Kimco Realty Corporation (KIM) Earnings Call Transcript & Summary

Good afternoon. For those who don't know, I'm Craig Schmidt. I cover the retail REITs at BofA. At the end of the table we have [indiscernible]. So you may want to follow that anything. From Kimco to my left, we have Conor Flynn, CEO; to his left is Glenn Cohen, CFO and Treasurer; to his left, Marissa Gracia, Managing Director of Structured Investments; and then Dave Bujnicki, everyone's favorite, the Head of IR. Thank you guys for all coming. It's impressive group. We always say we like the defense, and you -- do not hesitate to [indiscernible] thank you for letting me see look throughout the company.

Rather than do an overview, I thought maybe just jump into what differentiates Kimco from your other shopping center REIT?

Yes. Thanks for having us, Craig. This been a phenomenal conference. Great to see [indiscernible]. We're very proud at the differentiators of Kimco. We think they are numerous. It starts with our people. I think having a company culture, [indiscernible] has always taught us that when you're looking at an investment across the investment landscape, it starts and stops with the people of the organization. Can you trust them? You want them to be good stewards of your capital. So I think that has always been sort of the foundation of Kimco. We recently actually this past week in Fortune announced that Kimco is the best place to work in real estate. We're the only public company listed is on that list, and we're very proud of that because that's all driven from our employee base. [indiscernible], Great places to work. We're very proud of the Kimco culture. So it starts with our people. we've positioned ourselves, I think, to have a number of differentiators. As a whole, Kimco has, I think, a unique portfolio where we have now 80% grocery-anchored assets. And then we have an opportunity set unmatched in the peer group, where we have positioned the portfolio for significant densification opportunities. And we've activated over 2,000 apartments. We have over 5,000 entitled in addition to those 2,000, and we have goals to get to 12,000 of appartments entitled. And when you look at the opportunity set of the portfolio, the the occupancy gains that we're experiencing today, plus that value creation of future densification opportunity is unmatched in the peer group. We also think of our balance sheet. Glenn is here and give Glenn and his team a lot of credit for we're positioning ourselves to have the best balance sheet that we've ever had. So we have the lowest debt metrics. We've got the most liquidity we've ever had, and we've got the longest debt maturity profile in the peer group. So usually, balance sheets are priority #1 when recessionary periods start to take hold. And we feel like, regardless of how things play out here, we're in a position of strength from the balance sheet perspective. And I think our levers for growth, during this next period of time, will differentiate ourselves as well. So when you think about the components of growth at Kimco, no one else in the peer group has the opportunity set that we do. We're still over 100 basis points below our occupancy peak before the pandemic. So we've been averaging around 10 to 30 basis points of occupancy gain in the past few quarters. We're 130 basis points below our peak occupancy in 2019. And see a very clear window of demand to drive that occupancy further. You combine that with the external growth opportunities we have. We're sitting with now a portfolio that's generating over $200 million of free cash flow after dividends and CapEx and leasing commissions. And you combine that with our Albertsons investment that we can now start to monetize that will produce $300 million to $350 million of capital to reinvest into our business. And that's $550 million or so of dry powder to go in and create some pretty significant external growth opportunities. And that puts us in a unique position because the organic growth is strong from the portfolio, and we have a menu of options to invest accretively from the core acquisition side, the structured finance side, where we have a mezzanine and preferred equity platform. And we really feel like we're in a position of strength for any type of disruption is that usually when you can make your best deals when there's levels of disruption.

I'll just add 1 other thing. If you look at our tenant diversity, it really is a differentiator. We have almost 11,000 leases, 4,900 different tenants. But when you look at the makeup of those tenants, so our largest tenant today is the TJX companies. They only make up 3.7% of the ABR. They're an A credit. Our second largest tenant is Home Depot, they only make up 2.2% and they're an A credit. Ross is our third largest. They're split, they are BBB+ and A rated as well. They make up 1.9%. And when you get to our 11th largest tenant, which is Dollar Tree, they make up 1%. So just the tenant diversity just puts us in a great position that really not any single tenant can have a major, major impact on really -- on the overall cash flows of the company.

