Kimco Realty Corporation (KIM) Earnings Call Transcript & Summary

[Audio Gap] when you look outside of our traditional retailer Rolodex, it's really interesting to see some net new demand sources. And what's happened in the last few years is you've seen medical and health and wellness and beauty become a bigger component of the merchandising mix in the shopping centers. But one thing that I found fascinating from the Vegas ICSC Show is the influx of mall retailers looking at open-air shopping centers. And you've heard inklings about their thinking about it or they're doing white papers internally to think what's their growth story going to look like. Well, if you think about it, most of the high-quality mall tenants are already saturated the A mall environment. And where are they going to grow? Because, typically, in retail, you either grow or you die. And so what's happened is a lot of these mall retailers are now looking at their consumer and there's more data than ever before on their consumer base about where they shop regularly, not just for the mall trip. And what they've found is that they can co-locate with the Whole Foods, with the Trader Joe's, with the grocery anchors and pick up more consumer visits by co-locating with those areas that are closer to where people live. And so you've seen Sephora come into our space in a big way. You've seen even some of the more like the athleisure tenants like Athleta and Lululemon. You've seen the footwear tenants like Foot Locker, Skechers. Even Macy's is now leaning into the open-air center to do. We just did our first deal with them. And I find that really interesting because it's a wave of demand that we have yet -- really have not experienced before from a new set of retailers that adds, I think, a nice dynamic that we previously didn't have. So overall, from a high level, it's very balanced. Clearly, there's some shadow supply coming from the Bed Bath bankruptcy. That's playing out these next few months in the auction process. But from the feedback that we heard from Vegas, there's also a lot of bidders lining up for those bed Bath boxes because of that lack of supply. And there's some unique attributes to those leases where some off-price retailers may be purchasing those leases to get into a shopping center, that may not be permissible unless they are acquirers of that lease. There might be a cotenancy or a block of other certain use case for them if they were signing a net new lease, but if they acquire an existing lease, it allows them to sidestep that. So there's some interesting dynamics playing out there. And then, obviously, the news recently about some interested buyers in the buybuy BABY brand as well. So it's a very fluid environment. We're obviously keeping close tabs on the consumer and the retailers and their demand. But right now, it seems if you look at the fundamentals, they're quite strong.

So you touched on a lot of different things that we'll touch on through the course of the conversation here today. But maybe just to juxtapose some of these very positive dynamics that you've talked about to, I think the retailers when they reported their first quarter earnings, we started to see a little bit more of a shaky or choppy environment, particularly on the discretionary side, maybe some of the consumer feeling a little bit of pressure on the consumer [ caple ] side, maybe a little bit of a trade down there. So have you seen any slowdown in the trends in terms of foot traffic in your centers, either from a demographic standpoint or from a geography standpoint? I guess like how is -- are you starting to see some of that impact in terms of the trends in your centers?

So we do track traffic. And so far, so good. It has not really dipped. And it continues to -- from the COVID years, it's continued to compound positively. So it's one of those things where there's a number of factors at play, I think, that are benefiting the shopping center. First, you think about the flexible work environment. Most folks are typically working maybe 1 or more days a week either from home or from the local area. And typically, we're seeing that pickup in visits to the shopping center. So you think about setting up for the day and then a coffee shop or maybe a restaurant, we're picking up trips there. The other dynamic that we're benefiting from is, I think the -- when you look at where most retailers are focused on a distribution of the goods, if you order them online. Typically now, as Target and others have disclosed, over 90% of online orders are being fulfilled from that local store. So it's again, increasing the margin because it's closer to where people work or live. So there's a lot of interesting dynamics there. The demand side of it that hasn't changed. So as we were talking about earlier, the small shop as well as the anchor side, we didn't mention the small shops, too, which is, I think, a really interesting dynamic. I would have thought that the small shops would be the first real crack of this recessionary fear that continues to mount. And when you think of the regional banking issues that have gone on and where they lend money and small businesses being such a big component of the economy, our first quarter small shop occupancy gain is one of the highest we had on record. And typically, first quarter is actually a dip in occupancy if you think about the seasonality. So there's this huge demand drivers for small businesses. And yes, consumers probably shifted from the goods that they were acquiring during COVID to more services now, and it's starting to balance out. You're seeing more discretionary spending, shifting towards that grocery. So that's why I think Walmart outperformed target this quarter. But again, these are retailers thinking longer term. Like they're already looking out -- they've already fulfilled their stores for this year. They're looking out next year and 2, 3 years from now. So -- and all of them are pretty consistently saying the same message that they need to reinvest in the store base because a lot of capital was flowing to building the e-commerce side of the business. And I think a lot of them took their eye off the ball on how to integrate the two. And I think now when you look at almost all of the earnings call scripts of our public retailers, the capital is flowing back to the stores to get the consumer to be engaged and also with curbside pick up and create a little bit of a better margin when they get to the consumer in the store.

