Kimco Realty Corporation (KIM) Earnings Call Transcript & Summary

Why don't I kick things off and then we can dive into Q&A. First, thanks for having us. We really are excited to be here and continue to resonate with the Kimco story. I think since our second quarter earnings call, the biggest change is, it's just gotten better. The operating environment is 1 that is very, very healthy. Lack of new supply, I think, is something that's pretty well articulated across the retail sector, specifically in our markets, 0.2% of existing stock under construction is the lowest of any commercial real estate sector.

There's more office being constructed today than there is shopping centers. We sit at an all-time high occupancy rate for our small shops, but our anchor occupancy is still 100 basis points below our all-time high. And that's meaningful upside for us because I think a lot of people are talking about, well, you're full. You don't really have any more upside to go in terms of leasing momentum. We actually think that's the case. Our spread between our physical occupancy and our economic occupancy. Some people reference that as the snow pipeline, the signed but not open pipeline is 400 basis points. That's $75 million of just annual base rent that has not yet started cash flowing. So we are super excited about the future for Kimco because we think we are at the cross-section of a unique opportunity where we see margin enhancement, performance enhancement tied to the 1 Kimco platform where we're taking costs out of the business, that snow pipeline delivering, so enhancing the cash flow, enhancing the margins all while we trade at a meaningful discount to our net asset value from a multiple perspective. And from a portfolio perspective and a balance sheet perspective, we think we offer a tremendous opportunity for investors. For the last 3 years, we've been running at near the top of the sector with over 5% FFO growth over 3% same-site NOI growth and with the balance sheet of an A- A3 credit rating, all while our multiple is almost 3 turns lower than the next peer. We think that's a unique situation to take advantage of. And so we continue to articulate that there's a pretty wide disconnect between where the public and private pricing is today for our product. And we're highlighting that by showcasing and we just produced our updated transaction report where we just sold an asset for a 5.1% cap rate and continue to showcase that. Our stock is trading at north of a 7% implied cap rate, north of an 8% FFO yield, and we think it's a unique opportunity to, again, showcase that we can buy back our stock at this type of spread as a great use of capital. I think from an overall transformation of the portfolio, that's another thing that we continue to be excited about. Kimco for the lion's share of its history was about 50% power center, 50% grocery-anchored, we're up to 87% grocery-anchored today. We have 28 grocery stores under construction just for reference point, Regency is 85% grocery-anchored. So it's a unique transformation that we've seen that we continue to see upside as that grocery anchor continues to create a flywheel of merchandising mix around that everyday shopper. And that's, I think, a big thing that we delivered that I think is starting to become more valuable today with AI and all the technology. We offer a human experience. The U.S. consumer is a shopper. The U.S. consumer loves the treasure hunt, and that could be in our T.J. Maxxs, our Marshals or HomeGoods or HomeSense or Burlington or Ross or Nordstrom Racks, our grocery stores, people love to look and feel the product, the produce and then the services, the medical, the health and wellness, the fitness, the everyday goods and services we provide is in your everyday path of travel meaning that if you value your time and you value convenience, Kimco is that intersection that you drive by on a regularly scheduled basis. And that's what continues to drive our traffic higher. Our traffic counts are over 3% higher than last year. Our leasing momentum continues across both small shop and anchor occupancy, and we're constantly trying to improve the growth profile of our portfolio. That is a function of looking at the components of what the portfolio has and a unique attribute to Kimco is that 9% of our annual base rent is in flat ground leases. And that's from the history of Kimco. We were ground leasing to home depots, ground leasing to Costcos, ground leasing to Walmarts, to take the risk out of the development cycle. You would do that because Milton and Marty would follow the utility trucks to where household formations were occurring and how could you take risk out of the development cycle by ground leasing a big portion of the asset to the best credit tenants. That's created in a lot of ways, some unvalued portion of Kimco's portfolio that we are starting to shine a light on. And Ross can go through some of the initiatives we have to reinvest that opportunity where we can sell very low growth, low cap rate at ground leases at 5 cap rates and reinvested at a meaningful spread both on a cap rate perspective, but even more importantly, on a growth rate perspective. And every 1 of those trades we're selling it like a 6% IRR into north of a 9% IRR. So every 1 of those transactions into a grocery-anchored center is helping the growth rate. And we continue to see more opportunity and another differentiator for Kimco is our over 12,000 entitled apartments. This is an initiative we put in place over 5 years ago to showcase the highest and best use of our parking lots are just not being valued -- now there's no cash flow coming from those entitled apartments, but we just round trip 2 apartment towers sold them for a 4 cap and a 5.1 cap and gives us tremendous opportunity to say that can happen year in and year out in perpetuity because, in essence, we have active projects in the ground coming up, delivering year in and year out, and we can start to monetize those and reinvest buy back stock or reinvest in that growth grocery-anchored shopping center. So those are the type of attributes that we think differentiate Kimco and that put us in a unique position to take advantage of dislocation -- sometimes it's good to be public. Sometimes it's not going to be public, but there's always going to be opportunities. And at this point, we think we have the balance sheet, the platform, the team and the liquidity to take advantage of this dislocation.