Yes mark-to-market opportunities [indiscernible]. We have Milton [indiscernible]. So there's [indiscernible] vintage. These are the ones that we've been waiting patiently to capture, and we go space-by-space, identify the market rent versus [indiscernible] every single year. And our anchors are averaging 60% [indiscernible] virtually [indiscernible] supply and retailers are outstanding extremely aggressively, underlining that the store base is the most profitable form that they can service their customers from. But I think we're in a unique position to [indiscernible].

The target today much came out of protons, I would say, the elimination of the importance of omni-channel and really heightened.

No question. No question. If you look at where capital allocation pre-COVID versus post-COVID for our retailer, it was, how pre-COVID, how quickly can you grow. Doesn't matter if it was profitable, but we've got to show you [indiscernible] and usually breakeven that, right? And now it's all back to the fundamental [indiscernible] cash flow growth, [indiscernible] margin and that's the margin that we see where the commentary is leading from [indiscernible] is all about reinvesting [indiscernible] stores net new stores, optimizing the store for [indiscernible] distribution. So it's one of those situations where, to your point, a lot of things that the value proposition of the store which is [indiscernible].

[indiscernible] are the in terms of investing in our e-commerce platform versus reinvesting in store is really [indiscernible].

Yes. They actually came out [indiscernible]. Over 90% of the online orders are full filled by their stores, and it's 40% cheaper if you look in their stores [indiscernible], which is like an eye-opening comment because that we've always known that it's more profitable to do it from the store, but they're really sort of the first to move solidify and sort of come out [indiscernible]. And so I think the [indiscernible] now for others to follow. It's interesting, too, on their real estate strategy. Target, you're probably familiar with the Target store, but they had a small store format that they were rolling out for the past 5 years or so. And what they found is they're going back to the largest store format to roll out because they have more SKUs, they have the opportunity to use it as a last mile distribution fulfillment center. So it's early in the days of this new world of retail where it's a hybrid model, but I feel like there's going to be more in that demand for more larger stores. The target [indiscernible] they can carry their close to the consumer, and it's cheaper to that.

That would be a challenge for you, but in terms of much vacancy, how are you bringing [indiscernible]?

Yes. Net new demand is always positive, I guess, got in my view, but going larger, I think, is actually better for our business because it allows us to try and look at our assets and figure out how to add square footage [indiscernible], how to expand the box or they adopt the background beside, give them more per square footage [indiscernible] market space. And one of the things we're challenging our team with Kimco is, how do we better optimize our assets so that the real estate in the store is more valuable to the retailer because of that hub for distribution fulfillment. And Target has already done it in a lot of ways. [indiscernible] in the past. We're trying to make sure that with the lessons learned to be proactive in [indiscernible] retailer say, "Hey, Let's look at this together and say, how do we go about making the store full [indiscernible].

[indiscernible].

Absolutely. I mean, they clearly are focused on [indiscernible]. There are a lot of different test pieces out there still of what really is the solution. Target [indiscernible] and then integrated to the back into the store and fulfilling and SKU monitoring. A lot of grocers are trying micro fulfillment centers that are bolted on to the stores [indiscernible] in there. So it's not a 1 size fits all, but it's interesting to see where it's headed, where the last mile store continues to evolve as you sort of pointed. [indiscernible].

I guess, along those lines, how many of your stores have both [indiscernible] curbside pickup?

