Kimco Realty's CEO Presents at 2013 Citi Global Property CEO Conference (Transcript)

| About: Kimco Realty (KIM)

Kimco Realty Corporation (NYSE:KIM)

March 04, 2013 4:15 pm ET

Executives

David B. Henry - Vice Chairman, Chief Executive Officer, President, Chief Investment Officer and Member of Executive Committee

Milton Cooper - Executive Chairman and Chairman of Executive Committee

Glenn G. Cohen - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Michael Bilerman - Citigroup Inc, Research Division

Quentin Velleley - Citigroup Inc, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Welcome to the 4:15 p.m. session of Citi's 2013 Global Property CEO Conference. This session is for investing clients only, and if media or other individuals are on the line, please disconnect now.

We are very pleased to have with us Kimco and the entire management team: Milton Cooper, Dave Henry, Glenn Cohen and Dave Bujnicki. Pappagallo, I assume you've left behind somewhere?

David B. Henry

Leasing.

Michael Bilerman - Citigroup Inc, Research Division

Leasing. Lease, lease, lease. Dave, am I turning it over to you or Milton -- who's giving -- Dave, you're going to give the opening comments, and then we'll turn it over to Milton.

David B. Henry

Thank you, Michael. Thank you for having us and thank you, all, for coming to attend the Kimco presentation.

We have passed out very small versions of our investor presentation, which we've updated and refined over time. We've made it small so, hopefully, you'll take it with you and read it at your leisure. We won't go page by page today, but we are leaving it for you and it's a pretty comprehensive look at the company. With your permission, I will hit some highlights.

Our company started, for those of you that aren't that familiar with Kimco, our company started in 1958, so we have a very solid 55-year history. We went public in 1991 and we are on the New York Stock Exchange, and we're now part of the S&P 500 Index. We are proud to be North America's largest owner and operator of neighborhood and community shopping centers, with approximately 900 shopping centers in 44 states, Puerto Rico, Canada, Latin America. We are 1 of only 12 REITs today rated BBB+ or better, so we feel our balance sheet is very strong.

To give you some other colors. We have a large planning board, investment-grade tenants and we are Home Depot's, Target's, Costco's, Walgreens' and TJX's, the largest landlord by number of stores. Overall, we have roughly 8,400 individual tenants and close to 15,000 leases. 2/3 of our U.S. shopping centers are located in the top 30 metro areas and our core markets include Greater New York City, Baltimore, Washington and Philadelphia corridor, Florida, Texas, Southern and Northern California and Chicago.

The shopping center industry, and neighborhood and community shopping centers in particular, are recovering well today, quarter-by-quarter from the great recession. At Kimco, our occupancy now stands at around 94% and we have had 11 straight quarters of same-store NOI growth with strong leasing spreads and renewals. Improvements are being driven by virtually no new development in the U.S., population growth of close to 3 million people per year and positive GDP. These positive factors are outweighing industry challenges, including growing e-commerce sales and soft local store occupancies.

At Kimco, we have been focusing on our portfolio -- on upgrading our portfolio, and we have sold more than 100 properties over the past several years, while we have bought 60 very high quality centers during this same period. We have also strengthened our balance sheet, taking our net debt-to-EBITDA from 8x down to 6x, and we continue to have one of the lowest FFO payout ratios in the industry at 61%. We have also reduced our non-retail assets from $1.2 billion to roughly $380 million, only 3.5% of our total assets.

Internationally, Canada remains a strong and steady contributor to our earnings, and Target will be opening 25 new stores in the quarter starting in April. Their very first store will be in one of our Toronto area properties. In Latin America, we previously announced that we will sell our 14 properties in South Americas, since we don't have scale and taxes are a little tricky. In Mexico, capital markets have exploded recently and property values have increased markedly. We may sell some of our assets and take advantage of these relatively high prices today.

I'd like to leave you with a picture of Kimco as a very solid aircraft carrier in the neighborhood and community shopping center business. We are national in scope, very well diversified, again, 900 properties and 15,000 leases and we have a very strong balance sheet. In general, our retailers and tenants sell staples, provide services or are discount-focused. We believe that retailers will continue to do well, and it is noteworthy that there is now a 5-year high of planned new store openings in our business.