And there's been a couple of bankruptcies over the last several months. Where is the demand coming to backfill these boxes? And then, I guess, just within the dynamics of if there's more bankruptcies, you get additional back -- you get some boxes back. Is there -- we've talked a lot about that overwhelming supply -- or demand for space in your centers. So is there enough that you should be able to manage through any sort of time of trouble?

Yes. So on the bankruptcy side, really, the largest one would be Bed Bath & Beyond for the sector. And it's interesting to see Party City is more of a debt for equity swap and there hasn't been many store closures announced there. So we don't anticipate that being a disruptive bankruptcy. It's more of a reorganization, and we think that, that retailer has a reason for being longer term. Bed Bath obviously is a case study of sort of what went wrong there over many, many years. Buybuy Baby, I think, is going to be separated and sold as a separate unit. The boxes of Bed Bath & Beyond, we haven't signed a deal with Bed Bath & Beyond in over a decade. And when you think about when they sign those leases, Bed Bath & Beyond where it was a great credit and they had a lot of powerful negotiating tools to create a lease that was in a good location at a market rent or somewhat below market rents. If you think about 10-plus years ago, those boxes are typically right smack dab where you want to be in great real estate. And so we've got 30 boxes. 10 of them we've already gotten recaptured and 3 of them have already got leased and 7 of them are already at lease. So of the 10 we have control over, we have good visibility of spreads between 20% to 25%. A lot of the retailers that are backfilling those, as I mentioned already, you've got the off-price sector really being aggressive on those. You've got grocery stores continuing to look. Dick's and the sporting goods sector continues to be quite strong. Hobby Lobby and the crafting sector continues to be strong. You've really got a nice wide spread of demand sources that, again, since there's no new supply, you're seeing a lot of the demand flow to the first-ring suburbs. And that's where our strategy has been for the last few years is to transform the portfolio to be closer to where people live. And what the population shifts, we seem to have benefited from that as well as the work from the hybrid work model.

Yes. And you just brought up the visibility into the boxes. I think when looking at a REIT, it's important to understand like the visibility into your future earnings growth and the understanding of like the stability going forward. So you have a very nice sign, but not occupied pipeline, which provides visibility to tenants coming into the center. So I guess -- the question is just kind of about the realization of that? Like how long does that take? And does that -- just given kind of maybe the uncertainty around the macro, does that provide a certain level of comfort with the trajectory of the business given that you see that kind of coming forward?

Yes, it's a good point. I mean our business is -- the cash flow is very visible, and the growth of that cash flow is very visible. And to your point, the spread between the physical and economic occupancy is really pretty clear. And that's where you've signed a lease but you yet to have the retailers start to pay rent. And so you build up the spread between physical and economic occupancy that you know this cash flow is going to come online. So our spread is 280 basis points, which is relatively wide to our historic numbers, which means that close to $44 million to $45 million of NOI is signed but not yet cash flowing. And so you see the visible cash flow growth on the horizon. The key for us is to really work with our retailers, work with the municipalities to try and expedite that opening schedule because typically leases are signed when retailers open, the rent commencement date kicks in. And so that's where our platform comes in handy because of our scale, the ability to expedite that process to try and get them open and operating to try and source goods that may be in some short supply, whether it's HVAC units or different items like that, that go into the new spaces. So we're very, very focused on compressing that as quickly as possible because, obviously, that will help with the visibility towards our cash flow growth.

Maybe one more for Conor, and then we'll try to get some other people involved. But we've been hearing about mall retailers looking at opportunities off while you brought it up, presumably that's based on the favorable economics of the store. So can you kind of maybe help walk through like what's the economics of an off-mall location versus on-mall location will benefit you get from being off-mall? And then, I guess, in a steady state economy. Would you expect that to accelerate? Or does that kind of -- does that pick up even more if the macro remains kind of unsteady?