So we are very proud that we were the first to launch curbside pickup. We actually trademarked the curbside pickup because anybody else [indiscernible] the e-mail. Like we're very proud of that fact that we have to move our -- we launched it nationwide, all of our centers have it. The Weingarten centers are now being re-rated into the curbside pickup program that we have at the Kimco center. So that should be completed in the next 2 quarters. And it's -- we think it's here to stay. The consumers seem to liked it. It was 1 that I think was widely adopted during the pandemic over the risk of approach, where you can shop quickly, efficiently and not have to have to touch [indiscernible] engagement points. What's happened, though, is that I think customers really gravitated towards it when they're in a rush, when they have [indiscernible] the car, when they have to be efficient of their time, and they need the essential [indiscernible] provide. And so I think it's here to stay, and it's a very low CapEx investment to really optimize omnichannel for [indiscernible]. What we found is the nationals all have a very strong omnichannel program already. What we're trying to do is get the small shop up to the same level. And so, in essence, if we can created a curbside pickup program, where we're not forcing the consumer to use any type of [indiscernible] shopping when they would, but they use Kimco curbside program in shopping center, which is you are parked in stadium, Lot A1 right on the big [indiscernible]. It's the same system that we use, is very easy to adapt on [indiscernible].

We actually [indiscernible] pickup points [indiscernible]. And so you had like multiple pickup points for the curbside. I guess that's how the smaller shops take advantage of that as well?

Exactly. We try and -- I guess one of the other sort of [indiscernible] during the pandemic is that communication [indiscernible] is in a lot of ways you had to come together and improve it. And so we now -- we always had great communication with the national players that we see on a regular basis [indiscernible] use and our interaction with them. What we do have now is a great contact with even all the small shop portfolio. And those are the ones that we're working with to identify the investment [indiscernible] to the curbside [indiscernible].

Great. And then, I know 1 advantage you have [indiscernible], you are not -- your peers not [indiscernible] is your investment in Albertsons. It looks like you've extended that [indiscernible].

We actually have not gone along with [indiscernible]. Our free [indiscernible] optionality, [indiscernible] flexibility in our investments. So we have now in control of our shares and have the opportunity to monetize [indiscernible]. And Glenn can walk you through the REIT rules, and we're making sure we want to maintain REIT status.

Right. That's the $300 million, $350 million?

That's the governor for us. Yes, that's $300 million to $350 million a year of proceeds that we can then reinvest in our business. They're paying about a 2% dividend. So if we can reinvest it accretively [indiscernible]. Nobody else really has that.

Yes. I mean a lot of people asked us about why we didn't go along with it. And it really simply just comes down to just wanting our own flexibility. We have full faith in the management of the company. We're big supporters. We're big investors still and there are -- there are [indiscernible] larger tenants. So there's a lot of ties together with the company. So it really just comes down to just, look we're public, and we've been very public about the fact that we want to monetize -- stop monetizing it and to raise somewhere $300 million to $350 million to manage just our tax structure a little bit. So as a REIT, what are the obligations of being REIT is that you need to have 75% of your revenues come from real estate activities, rents and [indiscernible] recoveries, anything that's real estate related. So, today, we generate about $1 billion of revenue from real estate activities. So you got to work backwards then. So the math says, if we do $300 million to $350 million of non-real estate revenue, i.e., the gain that come from the monetization, that we still can be comfortable within the REIT compliance and get [indiscernible] opinions from our lawyers when we do in capital and a lot of new stuff. So we want to start that [indiscernible]. So really, it simply just came down to having flexibility to determine when you want to start [indiscernible] begin monetizing.

And could this be a '22 event, or [indiscernible]?

No, we would expect to be able to monetize some portion of it between now and the end of the year. And quite candidly, it sets us up that in the beginning of next year, we have the ability to do another $300 million to $350 million early on depending on where the price is. And really, what we want to do is try and match funding. So we have some things that are lined up, that, at the right timing, you can just match fund them and they will just be very, very accretive to the business.

Marissa, you want to talk about some of the leading opportunities we are looking for the uses of proceeds?