Milton, any added thoughts?

Milton Cooper

So I guess, our strategy now is keeping to simplify everything we have and move to a simple structure so that it would be easier for Michael and Glenn to follow and understand it. No, that's really for people like us. And I guess, the other thing we've always tried to have to distinguish ourselves with 3 main distinctions. One, age. We've been around so long that we have lots of leases that were added into decades ago. So needless to say, contract rents in the last 20 or 30 years have gone up. So there's a reservoir of lease rents that are very low, but -- way, way below market. Last illustration was Target paid $2 million a year, the prior tenant with the increase in tax had a negative. The second that we've had, we've always had a business of finding opportunities, whether it was Montgomery or Strawbridge & Clothier venture, Ames, you name it, and the most recent one is SUPERVALU, and I think it will work out quite well.

And finally, we have $10 billion of joint ventures, which serves as a reservoir of acquisitions over time, as certain of the joint venture partners want to exit. So I think those 3 ingredients will distinguish us and it's a pretty good time to own income-producing property in America. So those are my thoughts.

Question-and-Answer Session

Michael Bilerman - Citigroup Inc, Research Division

Great. Thank you very much for that. We've been starting these sessions with the question that we've been asking everyone, which is what do you think is the most value-creating opportunity that you have within the company today that the market is not giving you much value for?

David B. Henry

Milton hit it right there in terms of our ability to buy out some of our institutional partners at very attractive prices. This is something that comes along, but it's pretty steady for us. I think we bought out 4 partners last year, 4 separate partners in addition to the big Blackstone-UBS transaction. We have a history of doing this. As you know, management of these institutions change, strategies change, and it gives us an opportunity to buy these properties at prices that are probably lower than full market.

Glenn G. Cohen

I guess, I would add also, with 900 properties, there's a tremendous amount of redevelopments that we can do on the properties. We today have roughly $100 million that we'll spend this year and a shadow pipeline of another $150 million over the next 24 months, so that will clearly add. And the returns on those are high-single digits to low-double digit. And then the other thing I would add also is, we've been very, very active capital recyclers. We started at our Investor Day back in 2010 with a plan to really upgrade the portfolio. Today, as Dave mentioned, we've sold 115 assets since that Investor Day. We sold $400 million of non-retail assets and have taken over $1 billion of capital and redeployed it into 60 shopping centers in better markets that are producing better metrics. And I think that's something for the future for us as well. You can continue to see us just be a recycler and watching the portfolio [indiscernible] and following with population growth.

Michael Bilerman - Citigroup Inc, Research Division

Where do you think, in terms of -- do you think about the joint venture book? How much do you think is likely to be brought on balance sheet or recycled to another partner over the next couple of years? And when you're thinking about the value opportunity of what some other REITs would pay for?

David B. Henry

Well, they come in all sizes. The UBS Wealth Management was one of our larger ventures, $1.1 billion, I think, something like that. We have many smaller ventures, but I think a good target would be at least a couple hundred million dollars, at least, a year out of these ventures.

Michael Bilerman - Citigroup Inc, Research Division

And at somewhere -- 150 basis point spread, you think the market -- I mean, what's the value disconnect?

David B. Henry

Well, given that we value our partners very much, I wouldn't want to get into that kind of spread. But it's certainly accretive.

Quentin Velleley - Citigroup Inc, Research Division

Just lastly on the joint ventures, and I know UBS were obviously a seller for [indiscernible] make them sellers of their joint ventures today?

David B. Henry

Well, we've seen starting with the great recession many of these institutions wanted to recycle the capital or bring back capital or they were uncomfortable with the debt metrics on some of these ventures, or there was simply a management change or a reallocation from real estate to other asset class that they -- again, as I said, it comes in all shapes and sizes in terms of why people want to exit. Some are not long-term holders as we are and they simply want to go home after a period of time with a profit. GE Capital is another one that we've entered into arrangements to buy out certain properties. They're shifting back into more of a debt [indiscernible] rather than equity focus.

