efficiencies of scale. And so what we did as a portfolio manager was we looked through the asset base. And we saw that, as a whole, the U.S. was oversupplied. And this was 5-plus years ago. And we went asset by asset, market by market; and really determined where are we best suited to create value and increase the cash flow over the long term. We've gone out of markets that had low barriers to entry where just a tremendous amount of supply was either already built or was in the pipeline to be delivered, and we focused on really "high barrier to entry" markets where there's a lot of density surrounding our assets. Traditionally speaking, there's not a lot of folks out there that can make the economics work of building a shopping center in dense areas because, from a high level, 80% of your asset is just parking lot and that's not producing any income. So to be able to look at that and say that's a barrier to entry that nobody is really going to come in with a product type that compete, that gives us the potential then to have that balance of supply and demand even when you look with a broad brush of how oversupplied the U.S. is. And just this year, it's amazing to think we came into this pandemic all-time high occupancies. We were the only retail REIT trading at a premium to NAV. Our balance sheet was rock solid with a BBB+, Baa1 investment-grade rating, looking to try and actually get upgraded to an A-, A3. And the demand sources continue to be diverse [indiscernible]. So that's where we see the future going. It's just the convergence of retail with fulfillment and distribution.

So Conor, I have a lot more questions about the company itself, but I think some listeners might be actually surprised that you have a history of taking equity stakes in retailers, most recently Albertsons. Can you talk about what attracted you to Albertsons in particular and if anything else looks interesting today? Because, look, there was a time period, myself included, where we were pretty skeptical about Albertsons. It looks -- given what's happened with grocery stores, it's pretty interesting now, but what made you do that? And do you see opportunities to take other stakes in retailers?

Sure. So one of the things that we've always done as a company is try to be entrepreneurial. And what we've found is that we have a ability and an underwriting capability to value real estate and value retail real estate, and because of our platform, we feel like we are uniquely positioned to do that. And many times, it's the form of traditional grocery-anchored shopping centers, but sometimes it's in the form of retailers that own a lot of their own real estate. And we've done this for decades. If you look back at Kimco's history, there's a lot of names that most folks on this call may not even remember like Gold Circle or Caldor or Ames or Frank's Nursery. We did it with all of those retailers, where we actually underwrote their owned real estate and came in and took an ownership position in the retailer but at a basis where we feel very comfortable that, if the retailer went away, we can make a lot of money just on the real estate. And the same was the thesis going into Albertsons. They owned about half of their real estate, primarily on the coasts. On the West Coast, they have the banners of Safeway and Vons. On the East Coast, they have the banners of ACME and Jewel and others. And so those are the premise of the initial investment. We love their own real estate. And originally the transaction was we bought the defunct Albertsons from Supervalu, if you can imagine that. We bought the Albertsons that nobody wanted, and we turned around and sold half of them to Publix in Florida and got 4x our money back on the initial investment. And then we went on and started to actually create a business out of it because we brought in an operating team that turned-around the remaining Albertsons; and then went back to Supervalu and bought their other banners that were not performing well, turned those around. And then we went and merged that with Safeway and took that private and made a -- very much a conglomerate across the portfolio. Again, the team really produced solid results, and then we were able to take it public; and through all those initiatives, having about $140 million invested over time but returning 4x already and then having $550-plus million of a marketable security in Albertsons. Clearly, they're not all designed to work out as well as that. I wish we were all as good as that, but our thesis has always been look at the real estate, value it appropriately, so if the operations go sideways, we feel very, very comfortable with the value of the real estate. So we continue to look for those opportunities. There may be some sale and leasebacks because of this pandemic, where retailers are forced to liquidate some assets to try and boost their cash positions. And we're always in a position to act there if we feel like we can create some value.

Conor, there's an early question coming in on the webcast that I think is an interesting one. And it's something that you alluded to in the beginning, which is a rebounding in growth. So as you think about the value proposition for a retailer to be an open-air center versus a mall -- and I'm not suggesting you say malls are not good and open-air centers are great, but what is that value proposition? And do you think you're going to see more demand from traditional mall-based tenants on the other side of COVID-19?

