Kimco Realty Corporation (KIM) Earnings Call Transcript & Summary

Good afternoon, everyone and welcome to our conference meeting with Kimco Realty. Kimco owns and operates open-air shopping centers which are usually anchored by super markets and big box stores that sell day-to-day essentials. With us today is Conor Flynn, CEO; Ross Cooper, President and CIO; Glenn Cohen, Executive VP, CFO, Treasurer; Dave Jamieson, EVP and Chief Operating Officer; Will Teichman, VP of Business Operations; and Kathleen Thayer, VP of Corporate Accounting. Before I turn it over to management for opening remarks, I want to remind everyone that if they want to ask a question, please use Veracast software to input your question at the bottom of the screen. We will be looking for these questions and asking them on your behalf. I now pass it on to Conor to start this off with an introduction overview of Kimco. Thanks, Craig.

Thanks, Craig. We really appreciate you having us today. We are very pleased to be here with you today and reporting on significant progress that we've made throughout the pandemic. It's been something of a learning experience for all of us at Kimco, and one that we're very proud of how the team has rallied together and really performed at exceptional levels. We can say that the collections have continued to improve continuously as you know that the Delta variant is widely still an issue for us across the country and the United States. The overall feedback that we've been receiving from our traffic and from our retailers and from our customers that our shopping centers continue to perform and traffic is exceeding pre pandemic levels. The leasing dynamic continues to be in our favor as well as the last-mile retail store has become more valuable through the pandemic as it's used in more ways than one. Primarily now, retailers are leaning into their stores. They're investing in those last-mile retail stores, because it's a hybrid model. They're not only just focused on the 4 walls, but it's being used as a distribution of fulfillment point, because that connection point to the customer is closest from the shopping center, where they live, where they work and where they play. And that's why I think we're in a unique position to really turn the corner and come out of this pandemic stronger than ever. We had to flex our balance sheet through the pandemic to show that we had ample amounts of liquidity and we now are in a position of strength coming out of this pandemic in a way that allows us to tap many different opportunities for growth and position ourselves as really a company with dynamic growth levers going forward. We have a wonderful team, one that I am very, very proud of at Kimco. And I think that's our #1 asset. And that's what's really going to lead us out of this and continue to shine no matter what challenge faces us next. And so with that, Craig, I'll turn it back to you for any questions you might have.

Sure. Let me start off with the elevated leasing volumes in '21. Is it driven by a growing universe of tenants? Or are you scaling market share of tenants from competition who want to trade up to the assets?

Sure. I think I'll hand it off to Dave to give some color. But I think it's a combination, Craig. I think we've leaned into our relationships that allow us to take national players that have significant robust growth plans for the future, making sure we catch the lion's share of those new deals because we do have deep relationships with great operators like T.J. Maxx, Home Depot, all the grocery stores, really a tremendous role at [ x ]. But then we also want to explore new relationships with tenants. And I'll have Dave comment a little bit about that as well.

Yes. It is a combination. And I would add to that as well, through the pandemic, retailers have identified that maybe having more of a flex format or several alternatives to accommodate what's needed for last-mile open air and what's available is important, so they can grab that market share where they're operating within the trade area and/or add new store counts. As it relates to new retail activity, we are seeing high level of new interest from new operators. And I think you see that in any form of disruption, disruption comes opportunity, and it's those entrepreneurs that are starting to push through. We have some that are focused on types of storage and distribution that want to come in and take some space. Others that are looking at reinventing some of the retail solutions. You do have legacy operators that are now reinvesting their 4 walls to make it more sort of compelling on a 21st century value proposition to the customer. So you're seeing all of these ingredients go into the mix on the demand side. And on the inventory levels, I think everyone is appreciating that there is -- that is interim period where there's inventory that's now come to market as a result of the pandemic. And yes, Craig, to your point, they do want to upgrade the quality of their own real estate and their real estate portfolio. I do appreciate that, that window, most likely will not stay open for an extended period. So you're seeing this robust momentum of wanting to secure that position sooner than later to take advantage of that disruption.

And on the other side of that, store closings have been unusually benign in '21. I'm sure some of this was pulled forward with the number of bankruptcies and closings in '20. But how long do you think this can last? Can it last into 2022 and what's really driving this very low store closing number?