Quentin Velleley - Citigroup Inc, Research Division

Just in terms of your, I guess, I'll call it a new strategy of selling down the Latin American stakes. What really drove that decision to pull back from that market, of those markets? And how should we be thinking about the timing of the sell down?

David B. Henry

I think it starts from a very high level. We have been trying to go back to basics and trying to simplify the company. In terms of Latin America, it really was a struggle to get to some sort of scale. We were in 3 different -- we are in 3 different countries: Brazil, Peru and Chile, with a grand total of 14 assets. Chile was the only one that we were able to make a significant dent. And as I mentioned, taxes are tricky. And not having scale and not having the operating partners that could get us to the scale really led us to make a firm decision to exit Latin America. In terms of Mexico, what's changed there is the capital markets activity over the last 6 months. It's literally exploded in terms of new IPOs and companies that want to become public, as well as Mexico changed their laws to allow pension funds to more actively invest in equity real estate in Mexico.

Quentin Velleley - Citigroup Inc, Research Division

And then just in terms of the average age of your portfolio above 20 years, I think you've said before that you've got 1,000 leases that are over 20 years old. How should we be thinking about the embedded upside in those leases and in those older assets over time?

David B. Henry

Well we're going to try to do a better job on that. We're going to do some research for you. But we did go back and catalogue some of these older leases and we're now trying to figure out if options are extended and so forth to exactly what the mark-to-market will be. So hopefully, over the next couple of months, we'll be able to put a little more math to that question for you. But we do believe there's embedded value. It's not recognizable right away or it's not achievable right away, but it will be over time.

Quentin Velleley - Citigroup Inc, Research Division

Were there questions from the --

Glenn G. Cohen

And our note was getting better with age in reference to the portfolio, just want to make that clear.

Unknown Analyst

Milton, I have a question for you. I suspect you've been in the real estate business longer than anybody else in the room here. You've seen what's happened to property values and to your business over the last 30-plus years as interest rates have declined. And it seems likely to me that if we haven't seen the bottom already, we're awfully close and we're likely to see higher rates over the next 2 years, 5 years, you name it. I'm just getting your thoughts on what's the implications of unrising interest rates will be on the value of your assets and on your cap rates?

Milton Cooper

Well, cap rates, interest rates are tied at the hip. So to the extent you have rising interest rates, it has an effect on cap rates. What is different today is that the spread between interest rates and rates are much too high. You might compare cap rates -- not to the 10-year treasury, but to the treasury inflation-protected fund. Would you guess what that rate is? It's a negative 6%. So when you think about an asset that has inflation protection, that spread is too high and we have lots of problems in America, but the one thing we have is the best legal system for property rights. We have people all over the world wanting to invest in hard assets in America and we have a population that grows by 3 million people a year. So that combination, in my opinion, will overcome the possible increase in interest rates and the spread will come down.

Quentin Velleley - Citigroup Inc, Research Division

Just maybe speak a little bit about the office supply tenants, and in particular, Office Depot and OfficeMax? The number of boxes you've got and what you think the outcome is likely to be?

Glenn G. Cohen

So we have in total 73 boxes, the combined of Office Depot and OfficeMax that makes 1.3% of our total ABR. The average base rent on those boxes is a little bit over $10 a square foot, so we believe that they are at or below market in a lot of places. And overall, you'll probably hear it from many landlords, I think. I think, overall the merger itself if it goes through, would probably more on the positive for the landlord than not. If you're not dealing with a bankruptcy situation where all of a sudden you're flooded with a lot of empty boxes and lost rents. Through the merger process, they would be obligated to continue to pay the rent through the expiration date of the leases that they own, the stores that they close. And in the event that they have long-term leases where there is a store that's closed, my guess is that they would look to do lease terminations with the landlords as well. In addition, the box sizes are virtually square in a lot of places, so you can really do -- it's very acceptable to being able to split them. And you have enough frontage to really be able to put better tenants in and hopefully drive more traffic to those centers. So I think, overall, it probably turned out to be more positive.

David B. Henry

And another thing that's worth the noting, I think. We, like most of our competitors, in terms of boxes over 10,000 square feet, we're 97% leased. There's almost a waiting list of people to get at these sized stores. So they will be very easily re-leased to the extent they come on the market.