Sure. So the interest way -- interesting way to think about it is the value proposition to a retailer is it's all about location. And how do you conveniently serve your customer? And what's your value proposition? And typically when a retailer is looking at the landscape today, what's the closest asset to where their customer lives? And the way we've positioned our portfolio is it's typically an open-air shopping center, and the shopping center has some benefits to it. It has visibility from the street. So all the retailers typically have their name on their front of the door and can be seen from the street of the intersection, has a big field of parking. So it has easy in access, easy out access. You can park typically almost right in front of the store. So those are some of the sort of the high-level benefits there. Then you go on to the retailer occupancy costs. So traditionally, because Kimco has now efficiencies of scale, we've been able to pool our resources together and drive down occupancy costs for retailers. So there's the rent that they pay, which is traditionally a lot lower than mall rents, but then there's also the CAM, the common area maintenance, charges; and the taxes and insurance that go into their all-in rent because for retailers it doesn't matter. It's all about occupancy costs. It's their all-in rent. And what we've been able to do is pool our resources and drive down that common area maintenance cost so that it is not only lower than any mall REIT but it's lower than any open-air shopping center REIT. And we've done that in a number of ways from actually investing in ESG and some of the initiatives that we've really pioneered early on 5, 10 years ago that are now almost commonplace, solar panels on roofs, irrigation controls, the trash program that we rolled out. All these types of initiatives help drive down common area maintenance costs. And that's what gives us a little bit of an advantage when a retailer comes to look for the best location with the best economics, and typically that's where shopping centers shine.

So I want to stay on this theme a little bit and talk about curbside pickup. I know it sounds like a -- maybe a funny statement that we're sitting here talking about curbside pickup. And by the way, if you would have asked me a year ago if I thought curbside pickup was going to be impactful, I would have said, "No. That's sort of silly," but here I am using curbside pickup all the time. And I suspect that it's more beneficial to your tenants than maybe you even expected. Can you talk about how curbside pickup has evolved and if it will be a permanent place in retail sales going forward?

Absolutely. I think it's one of the biggest, I think, takeaways from this pandemic is how quickly the shopping center can evolve and how consumers evolve and adapt. We launched Curbside Pickup nationwide in 48 hours. We're the first open-air shopping center REIT to launch it. We actually trademarked the word Curbside Pickup, so Rich, you can pay me a little premium after this for using that, but we've been very, very focused on giving the customer the best way to shop and to make sure that they feel safe. And so curbside pickup is the way for contactless shopping. And if you think about it, I've always been amazed that more retailers don't have drive-throughs because drive-throughs really just enact -- or give the retailer a way to be more profitable, service more customers and be more efficient for shoppers that want to pick up things on the way to school or on the way to work or on the way home. Curbside Pickup allows us to almost give every single retailer, both big and small, in essence a drive-through. And what we did was we took a little bit of a page out of the playbook of what do stadiums use, when you go to park, to remember where your car is located in. Light poles have the big letter up on them, and then each stall typically has a letter and a number in it. And so all we did was just really sort of follow that lead and say why don't we do that in front of the major hubs or where the retailers are located, put letters up on the light poles there so, when you come into a shopping center, you know exactly where you need to go. You're texting with the retailer or the delivery service of choice, whichever you picked. They'll say, "Hey, come park in lot A and tell me which spot you're in, and we'll be out in minutes." And so as soon as you find a spot, you say, "Hey, I'm in A3." And then they typically run out and put it in your trunk or on your backseat or wherever you're most comfortable. And so I think, when you look at the data coming out of Target and some of the others that have been early in the Curbside Pickup program, that's what got us very excited. Because we saw what Walmart and Target were doing and how successful it was for them. And we thought, you know what, as a landlord, we can step up and make sure this is available to all of our retailers, both big and small, because we really do believe it's here to stay. And it can give our retailers a fighting chance to the pandemic but also give them a position, I think, of strength going forward to utilize it for their store for the future.

So it's interesting because, as I think about it, look, we've always thought retail real estate is in many respects about convenience. And I think about curbside pickup and how my family uses it and it's become even more convenient than what it was previously, so kudos to you on that. Staying with maybe the landlord-tenant relationship: Your rent collections have been really strong, industry leading for the open-air space, but I think the retail real estate rent collections across the board have been certainly much better than what we were expecting 6 months ago. So could you maybe just talk to us about that relationship, both focusing on your mom-and-pop retailers but also the large national tenants and how you work with them? And what do you think the relationship is going to be going forward in terms of rent [ modifications ]?