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Kimco Realty Corp. (NYSE:KIM)

Q2 2009 Earnings Call

July 30, 2009; 10:00 am ET

Executives

Milton Cooper - Chairman & Chief Executive Officer

Dave Henry - President & Chief Investment Officer

Mike Pappagallo - Chief Financial Officer

David Lukes - Executive Vice President

Barbara Pooley - Vice President of Finance & Investor Relations

Analysts

Jay Habermann - Goldman Sachs

Mark Biffert - Oppenheimer & Co.

Quentin Velleley - Michael Bilerman

Michael Mueller - J.P. Morgan

Alexander Goldfarb - Sandler O’Neill

[Ross Nussbaum] - UBS

Craig Schmidt - Banc of America/ Merrill Lynch

David Schick - Stifel Nicolaus

Mark Biffert - Oppenheimer

Mike Bilerman - Citi

Jim Sullivan - Green Street Advisors

Operator

Good day everyone and welcome to Kimco’s second quarter earnings conference call. Today’s call is being recorded. At this time, it is my pleasure to turn the call over to Ms. Barbara Pooley. Ms. Pooley, please go ahead.

Barbara Pooley

Thank you, Debby. Thank you all for joining us the second quarter 2009 Kimco earnings call. With me on the call this morning are Milton Cooper, Chairman and CEO, Dave Henry, President and Chief Investment Officer, Mike Pappagallo, Chief Financial Officer and David Lukes, Executive Vice President.

Other key executives are available to take your questions at the conclusion of the call. As a reminder, statements made during the course of this call represent the company and management’s hopes, intentions, beliefs, expectations or projections of the future, which are forward-looking statements.

It is important to note that the company’s actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those forward-looking results is contained in the company’s SEC filings.

During this presentation management may make references to certain non-GAAP financial measures that we believe help investors better understand Kimco’s operating results. Examples include, but not limited to funds from operations and net operating income. Reconciliation of these non-GAAP financial measures are available on our website.

Finally during the Q-and-A portion of the call we request that you respect the limit of one question with appropriate follow up so that all of our callers have the opportunity to speak with management. Feel free to return to the queue if you have additional questions, if we have time at the end of the call we will address those questions.

I will now turn the call over to Mike Pappagallo.

Mike Pappagallo

Thank you, Barbara, good morning. Although the economic and retailing environment remains tough we were encourage by the operating performance and financial results of our core shopping center business during this past quarter.

Before considering the reported non-cash impairment charges, which I will discuss shortly, our FFO per share was $0.31 that compares to a $0.66 level in the prior year’s second quarter.

Looking at things from the top down, the drivers of the decline were the absence of transactional activity in the current quarter, lower income from our structured investments portfolio and the affects of the recent equity raise.

We are using the term structured investments to cover the gamut of investments outside of the core shopping center business, which includes both the retail and non-retail preferred equity investments, various financings provided to retailers and others and former Kimco select investments.

The lower transaction levels and lower income from these non-core activities accounted for substantially all of the $57 million reduction in FFO before the impairments as the shopping center income remained roughly flat to last year.

David Lukes will provide his perspectives on our portfolio performance in a few minutes. However, suffice it to say that we were pleased with the resiliency of the portfolio as a whole with occupancy closing at 92.1% overall and 91.8% in the U.S. Same site net operating income of negative 1.8% reflects the realities of the lost rent underlying occupancy over the past year.

The positive leasing spreads and normal step increases enjoyed over the same timeframe helped to mitigate impact. Interestingly, the same site NOI generated from our consolidated assets fell by only 1.2%, while the declines in the joint venture assets was roughly 3.2%.

However, the proportionate affect of the JVs decline was to reduce the statistic by six times of 1% to bringing the composite to negative 1.8. I recognize that there has been increased inquiry regarding credit losses so let me give you some insight. Overall credit losses across the entire portfolio calculated against total revenues for the first half of the year averaged about 1.25%. T1he comparable amounts for 2008 were about 0.75%.

