Kimco Realty Corporation (KIM) Earnings Call Transcript & Summary

Okay. Hey, good morning, and thanks for joining us. My name is Richard Hill. I'm Head of U.S. Commercial Real Estate at Morgan Stanley. I'm joined today by the management team at Kimco Realty, including CEO, Conor Flynn; CIO, Ross Cooper, who is on the phone; CFO and Treasurer, Glenn Cohen; and Head of Investor Relations, David Bujnicki. Gentlemen, let me begin by saying that I have had a reoccurring bad dream that I missed this presentation. So I'm really glad to be here this morning. I'm going to turn it over to Conor for some prepared remarks, and then we'll jump right into some questions. So Conor, over to you.

Thanks, Rich. Appreciate it. Hi, 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 focused 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-anchored and mixed-use asset portfolio, concentrated in high barrier to entry markets and preparation for a major economic downturn has been validated. As we mentioned on our recent earnings call, we are committed to growing our annual base rent from grocery-anchored shopping centers in the next 5 years to 85% to 90% from our current level of 77%. We have 10 grocery deals that are actively working, which will help toward meeting this goal. Second, the last mile retail store has proven to be mission-critical, acting as a hub for profitable distribution fulfillment. Several of our retailers have successfully leveraged their store base to accommodate their omnichannel platform, which has made brick-and-mortar locations more important than ever before. We see this trend continuing and believe our shopping centers will benefit from it as the vast majority are located in the first-ring suburbs and in close proximity to the consumers they serve. The company continues to see important foot -- improvement in foot traffic at its shopping centers, as additional tenants reopen which has led to higher rent collections and a reduced need for rent deferral agreements. All of Kimco's shopping centers remain open and operational with approximately 98% of our tenants currently open, including those that are operating on a limited basis. Collection trends continue to improve. In the third quarter, Kimco collected 89% of base rent billed, highlighted by a September collection rate of 91%. Our third quarter collections were one of the highest increases across our second quarter rent collection rates amongst the entire shopping center sector. October and November collections are tracking in line with September. Leasing activities have also significantly improved. In the third quarter, our volume of renewal and option deals executed reached pre-pandemic levels and showed strong positive leasing spreads of 8.8%. We are laser-focused on leasing productivity as we see this as the key to our business in the near term. We are confident in our portfolio, our improving rent collections, our liquidity position and our balance sheet. The Board continues to monitor Kimco's financial performance, and we expect that they will declare and pay a dividend on our common shares during the fourth quarter to maintain compliance with Kimco's REIT taxable income distribution requirements. When we get to 2021, we expect to establish a more normalized and well-covered dividend level based on our adjusted funds from operations and REIT taxable income. Our balance sheet is strong, and we are in a remarkable position to play offense if outsized opportunities present themselves. At a time when many are looking to the capital markets for new debt to help carry them through this downturn, Kimco's sector-leading liquidity position has enabled us to opportunistically refinance our debt at very attractive rates, while extending our maturity profile to over 11 years, which remains one of the longest for all REITs. We also have the luxury of owning over $550 million of Albertsons common stock, which can be monetized over time at our discussion as the IPO lockup provisions expire. This is a clear differentiator. 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'll turn it back over to Rich. Thanks.

Yes. Thank you, Conor. That's great. I want to touch upon a few comments that you made in your prepared remarks. Let's start with 3Q '20 earnings. Same-store NOI growth certainly improved relative to 2Q '20. Pro rata leasing spreads were a little bit mixed. Occupancy was relatively stable. So rather than rehashing your 3Q '20 earnings. What I would like to understand a little bit more is where you think we're in this bull versus bear scenario analysis? One of the things I was really struck by in 2Q '20 and even our discussions leading up to 2Q '20 earnings was how you would frame the debate of various different scenarios. So as you think about where we are today versus where we were in 2Q '20, can you talk about if we're shifting maybe to scenario A versus scenario B versus C? How are you thinking about that trajectory at this point?