I wouldn't agree with your original point. I think a lot of it was pulled forward, right? I mean we -- going into the pandemic, we're operating at an all-time high in occupancy at 96.4%. In Q2, we closed at 93.9%. Obviously, there's a good recovery that we've started to see through end of '20 into '21 and Q1 and Q2 of '21. But that's a big delta between where we were and where we are today. So that creates that opportunity on the back end to backfill. And I think what you're seeing right now in terms of the [ meta ] level that we saw in Q1 of '21 was immune to bankruptcy environment. And in '20, you didn't have retailers that went into bankruptcy, but the majority of them came out with a better balance sheet instead of liquidating, their recapitalize, they shed their underperforming locations and started to refocus on what their core competency was with a stronger balance sheet. So that's given them an opportunity to survive in the interim. And depending on where they put those investments, they can then drive into the future. But what we'll be watching very closely is, who are those winners and losers into '22 and '23? Who made those critical investments when they had the opportunity with this additional cash that may have come on to the balance sheet to reinvent their value proposition, to better connect with the customer, to utilize various forms of distribution and then how to operate within the 4 walls, that will really be a telltale sign of who really succeeded through this period.

Great. And then how was the assimilation process proceeding following the merger with Weingarten?

Sure. I'll take that one, Craig, and then I'll hand it off to Will for some color on the integration process. It's been a very much a seamless process going through the integration with Weingarten. All things again to a lot of the people on both sides of the team. And it's really one that the collections, the leasing volume, the recovery continues on a pace even faster than we anticipated. And it's a portfolio that we're eager to showcase that we feel like is in a prime position to really enhance the growth profile of Kimco over the long term. The leasing volume has been robust for the Sunbelt, as you are well aware. And we continue to think that those assets in the best markets across the Sunbelt are well positioned for long-term value creation. With that, I'll hand it over to Will.

Thanks, Conor. From an integration perspective, we've been very focused on planning and having a good plan, solid plan in place and then executing on that plan. We are 45 days post close, and at this point, have completed a number of major integration milestones. About 2 months prior to closing, we formed an integration management office with representation of each of our functional areas. And at IMO, met on a weekly basis with the executive teams of both companies to ensure that this planning and execution process was streamlined and straightforward. I'll call out some of the milestones that we've accomplished up to this point. Within 24 hours of closing, we had all of the Weingarten office locations up and running in our secure network, which was critical to bringing on board over 100 employees that were onboarded as a part of that process. From an office perspective, we have begun to consolidate overlapping locations. Two have been completed in Denver and Sacramento, and we're looking to further consolidate additional locations through the balance of this year. And as really locations where Kimco had an existing presence, given the overlapping portfolio in the Sunbelt markets. With respect to employees, about 80 permanent employees were onboarded on the first day, 20 transitional. Those transitional employees will be finishing out their 10-year by the end of the year. And we began a somewhat unprecedented effort to onboard those folks. And the feedback so far, and we've surveyed those individuals multiple times post close has been overwhelmingly positive, and we're really proud of the work that our teams have done to make sure that these folks are welcomed in the organization and they're able to hit the ground running, both with the tools and the knowledge that they need to be effective. From a leasing perspective, we also hit the ground running on the first day. We were in a position to bring all the Weingarten sites online on the kimcorealty.com leasing search tool. We had our site plans up and running. We started to accept leasing inquiries actually within hours of closing the deal through our 24/7 1800 call center. And then over the 2 to 3-week period post close, we really focused on some of the heavy lifting related to system integration. We, as a company, have invested heavily in cloud technology over the last several years, and that really positioned us well to be able to complete this integration in sort of a record time frame. Within 2 weeks, we had concluded the migration of the leasing and construction pipelines underway. I was in the Weingarten sites, brought those on to our Salesforce platform, which is the tool that we use for operations. And then of critical importance, obviously, from a financial system perspective, within 3 weeks we had the general ledger, general rosters, accounts receivable and building collection efforts up and running, starting to apply cash for tenant rent payments. So overall, feeling good about where we stand, 45 days post close. From a synergies perspective, the vast majority of the synergies that we had communicated in advance of the transaction are related to 3 categories, staffing, office and professional services. And we feel at this point that those savings opportunities are well known. Many have been already secured as a part of the early stage integration, and we feel good about the direction that we're headed in being able to fulfill the synergies that we represented on the front end of the transaction.

Let me just add just a couple of points just to first keep in mind. Obviously, the third quarter recording will be the first time we're reporting as a combined company. You'll have just under 2 months of activity of Weingarten within the numbers. Embedded in the third quarter numbers, there will be between 50 and $60 million of merger costs that will be expensed. So that's something that we publicly disclose. But just to kind of keep it in mind, because we don't want people to get confused about what's in the numbers. So you'll have the merger-related costs during the third quarter. In addition, we are very actively working through the purchase price allocation. As you might imagine, it's pretty complicated. It's a $6 billion allocation that needs to be made over all the assets and liabilities. We will have a preliminary purchase price allocation completed with the third quarter close. So we'll be able to have good transparency around how much is coming from the mark-to-market of the Weingarten debt that's now on the combined balance sheet, the impact of above and below-market rents from the leases that have come on as well and the resetting of straight-line rents related to the Weingarten leases as well. So we'll be able to call those out separately. So people be able to have a good analysis and looking at it on a combined basis as well.