As we looked in to the rest of the year, our operating plan provides that those loss ratios moving up towards 1.75%. All of that said, we have been conservatively building reserves over a number of years and these reserves not only are booked on our billed receivables, but also on the accrued recoveries for CAM and taxes during the course of the year.

The composite available reserves represent about 2.5% of annualized revenues. So, while actual write-offs of uncollectible accounts are expected to increase our reserve positioning should mitigate the affect on operating results.

Now, let me cover the impairments. As described the earnings release, we incurred $176.5 million in non-cash impairment charges during the quarter. Although you can slice the data in any number of ways, there are essentially three groups.

Charges against non-core asset values, write-downs of our joint venture positions and shopping center portfolios, since accounting rules require that net positions and JV’s be calculated at fair value and finally asset valuation issues in the consolidated portfolio.

The portfolio of structured investments in non-core assets took a $126 million charge. The shopping center joint venture is about $47 million, including the $42 million attributable to the Prudential deals, while our wholly-owned assets generated only a $4 million hit.

As I mentioned in our first quarter conference call, continuing declines in asset values could result in reserves being required through the year and it is now coming to pass. These charges are more pronounced on our balance sheet due in part to the number of joint ventures that we have, which includes the preferred equity positions and as you all know by now that joint venture investments are treated differently than long-term operating real estate consolidated on the balance sheet.

The use of discounted cash flow techniques, using more current cap and discount rate assumptions result in the joint venture investments to be marked to fair value and it should come as no surprise that certain of the more recently acquired assets were subject to a negative mark.

In addition, we took a fresh look at the business strategies of our non-core assets and made certain assumptions on holding periods and alternative strategies, which generated additional charges. So, far in 2009 we have monetized about $70 million from the sale of equity securities and bonds and certain prepayments of our payoffs of debt instruments.

That number is actually a little higher that was in the press release, as we sold some additional securities yesterday. As you might expect, we focused on securities sales as at least there’s a market to sell into. The liquidation of the non-core assets will not be a quick process and while the impairment charges bring the carrying value to a more realistic current value, we’ll continue to explore multiple approaches to exit.

On the matter of balance sheet leverage; three months ago, Milton made a statement during our first quarter conference call regarding his view of the optimal level of debt, a REIT should have. The concept was easy enough, but the reaction was quite astounding. Some have agreed to the number. While others offered different points of view and percentage levels.

The one common point of agreement is that the industry needs to reduce leverage and Kimco is certainly no exception and while using debt percentages for a directional discussion is fine, it is difficult to manage or plan the balance sheet that way, simply because the capitalization number, be it on total market cap or NAV is subject to variability.

As we plan the next five plus years, the framework I’ll be using to assess and monitor de-leveraging will be more objective measures of net debt-to-EBITDA and fixed charge ratios and clearly there is work to do. Our net debt-to-EBITDA is 6.9 times; add preferred stock and it is 8 times.

For those who wish to look through to our joint ventures and pro rata consolidate the debt, the ratios jump to 7.9 and 8.6 times. These stats are now disclosed in our supplemental package. I believe we should target reducing the net debt-to-EBITDA levels by at least two turns, meaning that the baseline debt-to-EBITDA for our consolidated balance sheet should be under five. The related ratios, adding preferred and JV debt need to follow suit.

So, if our objective is to mitigate the effective debt, we need three things. First, lower absolute amounts of debt in relation to book assets. Disposing of over $1 billion of non-core assets is one of the primary ways to do it. This will take time, but the process of de-leveraging is far from a quick hit.

I’m not going to look to the equity market to bail us out. I don’t think our investors are going to keep buying into massively dilutive equity issuances solely to pay down debt. Down the road, there will be circumstances where value creating shopping center opportunities will be available. Issuing equity at that point would make sense if our price and the deal returns support it and that will help build EBITDA levels and the equity capital base.

The second point also relates to EBITDA. Right now, it is difficult to imagine increasing cash flows, but over the extended de-leveraging process, we will increase operating cash flows from our shopping center holdings both in the U.S. and as our Mexico developments are completed. This will also drive improvements in those key ratios.