Yes, happy to. It's a good question. Early in Q2, we tried to help the Board understand trajectory that may happen in the midst of a pandemic that we have never seen the likes of before. And so what we did was we highlighted 4 different scenarios that we feel like could play out: A, B, C and D, and did a bottoms-up approach and made assumptions on tenant based on collections, who would be paying, who would be maintaining and who would be needing a deferral or who would be needing an abatement or who would just be walking away? And so when we now look into the crystal ball and say, where are we in the pandemic? We obviously have a lot more tools at our disposal. We have a tenant tracker built to allow us to improve communication across the 7,000 tenants that we have. We have a lot of data at our fingertips that showcases us daily what the collections are looking like and the trajectory of it. And so when we look forward and look back, we feel like we've been tracking closer to that A, B scenario and continue to think that we're in a good spot in terms of where the portfolio is performing. As you said, occupancy has stabilized. We're coming into the winter months, which obviously could create a little bit of friction there as more case count continues to rise. But the defensive nature of the portfolio is really shining through. We continue to see actually -- it's pretty surprising that the demand has really bounced back. I wouldn't have expected the demand to be where it is today. And I think a lot of that has to do with the nature of the portfolio, and how we've positioned it for the future. Many of our retailers are now looking at these locations as last mile fulfillment distribution points, and they can take advantage of the disruption by some of the closures and jump on really high-quality real estate with a good sponsor and a landlord that they know is well capitalized that can help them grow. And so that's where I think we are today. As when we look forward, we feel obviously that the news from the vaccines is very, very positive that someone said that the light at the end of the tunnel is getting brighter. We do believe in that. And we do think that our portfolio is well positioned to manage through these next few tough months but then be in a position to really flip the light switch back on and see the performance come back. Because if you remember, it wasn't very long ago when we started this year, where we came in with the all-time high occupancy. We were the only retail REIT trading at a premium to NAV, and we're ready to really go on offense. Now clearly, we've been used to be playing defense. We've positioned the portfolio, and I feel like our defense is actually world-class. So we're in a position of strength and feel ready that when the tide changes, we're going to be ready to pounce.

Sure. And so Glenn, maybe a question for you. There's been no retail REITs that have guided at this point. Can you maybe walk us through what fact patterns you're looking for to give you confidence to guide at some point in 2021?

Sure. Yes. Again, look, we pulled guidance, obviously, because trying to predict the amount of deferrals that we would need, the collection levels, it's just not practical to be able to do. And for us, if you look at the second quarter, reserves were the highest we ever had to take in any particular quarter. Third quarter certainly improved from the second quarter, and we would hope that the fourth quarter would improve as well. But the things that we're really focused on. We're in the process now of going through our ground-up bottoms-up budget analysis that we do. And we -- our intent really is that to be able to provide guidance for 2021. And again, it's going to be based on what we see coming out of those budgets. I think I mentioned on our earnings call. I would say the 1 difference I would expect is we probably have a wider range than we have historically had. I mean, prior to the pandemic, our budgeting and forecasting ability was pretty spot on. I mean, we had a relatively narrow range of FFO per share that we've always been able to put out in the guidance range. And for years of either been in the middle of it or exceeded it. I would expect that we'll need a wider range to capture some of the volatility that could occur. And again, it really is a lot based on the collections and how lease-up is going as well. The intent is to be able to provide this back out for 2021.

Yes. That's helpful. I want to go back to talk about rent collections. Your rent collections have been really impressive, industry-leading maybe even. 89% in 3Q '20, 91% for September. Can you talk through some of the insights into negotiations in terms of what you're able to get in return from the retailers for a deferral of their rents? Because I think that's maybe something that is not being spent enough attention on. So what does that dynamic look like with retailers right now?

