Kimco Realty Corporation (KIM) Earnings Call Transcript & Summary

Hi, everyone. Thanks for joining us at the Kimco Presentation. I'm Caitlin Burrows. I cover REITs at Goldman Sachs. Here with us today from the Kimco team, we have Conor Flynn, Chief Executive Officer; Glenn Cohen, Executive Vice President, Chief Financial Officer and Treasurer; Ross Cooper, President and Chief Investment Officer; and Tammy Chernomordik, Senior Director of ESG.

So maybe we'll start. Being that ICSC was recent, can you guys just talk about based on your conversations at ICSC? Are retailers scaling back their open to buys because of some added uncertainty now?

Thanks very much. No, we haven't seen any change in the retail sentiment and what they're focused on in terms of really looking at their customer and how to best service their customer. And what we've seen is the retailer demand continues to be robust. It's across pretty much all square footage levels as well. And we're benefiting from a few major trends that I think continue to resonate with what the consumer is looking for today. First and foremost, the suburbanization that's occurred through the pandemic has clearly benefited Kimco and our portfolio. We're first-ring suburb around the top 20 major metro markets. So very clearly, we're benefiting from that surge in population shift. Second, the work from home mentality that and the flexibility that seems to be still to this day, the new normal. So we're seeing the pickup in terms of people shopping at our grocery stores, visiting our quick service restaurants and our coffee shops. And then third, probably the most important in terms of retailer demand is the utilization of the store, that last-mile store, which we define last-mile as really the store that's located closest to where you live, work and play. And so that the retail that we own, which is typically grocery-anchored and embedded in the community is being used as more of a distribution fulfillment point. And so e-commerce has obviously been front and center for a long time now. And what's happened is a lot of our retailers have realized how to integrate the e-commerce into the physical world and improve margins and cash flow. And so that is I think the takeaway from the silver lining of the pandemic is how the utilization of the store, I think has forever changed and it makes the last-mile retail more valuable.

Rising interest rates have definitely been a topic of conversation for a while, especially this year. Glenn, maybe you can go through how do changing rates impact your ability to refinance near-term debt maturities?

Sure. I mean, again, we've taken care of a large portion of the debt that was maturing this year. We did a $600 million bond back in February, a 10-year deal at 3.2%. So that was pretty opportunistic at the time, which is good. We do have one bond that remains for this year that matures in October. It's one of the Weingarten bonds that we assumed when we completed that merger last year. So that's a $300 million bond at 3.375%. I mean we could issue a new 10-year today, probably around 4.5%. So definitely, interest rates have had some impact. And we also -- it's something else to keep in mind because of the bonds that we assumed from Weingarten, all of those bonds were mark-to-market. So the bond that's actually maturing that has a coupon of 3.375%, it's actually from a yield perspective on our -- as it impacts FFO, it's actually 70 basis points is where it was marked to. And then the bond that we have maturing in April of -- April of '23, which I think is at 3.5%. That one has a coupon of or a yield from an FFO standpoint of about 90 basis points. So in total, there's amortization that's going to burn off over 2023 of about $12 million related to all of those bonds. But having said that, we have great access to the capital markets. We're sitting today with around $400 million of cash. We have our Albertsons investment, which again is not in any of our numbers that at the end of June, the lockup periods will expire. So that's an area for monetization that we can begin. We have a $2 billion revolver that has nothing tapped on us. And most importantly, we're generating today in excess of $200 million of free cash flow after dividends. So we have a lot of ways to handle the upcoming debt maturities. We have a very long debt maturity profile, really one of the longest in the entire REIT industry at 9 years today. And we've gone long, and that's still going to be our path. I mean we've done about $1.5 billion of 30-year paper with rates ranging from 3.7% to 4.45%. So we think we've positioned the balance sheet really well and can deal with the swings that happen within the treasury markets.

I was going to save that for later, but since you brought it up on the Albertsons topic. So at the end of June, the lockup is scheduled to expire. Just wondering if you can go through what your options are there? And when -- at what point you think you'll make a decision on kind of how to move forward once you have that option?