Finally we must continue to space out maturities to avoid large refinancing issues in any one year. We’ve done a good job of that so far and quite frankly, there is not enough attention being paid to the differing maturity schedule of REITs and the various tones that have been written about debt levels over the past months.

To put things in perspective, if we could reduce debt by $1 billion on the balance sheet over the next few years for non-core asset sales and increase consolidated EBITDA from the current quarterly run rate of about $142 million by a net $20 million from a combination of NOI growth and ultimately some acquisitions financed without debt, the debt-to-EBITDA ratio could drop below five times. A point of reference, the Mexico development pipeline has potential rent aggregating over $60 million annually in the portfolio.

Notwithstanding the long term objectives, we’re dealing with the realities of today in accessing capital. I’m pleased to report that we are significantly through our 2009 capital plan. We’re in the process of completing the remainder of our secured financings on the corporate balance sheet, which essentially involves two actions, closing on a small package of mortgage financing of about $85 million and financing four construction loan extensions for two years aggregating $100 million.

On the joint venture side most the remaining debt maturities are in the Prudential Joint Venture. Kimco Prudential are also prepared to pay their respective shares of the $117 million payment due in August, for the guaranteed term loan on the portfolio held for sale.

So notwithstanding the debt ratios, the fact is that our liquidity is in excellent shape with essentially unused lines of credit of just under $1.7 billion and cash today of about $100 million. As we look to the balance of the year, we’re estimating a steady $0.30 quarterly run rate of FFO for the next two quarters, which would put the full year number in the vicinity of the low end of our guidance of $1.33 per share before the impairment charges.

As a result, I am tightening the rate significantly of the prior guidance and tilting it towards the low end of the range. We would expect to have some additional falloff in same store NOI down to a negative 1% to negative 3% range, and that leasing spreads on a full year will be flat. That latter assumption was made despite strong releasing spreads in the first part of the year, primarily to anticipate the roll down in rents for some of the junior anchor boxes that came back due to bankruptcy.

With that, I’ll turn it over the Dave Henry.

Dave Henry

Thanks Mike. As usual Mike has provided a very thorough overview of our financial results as we navigate yet another quarter in a severe economic recession, and a difficult commercial real estate market. While our quarterly net income and FFO were significantly impacted by impairment charges and a reduction of transaction gains and other nonrecurring income. We continue to believe that the basic vital signs of our portfolio are healthy, and that our retail properties are well positioned to weather the current economic storm.

With equity interest in approximately 1500 retail properties in 45 states, Puerto Rico, Canada and Latin America. We are very diversified both geographically and through approximately 13,000 leases and 7,000 separate tenants. Canada with its 98% occupancy, together with several strong U.S. regional markets, helps offset the weakness in California and Florida, where housing and consumer spending have been particularly hard hit.

Our latest quarterly supplemental financial report has several very detailed exhibits, which helped illustrate the diversity and granularity of our tenants and our properties. Of particular note is page 29 of our supplemental, which lists our top-50 tenants, comprising more than 1800 store locations.

Overall, we believe our shareholders can take great comfort in the high quality of retailers and their focus on food, off price and discount merchandise, and everyday necessities and services. In general, we have low average rents and occupancy costs, strong tenant sales productivity and a very balanced lease expiration schedule. The neighborhood and community shopping center property type has shown strength through past economic cycles with Kimco’s historic low point in occupancy just under 89% in 1992, a particularly tough year in commercial real estate.

I’d like to take a moment to discuss Mexico, which continues to be in the news with swine flu, drug violence and currency volatility. The construction phase of our shopping center investment program in Mexico is rapidly reaching completion. In the context of the 57 property retail portfolio, containing 13 million square feet, there are only 10 properties currently under construction as defined in our supplemental and we believe only one property will remain under physical construction by year end.