Yes. It is a horse trading occasion, right, where you've got to understand the different dynamics that go into each of these individual leases. So each lease is crafted in a way, depending on the vintage lease that you have that has certain provisions. And it could be restrictions on your parking lot. It could be restrictions on your tenancy. It could be an exclusive. It could be a cotenancy. So all of these items, we typically -- we sift through the lease, and we say, what are the priorities here to get unlocked for future value creation. And obviously, Rich, you know, we've been very, very focused on entitlements. We want to try and continue the entitlement path that we're on, where we've entitled close to 5,000 apartment units over the last 5 years and feel like we can get to 10,000 over the next 5 years. And so we typically look for, is there any common areas where that they have restricted where we might be able to unlock with the deferral plan. The other item is the exclusive side of it in a way to lighten up the exclusive to allow us to use a little bit of a broader range to filling some of the vacancies that we might have received. The cotenancy clauses, we like to say we'd like to water those down, make them less impactful, make them to have sunset provisions where they actually -- you get a chance to cure them over a certain period of time. And so those are the types of items that we really prioritize when we're going through these negotiations. And the nice part is, is we really have divied up the portfolio to say, who's got the relationship? So of our top 100 tenants, which typically make up about 50% of our ABR, we went through that and really put together who is going to be handling each of those negotiations. Some of them -- we all handled, some of them we handled individually. And then as we have the region setup, we let the small shops and the more the regional players be handled by the individual regions. And that was, I think, very effective. To utilize our relationships to say, hey, now is the time if you have a big balance sheet and you have liquidity, please pay your rent, so we can go and help those that need it most. And those are really the small shops and the individual operators that we feel don't have the rainy day fund or the cash on hand to manage through this. And so our tenant assistance program, which we launched, really came into effect to help those tenants most in need. And we were pushing pretty hard on our relationship tenants to make sure that they understand that they needed to pay their rent, so we can go and help those most in need.

Got it. Do you anticipate that rent collections will continue to rise at a steady trajectory here? Or are you going to reach some natural cap, if you will? And so how should we think about that in terms of 2021?

Yes. So I think, Glenn can comment on some color too. I mean, historically, we've run around 95% collections because you always have a bit of cash collections or tenants not paying rent. And so if you look at our 90%, 91% where we are today and then you add in the deferrals of, say, 4%, 5%, that all sort of gets you back to more of a normalized run rate. I will say that some of it will be determined by the denominator as some tenants may fall out in -- post holidays, you may see collections tick up a little bit, but obviously, the denominator has changed. Some of that may also depend on certain categories, right? The theaters, the fitness, the restaurants. Now we don't necessarily have big exposure to those categories, but we do have some exposure. And so if those categories start to fail, and we're trying to help those categories as much as we can because we really do feel like they are the ones that came into this with a relatively strong business that we feel like we can help them bridge the other side. Then we'll continue to monitor that situation and try and help them as much as possible.

Yes. I think I'll ask -- go ahead, Glenn. Sorry about that.

I'm sorry, I think Conor framed it the right way. I mean again, we're seeing further improvements in rent collections month after month. But you're right, you're going to get to this point where 95%, 96% is -- on any given month is about the level you would expect. I -- just the only thing I would caveat with it is, as you mentioned, if you start and have another real second wave where you have a lot of shutdowns, and we need to have further deferrals, it could put some pressure on that. But if you look at the trend line so far, I mean, the second quarter, we had deferrals at just under 20%. Deferrals were significantly lower in the third quarter. And for the October, it was only about 2%. So it's trending in the right direction, but I just caution a little bit about what could happen. You've seen the rise in the amount of COVID cases and some further restrictions. We feel good about the portfolio. And I think, Rich, also -- and for everyone else, the reason the rent collections, I think, have been so strong is you really have to look at the tenants that make up our portfolio. We have a lot of very strong investment-grade tenants. We have a lot of tenants that are essential, and they've been able to -- some have actually prospered during this whole period. Certainly, the grocers have done extremely well. Home improvement has done extremely well and other categories as well. So I think it's a mix of what makes up the portfolio and the tenant mix that we have. But again, I would just caution a little bit about second and third wave of COVID cases.

All very fair, although I'm not sure we ever got out of our first wave, but that's a debate for another time. I want to take a step back and talk about the transformation of your portfolio. You guys have put in some really hard work since 2010 by selling over half your assets. So I guess, 2-part question for Ross and Conor, why did you feel like you need to sell that many assets? What was the driving principle in selecting the assets and what market do you want to be in? And has the implications of COVID-19 changed any of those views?

Sure. I can start. And Ross, if you want to add any color, feel free to jump in.