Sure. So the lockup is scheduled to expire at the end of June. The lockup is not just for Kimco, it's really for the entire consortium that we're part of. And the consortium today owns about 80% of the stock. So ideally, there's a lot of conversations that are going on amongst us because we want to do something that would be organized. We're not looking to just have a lot of stock all of a sudden just stop flooding the market. So something in an organized fashion certainly would make a lot of sense. So there's conversations that are going on there. Separate and apart from our consortium, Albertsons itself has announced its own strategic alternatives that they're going through. So there's a lot of -- it's a pretty fluid situation. So we're watching it. But ideally, although not in our numbers, our plan and expectation is that we'll be able to monetize a portion of it in this -- in the latter half of 2022 to get started. And ideally, we'll monetize somewhere between $300 million and $400 million. And we have a lot of uses of proceeds from whether it be debt repayment. We have 2 perpetual preferreds that become callable once at 5.125%, once at 5.25%. Ross can talk about the whole list of potential investment opportunities that we're looking at as well that would be accretive. But any which way you look at the Albertsons investment, the 2 things that come out of it are it will be accretive no matter what we do, because the yield on the investment today is only about 2%, and it will be delevering. So a lot of good things to come from that.

Maybe on the property side, can you guys share what your data is telling you more recently in terms of number of trips that people are taking to your centers and the potential drop in consumer spending and whether inflation could be impacting that at all?

Sure. So we do focus on data analytics. We think that that's actually going to be a big differentiator for us. And we already are starting to see how to utilize that in more ways than one and better understand our consumer and our trade areas better than we ever have before. So what we're seeing is actually our consumer continues to frequent the shopping center at a higher rate than it was last year. And we continue to see our consumer, which again is sort of the middle to upper income affluent shopper continuing to shop and not being impacted from the inflationary environment. Now the same cannot be said, I think for the lower income consumer, that's obviously dealing with a lot of inflationary issues and pressures from the gas prices that they're experiencing and the other inflationary impacts. But right now, the consumer for Kimco continues to shop at an increased pace. The dwell time is longer. You're seeing people still in the reopening phase of the pandemic, getting more comfortable going out to the grocery store, the restaurants, the movie theaters. And it gives us a lot of cautious optimism to see that our consumer is still engaged at a higher rate than last year. And so our momentum on the leasing side sort of correlates to where the consumer that we're servicing continues to shop today.

Got it. And going back to the increasing interest rates. Have you guys seen any change in shopping center cap rates for grocery or how does that differ between grocery and power centers? And as your cost of capital has increased, can you prioritize some capital allocation plans?

Sure, happy to. So it's been a bit of a bifurcation that we've seen in the market today. The highest quality institutional, primarily grocery-anchored product has remained extremely sticky in terms of its cap rate and very aggressively priced. We've seen lots of recent examples of transactions that have occurred even with the run-up in the treasuries of late with all cash buyers, institutional that are looking at these investments as long-term holds and some strategic and generational type of ownership. Where you are seeing pricing starting to soften is on some of the bigger box product, where the buyer is traditionally more dependent upon leverage or is it an IRR-driven buyer that is looking at a buy with a relatively short hold period and an exit, and that's where you're seeing some shift in the pricing in the marketplace today. But there is no doubt that today the all-cash buyer and certainty of execution is critical in order to be awarded a deal and to be -- to have that competitive advantage. In terms of our own strategy, first and foremost, our capital is always going to go towards leasing vacant space. We have a substantial amount of smaller redevelopment opportunities that are yielding high single-digit, low double-digits. And then in terms of external growth opportunities, we have sort of our 3 verticals that we focus on. The core acquisition strategy, which will continue to be very selective, where we're buying the highest of quality, long-term holds that we can tuck into our portfolio very nicely. We have our partnership buyouts, where we're consistently having conversations with all of our joint venture partners, several of which have various time horizons on when they may look to exit an investment, and we're there to create a very seamless and quick transaction for them at a price that hopefully is slightly better than market for Kimco. And then we have our structured investments program, where we've been very active in putting out preferred equity or mezz financing, where we're able to negotiate a right of first refusal or right of first offer on high-quality real estate, where there's a need for a slice of the capital stack that we can provide in a junior position to the senior debt, but in a senior position to the equity. And that's a program that we think is going to be even more active in the back half of the year or as we start to see some volatility in the capital markets, that's typically where we see opportunity for that product. So when we take a look at a blend of all of those components, we're very confident that we can continue to invest capital accretive to our cost of capital, which we look at every single day and clearly is changing as debt rates and equity rates are moving around, but we have lots of different ways to utilize that capital.