Yes. Sure. So we are looking [indiscernible]. We are looking at in sort of a 3-pronged growth. One, for acquisitions going out and acquiring shopping centers as we've always done; two, structured investments, which is preferred [indiscernible] financing; three, blend the 2 of them together [indiscernible] new financing. We are seeing returns in the low single digits to high -- sorry, high single digits to low double digits. One that with more acquisitions in the growth rate in sales, which are still pretty competitive pricing. Those 2 [indiscernible] significant return. The third is also we have JV partners that are always evaluating their portfolio [indiscernible]. So we're always [indiscernible]. So we are always -- that's always wait for us to invest as well to [indiscernible]. With the [indiscernible] investment program as well, which sort of serve as a pipeline for us, and it's our [indiscernible] with in the real estate because we can put in the right approach with lessor or [indiscernible] in all of our investments to give this opportunity [indiscernible].

Yes. And the idea with the structured investments is they are only investments in assets that we'd want to own outright. So what we're really doing is we're kind of installing ourselves and the capital structure below the first mortgage, but senior to the equity holder at a much higher yield on a property that we would own outright ourself. So it just sets us up for a future pipeline [indiscernible]. It should position us well, depending on what happens here.

Well, I was going to say, a recession possibly be around the corner...

Equity markets, [indiscernible] markets. We've got an opportunity, I think, to find the investments [indiscernible]. Because if debt market seize up, we should see the opportunities on the [indiscernible] side of it. The equity market is a trade-off. You don't need to go to equity market [indiscernible] cash flow. So we should be uniquely positioned hopefully to take advantage [indiscernible].

Right. That's all good news. Maybe thinking about some of your 2025 strategic goals. Are you still on your way to the 85% ADR [indiscernible]? I know you 80% [indiscernible].

Here we are. We are on track. It's -- you know us, Craig, inside and out . We went to Monaco, we were about 50:50. And so really, the portfolio has dramatically change. We do have outlined goals to get to 85% [indiscernible]. And naturally, we [indiscernible] back into that number by looking at the portfolio and seeing which spaces are coming available, we know what the grocers want to go [indiscernible]. So we've got a pipeline of proactively leasing [indiscernible] to make that happen. The other piece of that equation is what's the rest of it, right? What do you [indiscernible] 15%, and that's where we positioned the [indiscernible]. So we think that having these underutilized forms of commercial real estate where we can analyze them in the future is a nice way for us to create future value. And that's where we're really focused on entitling for multifamily, activating them [indiscernible]. The way we've done it is the capital light [indiscernible]. We've always struggled with trying to figure out [indiscernible] REIT, how do you really get the credit [indiscernible]. And the amount of capital [indiscernible] from start to finish. So the way we've done it with our redevelopment program [indiscernible], if it's a product that we think has potentially not get mature or the market that had a lot of supply coming on to the multifamily side, we'll probably [indiscernible] project to a multifamily developer where we'll still own the [indiscernible]. So we will have multifamily developer [indiscernible] we take on the construction, development for us, yet still add embedded shoppers or asset, right? And the thesis was that it will allow us to really target a premium for our retail entity. So we will have that [indiscernible] shopping there. What we found is, on the next [indiscernible] for us was entitlement [indiscernible] contributed on a market basis to the joint venture, where the joint venture is an expert in developing multifamily. And then we rise [indiscernible] with them through the lease-up program and get the upside of the cash flow. What we found there, and we've learned that the retail amenity that we already have a [indiscernible] drive significant premiums for the larger [indiscernible] side. So we've seen the benefits of both and just the obvious is that [indiscernible].

I mean the [indiscernible].

Yes. And we want to be mindful that we don't want [indiscernible] that one. So we'll probably activate 2 projects a year, probably break on about 1,000 units. And again, with think those 2 programs, we feel like [indiscernible] modest amount of capital for our [indiscernible]. We have the role for both structures. And if you think about the ground leasehold [indiscernible] off, and if we have ourselves, we'll be buying from [indiscernible] position [indiscernible].

And then, I guess, Glenn, you have a 6% to 6.5% look through net debt-to-EBITDA target. Why that [indiscernible]?