Michael Bilerman - Citigroup Inc, Research Division

Dave, we spoke in December when we met about the after sales program shifting from a strategic asset to a strategic market exit, or at least an examination, I mean, a more broader examination of where you want to be from an asset perspective. And I'm just curious sort of where the analysis has gone since then? And how you see the execution of that broadening of the disposition program occurring?

David B. Henry

We're committed on both fronts, Mike. One is the bottom part of our portfolio or properties where we perceive risk for this long term, but we're definitely committed to selling those. In addition, we like the fact that we have 80 properties in the New York City metro area, 140 properties in Baltimore-Washington corridor and 100 properties in Florida. Those are long-term good markets for us. We have physical offices there, we have presence, we have long relationships with the tenants, we have scale. So those are the markets that we want to play long term. Other markets where we just have 1 or 2 properties and maybe they're very rural or tertiary, those markets, even if we have very good shopping centers, we will probably put on the market over time.

Glenn G. Cohen

Yes. I mean, clearly, we want to remain national, but we're not looking to reduce to 2 or 3 markets, 80 assets or something like that. I mean, we like the large scale, we like the diversity, we think it gives our investors a great spread of risk. Having Home Depot as our largest tenant, it's at only 3%. So we are much more focused on these better markets. We've seen the assets that we've purchased, there's less 60 that we mentioned are in these better markets. And I think it's showing up in our operating metrics.

Michael Bilerman - Citigroup Inc, Research Division

But I guess from a size perspective, how do you think about -- have you been able to hone in more on -- I think, Mike, can talk about somewhere between the 15% to 20% potentially of NOI. This is -- the non-strategic asset today is down for like 8%, right, or so of NOI? But a strategic market would -- that sort of exit would raise that bar, have you sort of isolated that a little bit...

David B. Henry

We haven't put it in concrete, Mike, but you're on the right track in terms of the size of what's left to go in terms of properties outside of our core markets.

Michael Bilerman - Citigroup Inc, Research Division

You talked a little bit in your opening comments about one of the threats that's being e-commerce. I'm just curious sort of where are you with Main Street Fairness act and sort of how you sort of see that evolving and being able to leverage the portfolio a little bit?

David B. Henry

Main Street Fairness act has been resubmitted into the 2013 on both sides, both the House and the Senate. And many of us associated with NAREIT were in Washington last week, lobbying for Main Street Fairness as well as other things. I think it's fair to say there finally is real momentum behind this on both Republican side and the Democratic side. The bills are very specific, they still have to go through some hearings and they are looking for what they call a vehicle to attach Main Street Fairness to it. But the number of opponents that are opposed to this are limited. Unfortunately, Mr. Norquist is one of them. But nobody is arguing anymore that a local bookstore should collect an 8% to 10% sales tax, while Amazon doesn't collect that sales tax in that state. No, we passed this. And at a time when the states are desperate for revenue, we estimate they're losing about $23 billion a year in sales tax revenue because Internet and e-commerce merchants aren't collecting the sales tax. So I think you'll see it done and it's got real momentum. Maybe not until these guys are getting along a little better on other things.

Quentin Velleley - Citigroup Inc, Research Division

Just in terms of, I guess, the return of the Kimco plus strategy. Can you just talk a little bit about what Kimco plus, what transactions you were involved in over history and really how Kimco plus today is going to be different from some of those transactions that you did in the past?

David B. Henry

And we had Bornetto in here before, they're willing to sell Toys "R" Us, hasn't worked out exactly.

Milton Cooper

Well, let's see how many we've done, Montgomery Ward, Strawbridge & Clothier, Strauss stores, Frank's Nursery, Pekinger's, Venture, Ames, Service Merchandise, Shopko, Save Mart, and that's what I can recall so far. So this we've always done and it's not recurring, but it gets cash and then you can put back cash into recurring properties. So it's something that we think we've developed the skill set over the year by relationships with private equity firms, relationships with some of the funds and relationships with the bankruptcy, Paul.