So the dynamic playing out, I think, is that consumers' patterns are shifting. And I think they're going to the local stores a little bit more frequently than, say, the destination stores. And I think when you look at the different channels, too, they're also starting to emerge, right? So some of the interesting data that I've seen about the ICSC halo report is when you open a physical store, the e-commerce in that trade area pops for the retailer as well. But remarkably, when you close a physical store, the e-commerce sales fall off a cliff in the same ZIP code. So you wouldn't think necessarily opening and closing would create that same vibrancy of e-commerce sales and decline. One of the things I think the key component is the ease of returns. And I think that has been a big benefit to retailers leaning into brick-and-mortar because when they have a physical store that's close by, there is, I think, more cognizant awareness of, hey, this is a retailer that's close by that if I order online, I can get a few things. But if it doesn't fit, I can return it right close to where I live and don't have to deal with boxing it up and sending it away. On the mall retailer side, they're used to a different lease structure, where it's more percentage of sales, where the shopping centers lease structure is more consistent on base rent with annual increases. So it does take some handholding to get them to understand that we are focused on forecastable cash flows and understanding that we'd much rather have them in the shopping center, but they have to understand the way the economics and the net effective rent works for us is that Kimco has always been focused on making sure the retailer puts skin in the game so that we don't, in essence, overinvest in a specialty retailer. So if a retailer like a Sephora wants to come into a shopping center, they have to get comfortable with our lease structure, having them invest alongside us, but then also having a base rent with annual increases, that's forecastable and allows us to grow our cash flow rather than take some big swings, whether it's a good sales performance a year or not.

Thanks for that. And you guys have -- you were fortunate to acquire a large portion of Albertsons shares, which have been monetized and there's still maybe some left there. I guess, that's given you some dry powder as you think about capital allocation. So maybe you can talk a little bit about like the capital allocation priorities and where you get the best return? And then maybe we'll just touch a little bit on the transaction market along the way.

Sure. Thanks, Michael. Happy to answer that. So yes, it's a really exciting position that we're in right now. When you look at the liquidity that we have as a company, it's the largest that we've ever had in the company's history. So we have $450 million of cash on the balance sheet today, about $130 million of free cash flow after dividend, TI leasing commissions. We still own just over 14 million shares of our Albertsons investment, which today is worth just about $300 million. And then the full capacity of our credit facility, a $2 billion facility. So the liquidity is there. We're trying to remain extremely disciplined and patient. Talking about the transaction market, it's still been rather frozen with a limited amount of transactions so far this year. And the reality is, for all the reasons that Conor was describing, when you think about a seller's position today, they're owning an asset with the fundamentals being extremely strong, all the leasing demand, really no distress on the property level. And even if there's a mortgage on the asset that's coming due, you're just not seeing any sort of pressure coming from the lender to act in this environment. From a buyer's perspective, we've seen our cost of capital on borrowing costs increased. So naturally, buyers are looking for a little bit better yield. So you're seeing a little bit of that bid as spread stalemate today. We're hopeful that we start to see that narrow and more transactions in the back half of the year, and we are optimistic that there's going to be some additional opportunity. But as I mentioned, we're trying to stay disciplined, we'll be patient with it. We have other uses of our capital that are very accretive. First and foremost, as we've continued to say, putting capital towards leasing is really the best return that we can achieve. We still have a significant amount of smaller retail redevelopment opportunities within our assets that continue to return high single, low double-digit incremental yields. And we have an active structured investment program, where we've been putting out preferred equity and mezzanine financing capital at attractive returns when there is a need for some capital or a GAAP in the capital stack. So that's a program that we continue to selectively activate in addition to our partnership buyouts. And then once the third-party acquisition market comes back, we'll continue to be aggressive and active where appropriate.

And then along the same lines, like I think densification has become a larger theme within the traditional retail landlord space. And I think this was one of the key opportunities from the Weingarten acquisition to add apartments to centers. So the high interest rate environment and does it make it like -- this is a little bit of a sit back on the back burner and wait for the right opportunity? Or does this look increasingly attractive, given lending standards have gotten more difficult that may limit kind of apartment supply growth and so it's time to step into it, like how are you thinking about this opportunity?