The 1 thing you mentioned was the ground lease is you're selling those. I mean where are you how much of that you sort of tapped at this point? What does that opportunity set? And do you expect to accelerate that going forward.

Yes, I'm happy to jump into that. So as Conor indicated, part of our strategy, it's almost a bit of an addition by subtraction. So we're able to sell really flat, low-growth single-tenant assets at very attractive cap rates and redeploy that capital into a higher yield in day 1, but more importantly, about a 300 basis point CAGR spread between what those leases are producing and what the reinvestment is able to produce -- this year, we'll do just about $150 million of ground lease dispositions. We think, to Conor's point, that we can continue to do that on a recurring basis as our baseline while we have 9% of our ABR that's coming from these long-term ground leases, as we're selling, we're also signing new leases with these tenants that become a future pipeline core disposition that we can continue to recycle. The other piece of the disposition pipeline that Conor alluded to was our multifamily entitlements and completed projects. So we sold the first multifamily projects. We own those in a joint venture. So we were 55% of the ownership of those. But the 2 projects at our Pentagon project sold at a 4.9% and a 5.1% cap rate. And with the structure that we've been undertaking to continue to create new multifamily projects, it's a CapEx-light approach where we've been contributing our land that's been entitled and shovel ready into a joint venture. Our contribution sits in a preferred equity component of the capital stack. So we're actually earning while the construction is happening. And at the same time, our partner, the developer is responsible for the construction financing on their balance sheet. So it's a great structure that we can earn during the development phase. And then upon completion and stabilization. Again, we'll crystallize that value, monetize it get our percentage of the proceeds to then redeploy -- we are utilizing, in most cases, 1031 exchanges to defer the taxable gains, which is something that we're very focused on. But again, able to continue to find that spread on the year 1 yield as well as the going forward growth so that we can continue to enhance the growth profile of the organization and the portfolio as the impact of all of this recycling compounds on itself year-over-year.

And for that multifamily development, how do you decide between sort of monetizing a completion or holding the project long term.

Yes. It's a decision tree that we take and we look at on every single asset. So you've seen us undertake long-term ground leases with a developer where we're essentially just leasing them to dirt. That is the most CapEx-light approach possible, but also you're not really capturing that upside creation in the future, even though we do retain a right of first refusal in the event that, that gets sold because they are selling a leasehold interest at some point in the future while we retain the fee. I mentioned the structure that we're undertaking now on a number of projects where we're contributing our land on a marked-up basis once it's entitled. You have seen us, in particularly the 2 that we just sold or more of a traditional joint venture where we utilize more Kimco Capital on balance sheet. Realistically, you'll likely see us do less of that other than maybe some unique instances. But for the most part, our goal is to capture near-term returns and value while being able to take advantage of the crystallization on the exit. And then in certain instances, we're also looking at and we'll complete some land sales where we've entitled the land. We've created that value and made the determination that selling it prior to construction is our best course of action, take those proceeds that are on nonincome-producing land and then redeploy that into our core multi-tenant shopping center business with growth. So I think you'll see all of those approaches. And then on a select basis, we'll decide at that point in time based upon market feasibility, based upon cost of capital where it makes sense to undertake which path.

Yes. I mean, we're doing everything we can to just drive FFO growth. So being able to take a piece of land that's not earning anything turn it to something that's earning under construction. And then at the end, selling it at a low cap rate to take those proceeds, redeploy them into a higher cap rate, higher-growth asset. Well, we're going to do it all day long. And we've gotten it now fully started where we've now round-tripped the in, and we have 2 others that are in development and 1 that we just really completed at Culture.

Maybe taking a step back, and I know Tony talked about the consumer, but maybe expand on kind of the -- what you're seeing. I mean, you guys are clearly a big platform in the shopping center space. What are you seeing consumer performance or consumer behavior across retail categories. So kind of generally, what do you see across the board there?