As a result, we are focusing intensely on leasing the 3.6 million square feet of space, which will become available over the next six months. This space consists of 2300 individual store units comprising more than $50 million of potential annual rent. In July alone 120 store units were leased totaling 215,000 square feet.

In looking at our Mexico retail portfolio it is also important to note the strength and profile of our anchor tenants. We have 19 Wal-Mart Supercenters and Bodega stores, nine HEB grocery stores, six Home Depots, two Sam stores, nine Soriana, Chedraui or Mega grocery stores, 14 Cinepolis theatre leases, which is the largest theatre chain in Latin America, 9 MM Cinemas leases, the second largest movie chain in Mexico, one BestBuy, one Sears and several other regional anchors.

Overall, we have 71 anchor leases totaling $29 million of annual base rent of which 33 are ground leases, representing $11 million of base rent, primarily Wal-Mart and Home Depot. All leases in Mexico have annual CPI increases, many have percentage rent clauses and all of our properties are grocery anchored with the exception of our Waldo Dollar Store net leases, which also have a food component.

Our relationship with Wal-Mart in Mexico is particularly large and strong. When you include Wal-Mart’s Vips restaurant format and their Suburbia clothing chain, we now have 36 leases with Wal-Mart in Mexico.

Looking at another area of investor and analyst focus, the monetization and disposition of our non-core portfolio remains a high priority for our management team. While our non-core securities portfolio is more liquid than many of our other non-core investments we are actively seeking buyers or investors for the assets in this portfolio.

In making cases, the investments are very profitable and may appeal to institutional or other investors on a pool basis. Investments which either produce strong current cash flow or have value creation upside can be sold even in today’s difficult market.

The lease details of the non-core portfolio in our supplemental report and our job over the next 24 months will be to substantially reduce the amount of these investments and recycle the capital opportunistically into core retail properties. While new shopping center transactions remain limited as buyers and sellers struggle to find the right cap rate and stabilized NOI. We feel optimistic about being able to purchase properties selectively at attractive yields.

As a source of capital for these transactions, we’ve remained committed to our institutional joint ventures and fund management operations. As a premier retail operating partner, we believe we can enhance our financial returns and reduce risk by teaming up with long term institutional capital partners.

Investing 10% to 15% of the equity, yet retaining 35% to 40% of the upside through a promote or incentivized management fee arrangement will provide excellent recurring fee income and a growing portfolio of equity positions.

As highlighted by the recent rapid change in property cap rates and corresponding leverage levels, we feel that going forward we will need institutional partners that are willing to invest on a unleveraged or very low leverage basis. We are also determined to keep our Kimco parent completely separate financially from the joint ventures by relying solely on non-recourse property debt or investing on an unleveraged basis.

As cap rates have risen, opportunity funds and institutional investors are starting to become more active in evaluating acquisition opportunities and, we have had numerous discussions with interested parties as they seek to reenter the market for high quality core and value add retail properties.

Now I would like to turn to David Lukes, to provide comments and perspective on our U.S. portfolio operations and performance.

David Lukes

Thank you, Dave. Good morning. I’d like to start by giving you some details on our last 90 days of work and then conclude with the trends we’re seeing and what strategic actions we’re taking to create some value.

Our second quarter leasing in the U.S. portfolio remained active with 392 leases, totaling 1.5 million square feet. This volume represents a 32% increase over the same period a year ago, and the activity on new leases was strongest in Mid-Atlantic Region, the Southeast Region and in Florida, and was split almost in half between junior anchors, re-letting and shop space absorption.

Vacates on the other hand, also continued on a steady and high pace similar to last quarter, with just over 1 million square feet of tenants leaving our shopping centers. The net result of this leasing activity was at the finish of the quarter, 91.9% in total occupancy and 91.8% on a pro rata share basis, representing 44 basis points decline in total, a 40 basis point decline pro rata.

With these broad market numbers in mind and with the fact that our U.S. portfolio spans across every major market, I’d like to focus in detail on what local trends we’re seeing and can do that best by highlighting two aspects, stability and change. From the stability standpoint, I think it may surprise many that large sections of the country were flat or higher in occupancy this quarter.