So it is a key strategy and a differentiator for us at Kimco to look at the highest and best use of our real estate. And we found that with our strategy of focusing on that first-ring suburban major metro markets, we've seen that there's really a lot of embedded value in the real estate that we own and working with our platform to entitle those assets for future densification has been a key focus of ours. We're up to 8 -- over 8,000 units where we've targeted 12,000 units to be entitled by 2025. We believe that really there's a lot of embedded value in the shopping center just because of the traditional format is almost 80% parking lot, 20% single-story building. And typically, we're sitting in the whole -- the hole in the donut, where everything has gone vertical around us, and we're like the most undeveloped parcel in these trade areas. So the nice part about our strategy is we have optionality. And when the economics don't work, the entitlements don't have a shelf life. They typically live forever. And so we can selectively activate projects that do make sense depending on the supply and demand in the market. There is obviously a lot of supply in apartments in certain trade areas. But what we've found and the thesis continues to ring true is that the environment that you can create with apartments and retail. If you think about an apartment building, what's like the best amenity package you can dream up, it's probably got a fitness facility, it's probably got maybe a coffee shop, maybe a grocery store, but it doesn't have a whole shopping center. Like there's just no amenity package that comes close to the shopping center opportunity. And that is what drives premiums on the apartment rents because you've got this amenity base built in, in a trade area that is absolutely unmatched. The same goes for the retail. When you have apartments sitting on the shopping center, you drive more traffic, you have more embedded shoppers, there's higher sales and retailers want to be in those environments that enhance each other. And we have now activated a number of projects where that's playing out. So we do believe long term that the strategy is continuing to work. We've activated projects using a ground lease structure where an apartment developer will come in just like a Walmart or a Home Depot would pay us a ground lease for that area, and they put in all the capital, they develop it and we get the right of first refusal. So if they ever do sell it, we have the chance to buy it and bring it back into the shopping center and own it in a fee position. And that's a nice way to activate without a lot of capital or risk. The other way we've done it is with the joint venture partner where we bring in an apartment developer. And again, that's a nice way of going side [ Sato ] with the best-in-class apartment developers and learning from them, and that's what we've done on a number of projects as well, but we're going to be selective. We absolutely know that now is the time to really be -- it's -- I think we're one of the only REITs with a sizable cash position. We want to be patient because we think there will be opportunities. We think that we'll be able to take advantage of dislocation like we've done in the past coming out of COVID. So we're ready and being mindful of the fact that we should hopefully find a lion's share of opportunities take advantage of it.

And on the topic of the -- your cash position, right, like what goes hand in hand out which is the health of the balance sheet. So Glenn, maybe you want to provide a little -- can you talk a little bit about where the balance sheet sits now, where that's relative to like your target range and just kind of any upcoming maturities that you need to work through?

Sure. So where we sit today is we actually have no maturities left for 2023. We have about $645 million of bonds that mature in 2024. They have a weighted average interest rate of about 3.36%. But when you think about where we're sitting, as I was mentioned, we have $450 million of cash already on the balance sheet today. We have another 14 million shares of Albertsons. Again, worth roughly around another $300 million and full availability on our revolver plus we're generating in excess of $130 million of free cash flow a year. So in terms of maturities, near -- the near-term maturities, we have plenty of liquidity to deal with them. Ideally, we'll look to refinance a portion of those bonds in the unsecured bond market. Pricing today, if we would go to the market today, pricing today is probably about 200 over the 10-year. So if 10 years around 3 6, 3 7, just add 200 to that, you're looking at 5 6, 5 7. So we know that there's a little bit of a headwind in terms of the refinancing. But if you look at our overall debt maturity profile, it's really one of the longest in the entire REIT industry, not just the shopping center sector. We're at 9.3 years today. We've taken full advantage of the very low interest rate environment. including issuing $1.5 billion of 30-year paper that has rates ranging from 3.7% to 4.45% that don't start maturing until 2045. So it's very, very well staggered and really built to deal with changes and fluctuations in the rate environment. So only a small portion of debt matures in any given year. So it gives us the ability to really be strategic about when we go to the market and how we refinance it. But we're very, very well positioned. We have very little mortgage debt in total. There's only about $300 million of mortgage debt on the entire balance sheet for us and most of that really all came from acquisitions. So pretty well positioned.

And I'll look through net debt to EBITDA, it's 6.2x. So it's one of the lowest we've actually ever had as a company. So in terms of that range that we want, we set out for 2025, we're already in that range and feel very good about taking advantage of opportunities.

Right. The consolidated net debt to EBITDA is at 5.8x. It's also about the lowest it's been since the last 15 years.

Tammy, you've been waiting very patiently. Can you kind of maybe provide a little bit of an update on some of the key topics within ESG that you face and how Kimco is looking to address these type of -- how they're addressing the topic?