David B. Henry

We are committed to making sure that this is a plus part of our business. So the 15,000 leases and 8,400 tenants, that provide that recurring income stream, the dividend, 61% payout ratio, all those sort of stuff. So when we do these deals, and clearly make some nice profits, and not one of these deals lost money by the way. When we make the money for this, it goes back into investing in recurring income producing assets.

Quentin Velleley - Citigroup Inc, Research Division

What's your view on further consolidation in the traditional grocery space?

Milton Cooper

The grocery space. That's -- it's -- I'm trying to think how the conventional supermarket can survive against the warehouse clubs that are 70% food. I mean, you go to a Costco, which is I think maybe 75% food and Sinegal's religion is, no matter what he paid for a product, his markup is 15%. So the price is fantastic. You have Wal-Mart food, you have Target food, you have Whole Foods who are terrific, you have Trader Joe's, you have all these, you have the Dollar stores and then you have some of the fabulous private supermarkets, H-E-B, Wegmans, Publix, so the plain vanilla supermarket is going to have a very, very tough time ahead.

Quentin Velleley - Citigroup Inc, Research Division

Other questions from the audience?

David B. Henry

Nothing?

Quentin Velleley - Citigroup Inc, Research Division

You spoke before about keeping a strong national platform in your shopping center portfolio. Can you maybe just talk a little bit about some examples whereby you've taken or you are taking local or regional tenants national, which sort of gives you some benefit of having this national shopping center portfolio?

Milton Cooper

One side benefit of the national platform, take SUPERVALU, which is national. They have stores all over the country. We are a real estate partner, we've been retained on a national platform to help them with real estate issues, helped them and will create, in my opinion, opportunities for us to buy properties where they control the lease and share some of the upside with SUPERVALU. But the national platform gives you that.

David B. Henry

And we become one of the top priorities for a national retailer to meet with, to go over what vacancies we have, what opportunities they have to expand in the other markets. So by having such a large portfolio and a national footprint, it puts us near the top of the list in terms of what dealers want to talk to landlords about possible expansions. And we do about 100 of these portfolio reviews every year with major retailers.

Michael Bilerman - Citigroup Inc, Research Division

You said, you used the term aircraft carrier when you described the company.

David B. Henry

We like that analogy.

Michael Bilerman - Citigroup Inc, Research Division

Can the aircraft carrier go fast? I mean, can you get accelerating growth? It's not an oil tanker where you will be slow, but I guess from that perspective of being able to do -- do you have enough levers at your size to be able to move the growth needle?

David B. Henry

Look at it as very steady, very sure, very unsinkable, not being slow. Some of the newer aircraft carriers are nuclear-powered by the way.

Glenn G. Cohen

Every now and then, we send up an F16 with a little juice in it.

Quentin Velleley - Citigroup Inc, Research Division

If you look at the open-to-buys, there are a lot of those junior anchor-type tenants having 2013 and 2014 very high open-to-buys. I think you commented that your occupancy in your boxes, 97%. What's your view in terms of where these guys actually get their store rollout plans? Is there an opportunity for you guys to consolidate more shop space? Do you think they're going to look more into the mall or do you think they're going to go down into weaker assets and weaker markets?

David B. Henry

I think the first thing it’s going to do is to accelerate the increase in effective rents for us landlords. I mean, we're coming out of a recession where market rents were driven way low. Finally, we're seeing an ability to raise prices, if you will, and raise the effective rents. So these retailers that are worried about achieving their store counts, they're much more willing to pay higher rents, there much more willing to leave with lower tenant finish, tenant improvement packages, less free rent. So everything that goes into the definition of effective rent is getting better for us. And so the whole dynamic between landlord and tenant is beginning to shift as these retailers are looking to increase the store count.

Milton Cooper

You know there's another use that's coming. America is the only democracy that doesn't have universal health care and it's coming in 2014. So the person who couldn't afford insurance no longer will have to wait 8 hours in an emergency room. And what we can see is an enormous demand for space in the shopping centers for medical users for large groups of physician. The individual practitioner will have a very difficult time being able to have the economics to practice alone, they will have to form groups and we have a division that plan where they -- we know how to layout, we understand what the needs of maybe a one stop -- where we give them MRI equipment, all of the technology. And I think you can see that as a fabulous use of space.