Well, we had to start somewhere. It used to be higher. So we spent a lot of time bringing the leverage level down. We finished the second quarter with a look-through number at 6.4x. Ideally, we want to get down to 6x and really start pierce through that and go bring it even a little bit lower. I mean, we continue to work with the rating agencies. We do think, at some point, they will put us on positive outlook based on everything that we've done, the way the balance sheet is structured today, the diversity of the portfolio of the market path of the company. But we think that will -- it should come naturally anyway. So those are -- that's our initial target. But ideally, we want to get it to the lower range of probably pierce through it as well.

Great. And then the mid-70 dividend [indiscernible].

Yes. Again, same thing. I mean, we've tried to bring the dividend to a level where we're generating a significant amount of free cash flow. So keeping that dividend payout ratio in that low to mid-70s range is really where we want to maintain it. Now what you've seen over the last couple of quarters is we've continued to raise the dividend for the last 2 quarters, primarily because earnings growth has been better this year than what was originally budgeted, and we're bumping up against taxable income. And that has nothing to do with Albertsons. That's just the general operations of the business has been pretty strong. Retention rates have been very strong. So the cash flow has been stronger. So we're just -- really the dividend currently is [indiscernible].

[indiscernible]. So we can expect [indiscernible] growth [indiscernible]?

The FFO is growing. We have a good opportunity to be able to give [indiscernible].

[indiscernible]

[indiscernible] Our centers, they're pricing there where you have particularly lever higher [indiscernible]. It's still worth speaking out, right? Fields that were under contract a couple of months ago, maybe there's some that close, but they are still closing. [indiscernible] the first [indiscernible] still generating [indiscernible].

We're seeing a good amount [indiscernible] buyers still [indiscernible] multifamily, industrial type products. So it's just interesting to see a lot of cash buyers are looking at the going in yield and seeing it relative to the other 2 groups, and seeing that we are starting to yield [indiscernible]. So it's a multiyear industrial. And then if you convicted on the growth of the cash flow. We see demand going on in the market. You can get quite comfortable [indiscernible].

Yes. I mean I think for us, from an acquisition side, I mean we are very focused not so much on what that's going in day 1 cap rate is, but where we can take and grow the cash flow and is there real upside opportunity in the property itself, whether it comes from retenanting, densifying it. I mean those are really the criteria that we're looking at. It's not so much that going in day 1 cap rate is really where we take over 2, 3, 5 years.

A lot of your development dollars were spent on the [indiscernible]. How are you hearing to the company that you may be turning to more smaller, digestible projects, and, one, because of the time line is so long [indiscernible] different sites [indiscernible].

Yes. No. If you look at what we developed, a lot of it was the existing products that we [indiscernible], right? So that continues to be [indiscernible]. It's just we're taking capital light [indiscernible] So that's why we're activating more of the multifamily with a model [indiscernible] ground lease model. So the 1 that we've stabilized, we're very happy with are going to be top 10 [indiscernible] very, very long time, and continue to -- we continue to see more NOI [indiscernible] Bolivar in San Ireland. That's phenomenal assets. One of the highest growth grocers we have in the entire portfolio of over $100 million.

I hope you will [indiscernible].

And -- but that was an existing asset. That was one that if you think back on what that was, that was a [indiscernible] and like a laundry list of like the tenants that were just [indiscernible]. [indiscernible] So you really [indiscernible] be downtown. [indiscernible] obviously, again Fort Lauderdale and airport [indiscernible]. We own [indiscernible] street. [indiscernible] close to almost 4 antivenom Fort Lauderdale [indiscernible] and that's all phenomenal pice of real estate that continues to grow. We have 2 hotel centers there that are operating way about expectations. There are on ground leases. The first apartment tower is open and operating for a lease, that's on a grounding. The second and third apartment tower is under construction, both on ground leases. The office component we sold to [indiscernible], which under agreement to the [indiscernible] that's under construction and the retail continue. So we own [indiscernible] doing quite well there [indiscernible]. It's a product that we believe in Florida maybe [indiscernible] you place to be, right? So we're fortunate enough for that 1 continue mature in this next phase of the [indiscernible]. Going forward, you'll see us activate more redevelopment, more multifamily, but it will be more on that structure [indiscernible]. We you feel like there's some growth [indiscernible] in the portfolio, we know want to use that [indiscernible]. We are doing like $5 million to $15 million in development. When they get on the [indiscernible]. And if I can, the yields on those [indiscernible]. We know these large-scale projects that take longer, they needed more capital, they don't definitely don't yield as much. They yield well, but they're not high-single-digit yields. The more -- we like doing these $5 million to $50 million ones what we can do them, and we have a whole pipeline [indiscernible]. We spend $150 million a year on those types of projects.