Yes, absolutely. So I would say the way that we figure out what are the key topics is to engagement with all of our stakeholders, including investors. I would say the top two topics as many. If you go in the E space, it's going to be climate, right? It's going to be in two ways for climate. So there's reducing our impact. We have a science-based target, which is a greenhouse gas emission reduction goal for everything that we control and operate as well as a net zero target for that. And then in terms of the other piece of climate, it's resiliency, right? What are we doing before, during and after events that are inevitably happening on our properties. And we have a very comprehensive approach and perspective to addressing that, that sits across multiple teams in our organization. I would say the top social element, when we're asked about it is diversity, equity and inclusion. And of course, that's important for our employees and for the Kimco team, but it's also important to look at it across different stakeholders. What does it mean with our vendors, what does it mean with our tenants. So I would say the way that we approach it is really -- it is truly integrated throughout the organization from the very top, we engage with the Board. They have oversight over the ESG program. The management team is very involved. The ESG Steering Committee is made up of cross-functional leadership across the organization, and they act as both the network of implementers but also the strategic partners and goal setting. And of course, we have employee-focused groups to help us achieve our goal. So it is truly integrated throughout the organization, and that's how we address those issues.

Maybe one more for me and then we could see if there's anything from the crowd. But we talked a lot in the beginning about the overwhelming demand and real estate is a game of supply and demand. So can you talk a little bit about why we haven't seen that supply come into kind of meet this supply has been very low for quite a while now. So what's preventing more retail shopping centers from coming in and weighing on the group?

I think a lot of it has to do with the risk-adjusted return of ground-up development versus buying, existing or value-add or redevelopment of retail. The U.S. is, obviously, a very big market and where we're focused. Clearly, there's been a lot of redevelopment of retail in that first-ring suburb. There's been a lot of repositioning, whether adding density, removing retail and going vertical. I think a lot of it has to do with the other uses that -- and again, the intensity of the use of land. So if you think about, again, that 80-20 rule that I mentioned before, developing a shopping center is pretty inefficient use of land, especially in infill areas. And so when you think about net new supply on the horizon, it's really hard to think that there's going to be a lot of net new supply coming into the first-ring suburbs because there just isn't that much undeveloped land that makes sense from an economic returns because as well as the inflation impact of cost and labor and materials. The rents, obviously, are moving in the right direction, as you saw from our new leasing spreads, and then we really have pricing power. And market rents is really, I think, the first time in a long time, it's a tool that can be used by landlords to really push rents. The issue though is, again, that location that would make sense for ground-up development typically is more on the outskirts where land is cheaper where there might not have been so much development and you can find the parcel. So again, the long tail of ground-up development too, there's a lot of risk to it, takes usually years to complete and things in retail can change very quickly. So we found that focusing on our own portfolio, looking for redevelopment potentials, unlocking the value embedded in the real estate is a better use of our time and capital than doing a ground-up program.

We have about 60 seconds left. So if anyone has any questions.

Yes. We had some M&A activity reported recently [indiscernible] 2021 since you announced the merger closing Weingarten. So what is your M&A profile look like today or active looking? Or how would you characterize that?

Yes. Thanks, Brad. So the M&A market is one that, obviously, when you look at the sector as a whole, the whole sector is trading pretty far off, call it, NAV, or net asset value. And when you have a sector trading at a discount to net asset value, it sometimes creates challenges to have public-to-public M&A. The private sector is dealing with its own issues right now with obviously debt financing and some of the costs that are -- or the redemptions that are happening on some of those funds. So the likelihood of maybe a privatization is less likely today. That being said, you don't want to just get bigger to be bigger, we've been that before. And we went through a massive transformation of the portfolio to get to where we are today and feel good about the growth profile embedded in the portfolio. That being said, we're big believers in efficiencies of scale. We've invested a lot in technology. I think, in my opinion, technology is the biggest going to be and is today still the biggest differentiator for efficiencies of scale going forward. Obviously, with generative AI and all the things that are coming, I do believe that having a platform where you can gain efficiencies of scale is going to be today important and even more important tomorrow. But again, you want to have a marriage that enhances your growth profile. And obviously, in the Weingarten transaction, it also delevered us. So that combination is the sweet spot. We're clearly obviously in a position where we can do something if we find it accretive and find it attractive to the growth profile, but we're being disciplined and continuing to watch and see how it plays out.

Well, please join me in thanking Conor, Ross, Glenn and Tammy.