And maybe just as a quick follow-up on the transaction market. Can you comment on the institutional interest for the property types, if that's changed year-to-date, and just how much capital is interested in getting into the sector and how that ends up impacting competition?

Yes, there's been a lot of demand, there's a lot of capital formation for our product, and we really haven't seen that change. And we're also on the disposition side selectively of a few assets. So we see it from both sides of the table. And the good news is that buyers on our product type that we're selling have not shown any pullback. We've had several deals that have priced and gone under contract since the run-up of the treasuries, and we really haven't seen any retrades or meaningful pullback in that regard. Where you're seeing a little bit of a different mix in the bidding [ tent ] is that, as I mentioned, the financed buyer, who was much more successful 3 to 6 months ago is not the winning bidder in the marketplace today. It's all about certainty of execution. As a seller, you want to make sure your buyer has the wherewithal and the ability to get across the finish line. It might not necessarily be the highest bid. And then one other advantage that we've seen for Kimco in particular is the owner of an asset or a portfolio that has owned it for several decades or generationally and has a tax concern in terms of the sale. So our ability to offer a structure that can help mitigate or defer taxes for a period of time has put us in an advantageous position, and we've been able to utilize that historically. Over the years, our largest asset by NAV, Westlake in California was actually acquired utilizing DownREIT units. And we've been having more conversations of late with that structure than in the most recent past.

On the redevelopment front, you guys have done a good job expanding the number of multifamily entitlements that you have with the goal of reaching 12,000 by 2025. What's keeping you from expanding or green-lighting more of these projects?

Yes. Part of our strategy is to really unlock the highest and best use of our real estate and being in that first-ring suburb allows us to really look at really long-term value creation for our shareholders. And that has led us to, I think a very successful initiative of looking at how to entitle units for the future. And we're up to 2,000 units built on the portfolio and over 4,000 entitled, and we obviously have set the goal to get to 12,000 in 2025, and continue to see good momentum there as we entitled over 1,000 units in the first quarter. We're being very selective on where we activate projects. The nice part about our entitlement program is there's really no shelf life that lives with the project. And so what we like to do is really make sure that our capital plan is very conservative. When we activate a project, we really want to look and see is the market demand and the supply in balance, and then also what's the best way to activate it without muting our FFO growth, because we're obviously a REIT. We're really, I think graded on our cash flow and our FFO growth. And we're at a point in the cycle, where we see so much organic growth that's visible. We're looking at close to $50 million of NOI that's yet to come online, that's already been signed and yet to cash flow. And so as we activate these projects, we really want to make sure we don't put a tremendous amount of capital out that's not earning anything day 1. And development, typically, that's what you do, right? You fund the development and it really doesn't start to cash flow until the doors are open. So what we'd like to do is activate those projects either as a ground lease or a best-in-class multifamily developer comes in, develop, construct it and leases it, yet, we retain the right of first refusal on that parcel. As the leasehold starts to burn off, we think we'll get an opportunity there to collapse that and get some spread. The other piece that we've looked at is contributing the -- the entitled land to a joint venture. So in essence, getting credit for the entitlements that we put on the parcel and then having them take it from there and ride alongside of them. One of the learnings that we've found that's really important, I think to our long-term strategy is the retail is the amenity that really drives premiums to the multifamily units. If you think about how multifamily is differentiated, it's usually by amenities. And we have the grocery store of choice. We have the hair salon, the nail salon, the pizza place, the Starbucks. We have a lot of the built-in amenities like the gym, things that can really drive premiums to multifamily product. And what we found is that we can really create a lot of value by activating these projects the right way.

Tammy, since we have you, maybe you could go through some of the main ESG initiatives that you and the rest of Kimco are working on now?

Yes, absolutely. The first thing I'll say is this is really a company-wide effort. I mean it starts with the Board. It's -- we have oversight from the Board and the committees there. The whole leadership team is involved, and then it's really through our employees. We have a lot of employee-focused council. So this is really spread throughout our organization. So I'm not a team of one. I'm a team of 550 or so. But in terms of our goals and our initiatives, we have 16 publicly-facing comprehensive ESG goals that really run the gamut of E, F and G. So a few that I'll call out are our science-based target for greenhouse gas emission reduction, our diversity and management goal and our community giving goal. So a big focus on all of our stakeholders.

And I guess on those main goals, is there any sort of timing or expectations for execution or implementation?