And are you doing a lot of like outparcel and drive-through?

Those are -- I mean, the more [indiscernible] a little bit better. If you sort of cap out [indiscernible] projects [indiscernible] good way to [indiscernible]. We are good believers in having the retail [indiscernible]. We have, roughly, I think, 12% [indiscernible] in ground lease [indiscernible] reflected in our multiple, but we think it's the best way [indiscernible].

Is there [indiscernible] on other tenants in case...

Sometimes. Sometimes [indiscernible] parking field that's controlled by [indiscernible] Home Depot [indiscernible]. Now sometimes it's a grocer [indiscernible] and it's interesting to see how that's [indiscernible] one of the largest [indiscernible] differential going forward.

And then I guess, just a big question [indiscernible], is there any -- or if there is, what is the major misperception [indiscernible]?

No I ask our investors like that in almost every single meeting like what the overhang [indiscernible]. And I think a lot of the overhang that we used to have, has been removed [indiscernible] balance sheet [indiscernible]. I think right now, it's more of a generalization of the retail [indiscernible] out of [indiscernible] or just the [indiscernible] where you're starting to see the data beyond headline [indiscernible] retail headlines, whether it's the earnings release [indiscernible]? And so, unfortunately, I think it's part of being public in a sector that is somewhat misunderstood where you get locked into a bigger pool of all retailers that type of situation. So we're very focused on putting out numbers that speak for ourselves [indiscernible]. There's not really a whole lot you can say regarding [indiscernible].

There does seem to be an inherent [indiscernible] against [indiscernible]?

Yes. I mean a lot of [indiscernible], right? So you have to have understandable, right? So we're positioning to make sure that we shepherded as many investors that we could go as possible with the -- we have visible [indiscernible] not open [indiscernible]. And when we combine that how about free cash flow [indiscernible]. That's a pretty compelling [indiscernible]. Nobody [indiscernible].

You alluded to the deploy and the pandemic [indiscernible] store is and that being in that neighborhood close where you really are, you're in that last mile area is so valuable. I don't really think that [indiscernible] investors is fully grasping just how value able [indiscernible] where the tenants that we're leasing to, they're figuring out because we mentioned it before, the focus was so much on growing e-commerce, the reality is, it's much more efficient to deliver out of that store. So it is more profitable. So I think the store has become much much more valuable to them as well.

[indiscernible] e-commerce lower, but [indiscernible] reaching in our approach that more normalized growth. But you need both. I think that omni-channel.

[indiscernible] have both and make it from [indiscernible]. Rapid fire chat. So hoping very fast in asking. Which of the following is the greatest backward challenge facing? You heard the U.S. public REITs today, a risk of higher rates, a risk of a recession, or a rise of private equity and NGL? [indiscernible].

Yes, I think what we people see is that [indiscernible] I get my [indiscernible]. We're going to have just [indiscernible] that might be at a table.

Which of the following is the greatest sector specifically, labor issues, supply or capital market?

Capital market.

And then lastly, I think you touched on this, but are you seeing any signs of weakening demand?

Yes, We are. [indiscernible].

Well, thank you for doing the roundtable. Thanks, everyone, for joining. I usually have a point at the conference, but I happen to have it yet [indiscernible].

Thanks.