Okay. And then of the synergies that you had guided to, how many of those are operating synergies? And how many are G&A synergies?

The lion's share are G&A synergies, Craig. And that's where we were able to -- as Will outlined, really actually at the high end of our range, exceed them. So we feel comfortable in terms of the trajectory where we're heading. In the operational synergies, we continue to invest in technology, all the Weingarten employees that became Kimco employees were outbid with laptops and iPhones, the first day, so they were up and running and ready to hit the ground. So we continue to think the way that we've been operating as efficient as possible. We'll have some lessons learned that we can outline and really implement very quickly across the combined portfolios. But really, the lion's share of the synergies that we focused on underwriting was on the G&A side.

Great. And then of the 3 more heavily mixed-use project in Weingarten's portfolio. Who's overseeing that now? And was there some transitional time for them to help pick that up?

Sure. It falls under our operating teams and our development teams. We have engaged with all the venture partners associated with the Weingarten portfolio. We did that very early on in the process to make sure, there was a seamless transition, and there's an understanding and expectation of who we are as a company. For those partners, we were sensitive that this is a new relationship that they've inherited and built or have to build upon. And unfortunately, we have history on the multifamily side. It's a big focus of ours. It's where we've invested our own capital previously and have been successful with our Lincoln Square and are with our project down in Pentagon, which is also in close proximity to the central project in West Alex in the Arlington area from the Weingarten side. So you are seeing some efficiencies and economies of scale there as well. So that's where that program falls, and there really hasn't been any miss to this point on the integration there?

Yes. Craig, the nice part about those projects is they were really completed development projects. And so we could step in on the leasing side to speed relatively quickly because, as Dave mentioned, we have good data about our projects in those overlapping areas. And so we felt really good about the operations and felt that we could really -- would not skip a beat in terms of bringing those properties online and seeing the lease-up in the cash flow growth without having the development spend dragging.

Good. Great. And then on the transaction market, how does it change from a year ago? And are you seeing more product brought to the market for sale?

Yes. It's pretty remarkable to see the level of demand that has increased even in the last 4 to 6 months since the announcement of our merger. So we've seen capital formations and names, old names and new names continue to show up for assets that are in the market. We are seeing transaction volumes increase in the amount of supply hit the market has also increased in the last 6 months or so. But the bidding has been intense. We've seen several rounds of bidding on a variety of institutional quality type assets, primarily grocery anchored, but also those that are more in the lifestyle and power center formats. But just in the last 4 to 6 months, we've seen grocery-anchored institutional product, trading in the high-5s, than into the mid-5s, low-5s, and now we're seeing several data points that are transacting in the high to mid-4s. So the compression continues. I think when you look at the risk-adjusted return for the open air format of retail on the institutional quality side, investors are seeing a lot to like. And compared to other asset classes, it's a pretty attractive investment. And the financing markets have continued to cooperate, which enhances the ability to get these assets closed at accretive values.

And the company's goal to get to 85% grocery-anchored portfolio. Is that more through adding groceries to existing tenders or through a concentrated effort of acquiring grocery anchored centers?

Craig, it's a combination of both, but I would tell you that what we did do internally was look at our entire portfolio and outline which assets we own that we could reposition by adding a grocery anchor that really enhances not only the offering but compresses the cap rate. And then what we've been doing, as you know, as an asset manager, is looking at the portfolio, identifying the growth prospects throughout the portfolio and making sure we match funds with the redevelopment opportunities that we have. And we're in a pretty unique position now where we've done the massive dilutive dispositions to get to the portfolio that we have and now can look across the portfolio and say, is this ground lease is potentially flat, we could trade at a very low cap rate, we can recycle that capital back into a higher growth vehicle of an acquisition or a redevelopment that we have slated to start. And so that's where we sit today. We feel like the leasing momentum is significant. And then also on the acquisition side, we were continuing to look for third party acquisitions as well as we feel like we have a really good fingers on the whole some where the market is heading and trying to find those needles in haystacks where our platform can add a lot of value.

Okay. And then maybe -- just the redevelopment, what are your target volumes for annual development and redevelopment? What are your projected yields? And if it helps, you can break that out to small development versus some larger projects.

Sure. Again, it is important to break them out into 2 separate buckets. I would say the first bucket is your core redevelopment activity. Activity that we've been doing really since the beginning of the program, it's focused on repositioning the shopping center, adding or subtracting retail square footage, addition of out parcels, creating a better mousetrap for our retailer base. That's highly tenant driven. It's based on what their needs and wants are and how we can accommodate that and how we can reposition maybe some of our less functional square footage that's in place today. Typically, we're targeting anywhere from $60 million to say, $100 million a year of completed projects. But again, if the demand is there from a retailer and they like the existing center as it is, and we can just backfill it with a straight lease, that's just as good as returns on our leasing force or many other use of our capital. On the other side of it is more the signature investments so we've talked about for years now, and that's focused more on the non-retail and the multifamily, activating the thousands of residential and residential units that we have currently entitled. I won't be dependent on where we are in the market cycle, which projects we want to pull forward and activate, how we're going to structure that? Is it going to be a ground lease to venture? Is it a better option to actually sell the entitlement to monetize that? Where we want to be focused there is opportunistic and where it makes sense. We would like to target one or 2 projects on any given year, but the use of capital will be dependent on the structure we design for that particular project.