Yes, we continue to be, I think, positively surprised by the resiliency of the consumer, the traffic is the leading indicator that we continue to focus on being up 3% year-over-year and showcasing that they continue to prioritize the grocery-anchored centers that we own in first-ring suburbs. We're in the top 50 major MSAs in that first-ring suburb. There's no pullback. And so clearly, with oil where it is and where -- what could happen next, there's all sorts of questions on the macro noise getting louder. That being said, the employment market is still sort of the backbone in my opinion. And I think people are confident in their jobs and their paychecks and their ability, now when they get to the shopping center, how do they stretch their dollar, I think, is still going to be a piece of it. But when you look at the offering that we typically provide, it's the value, it's the off-price, it's the grocery store that's the discount type of opportunity that I think most people gravitate towards regardless of if it's a boom or bust cycle, it's a necessity-based idle. And so we continue to look at the AR and see if there's any AR creep. So typically, in past cycles, we've been very focused on what's a leading indicator of any type of pullback. Usually, it's an AR buildup and primarily tied to small shops because usually, they don't have a balance sheet to whether the type of storm that might be coming. We've actually seen AR go down. And so that typically doesn't make sense. If you're going to see any type of pullback or tenant credit issues. Same with traffic, right? Traffic is usually a leading indicator. And then the same goes for the leasing, right? So like in terms of renewals, new deals, are people keeping on of their spaces, are people signing new deals, it's the velocity just continues to improve. And good retail is hard to find. There's virtually no new supply, as I mentioned, occupancies are near all-time highs or at all-time does. And yet what's changed is the dawn of e-commerce and all the working capital that want to go build these e-commerce platforms. Rate environment has changed meaningful since then. And now it's all about margin. And where is the margin enhancement, where is the margin continuing to head the store base. And that's where the retailers are reinvesting in their stores, and that's why you're seeing retention rates at all-time high. Most of our anchor spaces, we've done an analysis that are 65% below market. And so the deal that they have currently is the best deal they're ever going to have. And so that's why I think you're going to continue to see this retention rate be high retailers leaning into their store base because in all their earnings calls, the physical store fleet is the differentiator when you buy online, you're going to be incentivized to pick up in store, that's where, again, the margin enhancement and the add-on things continue to add to the experience. And I think there's a lot of upside still to come because of the gap in physical and economic occupancy. Retail has never really hit that trajectory of that glide path where the CapEx load starts to meaningfully come down because of the lack of churn. And I think we're very, very close to when that snow pipeline compresses to seeing that meaningful free cash flow enhancement which creates more of a flywheel where you can go and invest accretively. Almost every other cycle you can point to was when our physical occupancy hit an all-time high, the economic occupancy was very low, and then something happened to disrupt it. And so we're at a point where with no new supply and the watch list tenants to be as small as it's ever been, I feel really good about the credit quality and the upside going forward.

So it doesn't sound like as you think about retailers talked to you about store opening plans for '27 even '28 doesn't feel like they pulled back or any of that. It feels like they're just continuing to care open.

Yes. Correct. No, they're still leaning into that. And I think they recognize that if they don't be aggressive today that the space is going to be gone tomorrow. And you're starting to see -- now this is a small sample size, but you're starting to see the economics of the anchor deal significantly improve for the landlord. Now that's been historically issue with our sector is that the lack of growth coming from anchors has been the weight of that's holding you down in terms of same-site NOI or other -- and the CapEx load, you're starting to see -- now that change in landlord favor where, again, the amount of fitness players, off-price players, grocery stores, all bidding for the same space has created an opportunity to say, who's going to pay annual escalators and see who steps up and we're starting to see certain players step up to get the space.

So has that translated in your SHOP tenants into either a change in like co-tenancy flows, percentage or overage rents or anything else? I'm just curious.

Yes. The carve-outs are very much landlord-friendly now. So instead of giving co-tenancy clauses, we're getting percentage rent, right? So like in essence, they're bear traps, they want you to step in are no longer there, and we're getting all the upside of the performance of the store. And you're continuing to look at other things as well. So for us, because our platform is very focused on highest and best use. And so our team is laser-focused on parking ratio requirements, what we can do to maximize the value of the asset longer term. That's where you'll continue to see the lease evolve to have more landlord-friendly items for us to capture that upside longer term.

I'm sorry if you mentioned this, but you've hit a record in small shop occupancy like kind of what's the path there? And what's kind of the target you're trying to achieve?