Yes, absolutely. So the science-based target is 30% reduction by 2030 and a $1 million giving goal every year, and then it's a 60% diversity and management.

Got it. Maybe on the occupancy side, Kimco has talked about having 10 basis points to 30 basis points of occupancy improvement per quarter, which has already played out for a few quarters now. But just wondering if you guys could go through the outlook for that continuing how long you think it could continue and until what occupancy level?

Sure. So that guidance range was more actually looking back at the recovery from the Great Financial Crisis. And what we saw was each quarter, we saw a build back of our occupancy in that range. We did caveat that usually the first quarter is a dip in occupancy. So we were not expecting sort of the robust occupancy gains we experienced in the first quarter from a budget standpoint or from a guidance standpoint is that's why really what led to the beat and raise there. What we're seeing is higher retention rates. And our space has been one that has seen a lack of new supply for a decade plus. And then when you think about where our product sits in that first-ring suburb, the chances of a competitive product being built today with the inflationary pressures on construction and labor, it really doesn't seem to be anywhere near on the horizon, where we're going to face any new supply, especially when you layer in the highest and best use of the competing parcel. Typically, if you're in that first-ring suburb, you're going to have to go vertical to make the numbers work. And so having a single-story building with 80% of the land dedicated to parking, that's not generating any revenue typically as a governor on any type of new supply coming in. So we continue to think that the demand is really strong right now to continue to drive those occupancy gains. But we're also at a point where we're being selective on the right credit mix, because the pandemic did remove a lot of our weakest credit tenants. And we're at a point now where we can be very selective on picking the omnichannel retailers that will continue to build off of a very solid credit base that we have today. So that the next cycle -- and we're in the cyclical business, right, so the next cycle we should be in a better spot in terms of our credit quality.

Let me just add something here. So to give you a little bit more color. So today, occupancy, overall occupancy for the company is at 94.7%. Peak occupancy, which we hit all time was at December of 2019, just prior to the pandemic starting, and that was at 96.4%. So we still have 170 basis points of occupancy uplift just to get back to the all-time peak. And I would tell you that with the merger of Weingarten and the other things that we've done, the portfolio is stronger than it's ever been. So we want to first get to that peak point, but we think that we could probably exceed it. In addition, from a cash flow standpoint, we're sitting today with our leased versus economic occupancy at a spread of 310 basis points. So it's pretty wide as this lease-up is and these recoveries have been happening. So that probably will stay elevated for a while. And I think as Conor mentioned, that represents just about $50 million of ABR that still hasn't come online yet. So we're pretty -- we're cautiously optimistic about where things are headed and see a lot of visibility as to where the growth can come from.

The tenant demand drivers too are pretty diversified right now, which I like to see. Typically, you want to see a depth in terms of the demand drivers for each square footage category. And I think that one of the nicest parts of our business that continues to evolve is the local shopping center is servicing more goods and services than they have before. So medical has almost doubled in the last 3 years in terms of leasing demand. And you're seeing it what used to be the optometrists and maybe the dentists now is evolving more towards the urgent care facility, outpatient facilities, pediatric urgent care, like those types of uses are sticky because they're investing a lot of their own capital. And so we like the medical growth plan that we're seeing experience at our assets. Also the shift in spending, everyone was buying goods during the pandemic, it's starting to diversify into services. So the hair and nail salons that are a big part of the fabric of the shopping center continued to be very strong and robust in demand. And we continue to see it with quick service restaurants, with health and wellness, and obviously, our anchors are very strong as well. So it's -- what we anticipated anyways was the anchors to lead the recovery because of their balance sheets and their creditworthiness. What's interesting to see is the franchise-driven concepts, which are now sort of the small shop [ du jour ] is really sort of the recovery pace is right on track. Both leasing [ for us ], anchor, as well as small shop is almost exactly what we like.

If anybody has any questions, I would say raise your hand, but actually it looks like you're supposed to use that mic over there. So if you want to get up and stand, feel free. Otherwise, I will keep going. Maybe you guys could talk about on the watch list, I think in the period up to the pandemic, one of the things that ended up disrupting the sector was unplanned store closures. So could you talk about your watch list, how you measure it, how you watch it and how you're feeling about that kind of risk to the downside?