Yes. I think you're going to see that you're going to see more redevelopment activity from us and significantly less development. I mean, we really are pretty much at the end of the development part of the cycle. We've done the projects that we've done, they're successful. But the time it takes and the tying up of the land, the time of the whole process is very long. So we see more upside in the redevelopment side. The smaller redevelopments, they're still yielding very high single digits for us. So we're going to continue to do as much of that as we can.

And are you going to take advantage of the COVID process to alter your merchandise mix at your centers? Is there any category you want to grow, whether it's essentials or discretionary or restaurants this seems to be an opportunity to give future direction to what your centers look like?

Yes. I wouldn't want to say it's taking advantage of the distress. It's just -- it's always going into the strategy of how to optimize the merchandising mix. And that's what we've always done. So our leases are the local resident experts on the core product, what would best serve the community, what we're currently offering and what we would want to add to it. We like to think of it, how do we expand the utility of the center, expanded to an 18 hour day as opposed to, say, an 8 or a 10 hour day. And the way you do that and achieve it is by adding that mix of uses. So restaurants are coming back. We had anticipated that the small shop activity would be a bit of a long tail on the recovery of the pandemic. We're starting to see that build back in a very strong way. Restaurant tours and entrepreneurs are seeing the opportunity where there's these elevated inventory levels, quality real estate, but fully fixturize restaurants so that they can come in with a little bit of capital, they can rebrand, refresh and open quickly, that's a real value-add. You want to align yourself to those best operators. On the off-price and the grocery and the health and wellness and the beauty, we want to continue expanding those categories as well with the best operators that will bring the strongest co-tenancy and increase the usage of the center over a broader period.

Great. Okay. Well, I -- I was going to turn to the rapid-fire questions. We have 3 of them. The first question is which of the following is the greatest challenge facing US REITs today? A, Fed action and higher rates; B, supply chain issues, and are including labor and logistics or C, flow to non-traded REITs.

It's a good question, Craig. I think when you look at the issues that all US REITs are probably facing, I think there's probably on the supply side, would be where I would say. I think the Fed is obviously on everybody's radar. But I think when you look at the issues that are on the front end of the risk curve, I would say that that's probably one that probably has the most risk adjusted?

Are you hearing how many retailers are concerned about holiday, given the supply chain issues?

We haven't heard any issues on that side. It's been more on finding staffing that upon opening and upon trying to bring people back. That's really been sort of the longer.

Okay. The second question is, over the next -- I know the answer to this. Let me -- over the next 5 years, which market will outperform urban coastal or Sunbelt?

You want to answer for us, Craig?

I would say, just because -- given a major acquisition that increased your exposure.

I like the easy ones, Craig. Thank you for that one. We're going to go with Sunbelt.

Okay. Great. The third question, and this is for your company, your company's office plan post pandemic, will you a, have no changes from pre-pandemic; b, leave it up to the team, c, offer hybrid or GE, d, go full remote.

So we're currently hybrid. And I think we're going to learn from this experience to try and be sure that we're nimble and try and retain and attract the best talent possible. And I think you have to take this experience and recognize that there's things that we've learned, but there's also things that we're going to experiment with and continue to learn all the way. So I think hybrid is where we're headed for the time being. But I often -- we often talk as a team, what else we should experiment with. So I think at this point, I think hybrid is probably the best answer for us.

Great. Okay. And then you obviously have a lot going on at Kimco. I'm just wondering what you consider the most significant difference between you and the other 17 public lease?

Craig, I think at Kimco, what makes us unique is we have positioned ourselves to have more growth levers than any other region. If you look at our Albertsons shares that are now worth over $1 billion, you look at our free cash flow after dividend, if you look at the transform portfolio, if you look at our entitlement path for value creation, you look at our balance sheet strength and the bond we just did. You name it, that we've got menu that I think is pretty robust. And that's what gives us a lot of conviction and confidence that we're excited for the future. We're going to focus on execution and just continue to let the numbers speak for themselves.

Great. Well, I think that brings us to the end. I want to thank all of you. This has been my largest channel. Sorry I didn't get to touch a couple, but I appreciate all your efforts in breaking this presentation. It's great to hear a little bit updated on the Weingarten front. We'll look forward to the third quarter results, and I hope you have a great rest of the year and a great rest of the conference. So thanks, again.

Thanks, Craig. See you.