Yes. So we did just crush 93% of the small shop, which is an all-time high occupancy, but at the same time, that shouldn't be a ceiling, in my opinion. When you think about the 28 grocery stores that are under construction, when you think about all the anchors that I'll be to open, typically the hardest space to lease is the small shop that's next to a dark anchor. And if you think about all that activity, that's about to come online. That to me continues to point to further upside in small shop leasing. You combine that with the diversity of uses that we see today. It's something that is sort of remarkable when you look at the diversity of demand for small shop spaces. We've sort of become the one-stop shop for medical, health and wellness, fitness, you name it in terms of like urgent care, pediatric urgent care veterinarians like outpatient -- like physical therapy, you name it, it's become sort of this wide spread of what's the best location that's convenient to where their customer lives. And the shopping center continues to capture that type of demand. And so we're being thoughtful about merchandising mix, grocery stores usually create multiple trips per week. So you're able to merchandise off that and get more sales coming from the asset that way. And so we continue to lean into that. And I think our 1 Kimco approach allows us to leverage our scale to have portfolio reviews with tenants that are doing 50 plus, 100-plus new stores a year, where they could do that with a one-stop shop like Kimco and have a trusted partner that they know is going to deliver on time, hopefully, on budget and give them the store opening plans that they so desperately need because their growth is fueled by those new store opening plans. And so that's where, again, our priorities and our focus continues, I think, to resonate with the retailers as well, and we meet with them consistently.

And to Conor's point, we hit the small shop all-time high occupancy, while we're still 110 basis points shy of our all-time anchor occupancy. So as those 28 grocery stores that are under construction are open and operating as we get back to the all-time high on anchor, we believe that we'll continue to see high watermarks hit on the small shop occupancy as we go.

And what's -- because 1 of the questions I get is, okay, you get to kind of peak occupancy -- and what are the other levers of growth you can pull? And you talked about maybe unlocking some of the anchor rents there. I mean talk about what are the other kind of positives or levers you can pull here so they iterate more than the growth you're achieving today, even?

Well, it is sort of remarkable to think that we've done that 5% to 6% plus FFO growth for the last 3 years with no external growth right? You think of other sectors that are spread investors or 100% externally growth focused. Like our organic growth is really driving that, which is sort of remarkable. All while we don't have a cost of capital advantage. And so when you look at what else can drive growth going forward, that's where I think Kimco sits uniquely positioned to have more levers than other. So Ross and his team have done a great job in terms of building a structured investment program that allows us to invest at a spread of about, call it, 10% on average yield to Kimco. That's usually in a preferred equity or mezzanine financing position. And it's on assets we want to own. It's on in markets we love. It's in areas where we already have a big portfolio. So it's, in essence, getting paid to wait because every 1 of those investments has a right of first offer or right of first refusal and we've acted on those and bought about 3 assets out of that program. So that's a big lever for us. If rates stay where they are or even go up, we think there's an opportunity set to continue to grow that book of future acquisition opportunities in getting paid away. The other piece of it is, is that flywheel of development that we're now on in the multifamily side. We're, in essence, building to a spread of 300 basis points because our land is free. Like that's not income-producing right now, our parking lots. And so we're able to contribute that with the entitlements that we put in place at a spread of 300 basis points to where those assets trade in the open market. And that capital is going to be an enhancing flywheel for us as well. And so when you look at those unique situations alongside how every time we sell a flat ground lease and buy a grocer-anchored shopping center, the growth improves like those are all pieces of the puzzle that we have that we continue to look at and say, there's a lot of asset management we can do on the portfolio still to allow us to enhance the growth profile going forward. And look, we still have a mark-to-market of 65% on our anchors. And so we'll be working hard to try and generate those upside scenarios of recapturing space all at a time where there's virtually no new supply. And so clearly, the leasing front is still very much the driver of our growth. But the opportunity to enhance our margins, I think, is going to be 1 where platform, the scale, the advantages, all come into focus all while that economic occupancy still sits at 92.5%.

That's the really interesting dynamic of our sector. And it's a bit of an anomaly when you think about it compared to other sectors elsewhere, if you were at 95%, 96% occupancy, you're going to see a ton of shovels in the ground in other sectors. Retail is just not the case for all the reasons that we've talked about land is expensive when you're comparing it to other potential uses and asset classes that can be developed, construction costs, financing costs, the challenges of lining up a tenant -- tenancy lineup and delivering all of those spaces at the same time. It is very expensive and challenging to deliver new retail construction. So we really don't see on the horizon any meaningful amount of new construction or development within retail anytime soon. So even as you're continuing to push occupancy to new levels, that is where we're going to continue to see the ability to push rents in addition to the other terms that create real value for us as a landlord. Conor mentioned it before, but you're seeing virtually no cotenancy provisions in lease negotiations anymore. Exclusives have been completely watered down. It gives us a lot of flexibility to lease our space and to create a tenancy that is very important to have that traffic morning, afternoon into evening as we talked about creating additional density, whether it just be outlets urgent care facilities on the outparcels or a 26-story tower in our parking fields, having elimination of no-build areas and having more control over your parking fields in your common areas, which we're able to negotiate today. Based upon the leverage that we have, has real value when you don't need to go back to the tenant and ask for permission or inevitably, they'll have their hand out for something if you need their approval as well as control periods. Long gone are the days where you have excessive amounts of tenant option periods for the anchor tenants. We are negotiating very hard to reduce and control the amount of options so that we can get to that mark-to-market sooner than what we've been able to do historically. Because when you look at the rent roll today, whereas on 6% to 7% of our rent roll that rolls in any given year, you have 75% of them that have options of which are being exercised at a 90% clip. You're only getting to 2% to 3% of your rent roll to really hit that mark-to-market in any given year. So the more that we can push, the more that we can get to sooner, we'll be able to push NOI, FFO and rents much more aggressively than we've been able to do in the past.