The Mid-Atlantic, Southeast, Northeast, Puerto Rico and Central Regions of our portfolio are passing the stress test of this economy and are witnessing normal leasing activity with no great rise in vacates. Demographic changes, increased competition and the effects of unemployment have simply had little affect on these portfolios year-to-date in 2009.

Stability has also continued on our long standing desire to minimize tenant improvement allowances on the belief that we should be investing in our real estate and should avoid investing in our tenant’s operations.

Concerns about TIT and other sources of credit for the retail industry is a very real concern, but the date has not warranted any change in our operating strategy regarding funding. Our average TI’s for new deals this quarter was $5.62 and represents money that will in all cases go to building improvements that increase the worth of our properties.

The bulk of our activity, also a stable source of occupancy was the focus on renewals which carry $0 in TI and almost no brokerage commissions. Our best customers are existing ones and our most secure deals are inexpensive. From the standpoint of security, a dominant factor is also location.

When we look through the vacates for the quarter, it’s a noticeable fact that the majority of spaces are in high growth suburbs or in shopping centers that are much newer than the average age of our core portfolio. When we dig deeper, we also note that vacates unrelated to chain bankruptcies tend to be businesses that are in the early years of their base terms and simply didn’t have a chance to stabilize their sales before the economy hit the newer housing areas.

The result is a direct correlation between shopping center age and cash flow security. Going forward age is on our side. Change on the other hand has produced specific market trends. 70% of the vacates this quarter were in the western regions and Florida, yet only 24% of the new leasing activity, which result in a larger negative occupancy trend than the remainder of the regions.

These areas of the country were hit hard very hard with unemployment, declining sales and overleveraged consumers. We are continuing to see stresses at the local level and the majority of our rent concessions and payment plans are in these markets and at keeping good businesses open until the markets improved.

The immediate effect in these markets has shown a mild increase in dark and paying tents, but still a very low 1.7% of our total pro rata GLA. The expiration schedule on these D&P tenants is stretched somewhat evenly over the next 15 years and consists mostly of credit tenants who continue to pay the contract rent in their lease terms.

Change is also apparent in the junior anchor leasing level where the best spaces lease first and the remainder are facing rent roll downs of anywhere between 10% to 40%. As we use our long standing relationships with national tenants to back fill boxes left by Circuit City and Linen N’ Things. Our numbers this quarter however do reflect a noteworthy trend.

As Price Pritchett once said, change always comes bearing gifts. Our gift is clearly below market rent. New leases for the quarter averaged 17% higher rents than the previous tenants and renewals held positive at 1.2%. While this is somewhat of a staggering statistic in the face of a very tough economy, the high quantities of below market rents in our portfolio are providing shock absorbers to the bottom line.

As an example we had a tenant this past quarter paying $10 a square foot. Market rental last year was $20. The market rent for the space had fallen by 20% to $16, but when the space was vacated unexpectedly and released, we saw a 60% increase in the rent over the prior tenant.

As only 2% of our portfolio rolls to market every year, the spread to market is rarely achievable on a timely basis, but in times of distress like today, bankruptcies and unexpected move outs do trigger change that bears gifts. These qualities of stability and change that I’ve mentioned are the effects of the current economy on our portfolio and represent facts.

The real story is what actions we are taking to create value. Leasing remains our best source of value and we continue to push our productivity through relationship marketing and old fashioned prospecting for local tenants. We’ve hired four experienced leasing directors during this past quarter two in Florida and two in the West Coast.

Dedicated in house leasing with tenured professionals historically has been our advantage over local landlords and the talent pool in the market right now is providing great additions to our regional teams. We’ve also increased our partnerships with local brokerage houses and have increased our commission schedules in key markets to take better share of those tenants represented by tenant brokers who very much value our ability to pay commissions on time and in full.