So the watch list is really interesting today because it's about as small as it's ever been. It's pretty unique where we're sitting today. We have 11,000 leases just under 5,000 tenants. And of those 11,000 leases, there are a whopping 3 that are in bankruptcy. I mean, it is like just a historically low number, something that we're watching because that -- it's just so amazing to be that low for so long. The other thing that we look at because we're always trying to measure our credit loss and what our credit loss reserve needs to be. So if you look at our top 100 tenants, starting at the top, our largest tenant is TJX Companies. They make up only 3.7% of our ABR. Our second largest tenant is Home Depot, and they're at 2.2%. And then the next 3 tenants only make up 1.9%. When you get to tenant number 100, they make up 30 basis points of ABR. So it's incredibly diverse. It's incredibly spread. And of the top 100 tenants, not one of them is a cash basis tenant today, which is pretty amazing. So we just -- we're analyzing it constantly. We are looking to see where the chinks in the armor can be, and we're very cognizant of that. But I mean right now, balance sheets are strong from the retailer side, and I think things are going pretty well.

I think when you look at the credit quality and then the retailer categories that are still in the recovery mode, that's probably where we spend more time. So if you think about the entertainment component, now we're mostly grocery-anchored shopping center. So we don't really have a lot of pure entertainment plays. But what we're watching closely is movie theaters, right? So obviously, Top Gun has really helped the movie theater industry. And all of our movie theaters combined are less than 1% of our ABR. But that's one category that we're watching closely as a lot of things have gone direct-to-consumer, the streaming services. And we continue to think that there's a place for it. We just opened a movie theater at our Dania Pointe shopping center next to the Fort Lauderdale Airport, and it just became the #2 producing theater in the state of Florida. So there's clearly a demand if the product is there, but that's one industry we're watching closely, that we're not totally convinced all the theaters that exist today need to be in existence 5 years from now. The other piece of it is, is like the health and wellness and fitness category, which obviously got significantly impaired in the pandemic. There are some weaker operators in that category that we're watching that may be consolidated. So that -- those will be the 2 that I would say that we continue to watch closely on.

I'll repeat the question. Sure.

Sure. Can you elaborate on the cap rates and the current conditions?

He just wanted some color on current cap rates and current conditions.

Sure. Yes. I mean, as I mentioned, the highest quality grocery-anchored cap rates are remaining in many cases, in the 4s, low to mid-4 cap range. And I would say one interesting tidbit from ICSC from the convention and conversations that I'm continuing to have with investment sales brokers trying to understand is this changing, what we're seeing day-to-day is that the grocery-anchored shopping center is remaining the stickiest cap rate of all the asset classes. So when you compare it to some of the softening in pricing on industrial or multifamily or self-storage, we're seeing grocery-anchored cap rates holding its value the most. Some of that may have to do with the fact that the cap rates have gotten so low in some of those other categories that there's a little bit of pullback. So we had a bit of a cushion compared to that. But it's nice to see that all the leasing velocity, the demand, all the fundamentals that we're seeing on our space day-to-day and the conversations we're having are flowing through to the investor demand on our product type.

Anybody else? Okay, maybe last one. So it sounds like the picture that you guys are painting here and the outlook for continued occupancy improvement is all very positive. I guess there's -- there are definitely macro concerns out there. So as we think about what to be on the lookout for where we might see weakness or slowdown or I don't know how you call it. First, what do you think people should be on the lookout for to think things are potentially cause for concern or actually that everything is going great?

There's definitely warning signs out there, and we're trying to paint a full picture here that we're watching our consumer closely to make sure we recognize the changing in shopping patterns and the changing in the consumer behavior. I mean, clearly, if an inflationary environment at this pace continues that, that's cause for concern in a number of different areas. Some inflation is actually quite good for retailers, but the pace that we're on right now seems to be unsustainable. But it looks like anyways from our business and from our vantage point, we would continue to watch the consumer, continue to watch investor appetite for our products, continue to watch really the leasing demand. And really, when you look at the components of growth that we have, typically, when there's dislocation, that's usually when it creates real opportunity for those that are well capitalized. And we're trying to be in a position of strength when those opportunities present themselves. And with $400 million of cash on the balance sheet, as Glenn talked about, our $2 billion untapped line of credit, producing $200 million of free cash flow after dividend, the Albertsons investment that's coming free and clear, we seem to be in a position of strength regardless of what happens next, and we've been through the wringer. So I feel like a battle-tested team is always important as well.

Great. Well, I think we'll stop there. Thanks, everybody, for joining us.