We do have some pretty unique levers to help really drive the growth where we are today. Investment program, the initial yields are high single digit, low double digit, and we're getting paid to wait. Again, we bought a couple of the assets from there. We still have about $150 million a year of redevelopments that we're doing in the portfolio, which is generating a 10% plus yield. No 1 else has 9% of their ABR coming flatly is that we were able to sell at low 5 caps to redeploy that capital at a minimum of a 6 or a low 6% cap rate with a growth rate that's 300 basis points higher than the flat lease. And then if the stock is not performing well, we put the balance sheet together that is as good as anyone. As A3 across the board. We have more liquidity than anyone else in our sector. And if warranted, we can buy back stock. So we have any aspect of the cycle, we kind of built the balance sheet and the company today to actually be opportunistic.

And I think total shareholder return is what we continue to hammer like that to us and hopefully to everyone in this room is super important. And so when you look at our dividend and we raised it 12% last quarter, it's all being driven by operations. It's all being driven by recurring cash flow operations. And it sits right on top of taxable income. So everything we do from the portfolio level is going to be distributed out. And so like that, to me, is like real upside. That has yet to be reflected. Our dividend yield is 4.5% with FFO growth of north of 5%, 3 years running with a huge snow pipeline and an A- A3 balance sheet not to me is pretty compelling.

So what's here, what's the pushback you're getting from people? You said you trade at what return discount, give or take. I'm just sort of curious, what are they saying to you?

It's sort of like what's your flavor of ice cream, like it depends on who you ask. But I think when you look at the size and the liquidity we have size and the liquidity we have, top fund flows is like 80% of your performance. And so when rates are going up, and there's a potential rate hike on the horizon. That probably is a fun flow issue, in my opinion, strips haven't really benefited from fund flows. I think the majority, if not the entirety of the sector is trading at a discount. When you look at the consumer and where oil is and where like some of the major macro issues, obviously, the point of the spear is the consumer for us, that could be an overhang as well. I think when you look at the opportunity set of what else the incremental dollar can invest in, even though we're proud of our run here of really strong earnings growth. You stack that up relative to what's taking the oxygen out of the room, which is what data centers in the real estate space, but then you layer on top of that AI and space and all of a sudden, the growth profile is -- doesn't really capture a lot of eyeballs. And then I think there's the overhang of retail still in the generalist view of like it's the hardest sector. There's bankruptcies there's consumer concerns, there's rate concerns, that incremental dollar may be going elsewhere. And so our mission is to show that -- the watch list has never been smaller. The supply side is virtually 0. The demand side is super strong, and we continue to show that this is not like a 3-year free incident of growth. We have really the runway to continue and you stack us up relative to other sectors, total shareholder return, it's pretty compelling. And so -- and again, we have the balance sheet now to take advantage of the dislocations and buy back our stock when we think it's opportunistic.

It's interesting. We're a pretty cycle-tested management team. I mean we've been through pretty much anything bad that you can think of and kind of come out the other side of it. But when you look at the consumer, the interesting thing is this sector, our sector is pretty recession-resistant. Like we've been through all these bad cycles, people still shop. They still go to the grocery store. They may buy something different in their basket and it could be chicken instead of steak, but they're in -- they're still shopping at 2, 3 times a week. They still get their hair done, they still get their nails done. They still go to the liquor store. They still feed their pets, and they still treasure hunt, all through those cycles, good times, bad times. It's just it's kind of being a human being, and you want to be out and there's a social environment to it, and it's held up through every cycle you can think of Covid, great financial crisis, Russian debt prices, pickup when you want. This product is pretty resilient. So -- and we've actually made a lot of money during times when there's been a downturn, not that we're looking for a downturn. But we've been -- and we're in a position from a balance sheet standpoint where we can be really opportunistic today.