Quentin Velleley - Citigroup Inc, Research Division

Just in terms of -- you've progressed through selling most of your non-core, non-retail assets, there's a few things left on the balance sheet like the Blue Ridge land and some of the non-retail mortgages. Can you just talk a little bit about the timing of the potential sales of those non-retail assets?

David B. Henry

Well, once we've closed in town and we have a number of other urban assets that add up to a fairly significant part of that non-retail total. We'll be down to about 1% of our total assets. Things like the Blue Ridge land may not be sold anytime soon. But at the end of the day, it's just a very, very small piece of our portfolio. So I think we're all going to have a party when InTown closes and we'll be done.

Glenn G. Cohen

It should be under $200 million by the end of the year. I mean, basically, Page 40 of our supplemental, we shouldn't need any longer.

Michael Bilerman - Citigroup Inc, Research Division

Is there any conditions to close on InTown?

Glenn G. Cohen

Sorry?

Michael Bilerman - Citigroup Inc, Research Division

Is there any conditions to close on InTown?

Glenn G. Cohen

We need to finish up the mortgage assumption process, but it's moving along pretty well. So we feel pretty good about closing in the second quarter.

David B. Henry

It's complicated loan assumption process, but the contract is now hard and Starwood is anxious to get it closed and do their thing with this portfolio. So we've got a way through a fair amount of special servicer and rating agencies' approval as part of this assumption and inter-creditor agreement. If you remember there's a mezz piece on top of this debt. So it's tricky but it should be done within 2 to 3 months.

Michael Bilerman - Citigroup Inc, Research Division

And you'll have some sort of guarantee on the debt?

David B. Henry

Yes. In Starwood, we'll be investing about $125 million of cash subordinate to that mezz.

Glenn G. Cohen

And pledging that their equity interest is pledged for our guarantee.

Michael Bilerman - Citigroup Inc, Research Division

Is there a chance, would they refinance it in the near term or that's just a longer term?

David B. Henry

I think it's probably a little longer term because you've got to weigh out that first mortgage and then refinance everything at one time. The first mortgage I believe has another 3 years?

Glenn G. Cohen

Yes. '15. The mezz debt, the way we structured it for them, it has -- it runs in 6-month increments. So it was done back in June of '12 for 3.5 years. So there's another 2.5 years that's left. But it's done in 6-month increments, so that if they decide to take it out, they can without any penalties.

Michael Bilerman - Citigroup Inc, Research Division

Is there anything refinancing that you have coming up that you have left in the balance sheet?

Glenn G. Cohen

Well, for the current year, we have there's $275 million of U.S. bonds that mature, which will probably go to the bond market later in the year to refinance it. Probably a lower rate than where those bonds are currently. We just refinanced our Hazel facility, so that's going to save about 250 basis points also. That's effective, actually, today, we just closed it today. And then we have a Canadian bond that matures in August and will probably go back to Canadian market and refinance that again. That's sort of 5.18% interest rate, we've probably been in the mid-3s, high-3s today on that bond. So there's definitely some further benefits that come from refinancing...

David B. Henry

And a steady supply of mortgage refinancings embedded within the joint ventures that we have. So every month these mortgages mature, we either pay them off or replace them with a much cheaper mortgage.

Michael Bilerman - Citigroup Inc, Research Division

We have 3 rapid fire questions. What will same-store NOI growth be for the shopping center [indiscernible]?

David B. Henry

3% [indiscernible].

Michael Bilerman - Citigroup Inc, Research Division

If you had more properties other than your own, would you personally [indiscernible]?

David B. Henry

I've always loved to tell stories, but I think [indiscernible]. In fact, there would be more or less public company shopping centers today than 1 year [indiscernible], I'd say more.

Michael Bilerman - Citigroup Inc, Research Division

And then Milton, get the second one, a book recommendation.

Milton Cooper

The new Nate [indiscernible] is terrific. He's the fellow who -- you read it? And he called everything right except the Red Sox and the Ravens. But it's a great book on the myth of predicting.

Michael Bilerman - Citigroup Inc, Research Division

Perfect, well there you go. Thank you, gentlemen, very much.

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