Cost reduction has also been a targeted source of momentum and we have been creating programs that focus on two different strategies. Reducing the cost that a tenants CAM will and reducing tenants other operating expenses that are not a part of CAM, but reduce their overall occupancy costs, thereby making our properties more competitive.

The CAM related reductions have been primarily those controllable items such as sweeping, maintenance, landscaping and utilities. As an example, we now have a growing pool of properties that we’ve installed water meters and electric meters that are not on traditional timers, but are controllers that measure humidity, rainfall and daylight hours and can be adjusted daily as opposed to timers which are less efficient.

The result is indeed nickels and dimes a day, but in aggregate makes us more competitive. The costs that are not related to CAM come from the theory that a dollar in rent is no different to a tenant than a dollar in other real estate related expenses. Trash and energy are two primary categories that the landlord is traditionally not in the chain of involvement.

For example, we’ve created a trash program where we bundle the total trash removal for a property, traditionally negotiated and paid directly from each tenant and created a larger pool of work that’s resulted in a 20% reduction in total cost. Over 200 properties are now on this program.

Kimco remains outside of the billing process and is not taking responsibility for payments or tenant trash removal, but acts as a broker on the tenant’s behalf, negotiating lower rates in return for a larger contract with vendors.

Energy is also a new program. As we prepare to install three solar systems in New Jersey this quarter, where rates are high, federal and state rebates are generous and our tenants will be buying electricity from a Kimco subsidiary with rates that are flat for a number of years and can therefore hedge against future rate hikes.

In our minds, the costs associated with this strategy are no different than expanding a building for an existing high credit anchor. We purchase the equipment and then tenant pay the healthy return on that investment through a lease modification. Our returns are in excess of traditional redevelopment rate turns and the contractual payments pay for the system in a very short period of time.

Creativity in these traditional and non-traditional programs are result of size and leverage and we will continue to work on revenue and cost one dollar at a time to create value long-term on our properties and with that, I’ll turn it over to Milton.

Milton Cooper

Thanks David. We’ve been through many cycles in our long history. The current downturn in my opinion is driven by the consumer and the consumer accounts for close to 70% of GDP. Since last September, the consumer cut down on shopping and walked by the retail stores, straight to the savings bank to deposit the money that he would have spent in the stores.

The consumer is worried and this is confirmed by the recent report of the drop in consumer confidence. The consumer is focusing on necessities and he is trading down, he is going from the department store to the off price retailer. Please note that one of the few retailers that had comp store sales increases was in off-price retailer TJ Maxx.

Supermarkets, drug stores, discounters, warehouse clubs and off-price retailers will increase their share of market. Department stores will lose market share. We will not be immune from the problems of the consumer and the retailer, but I believe we are better off on a relative basis and review of our top-50 tenants supports this belief.

Our plan to monetarize the non-core assets would not only enable us to focus exclusively on our shopping center business, but will help to reduce debt. Now, an advantage of being around for a long time is that leases entered into more than 15 years ago, have lower rents than those that have been entered within the past ten years and just as the homeowner is better off in tough times with a low mortgage, retailers are better off in tough times with low rents.

My partners, the two Davids and Mike work well together and they have fostered the team spirit down the line. Historically, Kimco has done well in times of stress. We have substantial cash and $1.7 billion of unused credit lines and most important, a fabulous team to execute and with that, we would be delighted to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today will come from Jay Habermann with Goldman Sachs.

Jay Habermann - Goldman Sachs

Hi, good morning everyone. Here with Johan as well. I guess for Mike, as you walk through the reserves and you said the 2.5% you set aside thus far and you anticipate roughly 1.75%, sort of the ramp up in the back half of the year. I guess as we look forward in to next year and if you think occupancy could trend below the 90% or 89% range, where perhaps you bottomed historically?

I mean, would you anticipate taking further reserves just to be cautious at this point in the cycle? Then secondarily, can you walk through the impairments? Just give us some sense of, how you’re arriving at fair value especially in the Pru Kim and preferred equity, as well as Valad?

Mike Pappagallo

Okay, Jay on your first point, I just wanted to make one clarification that as we think about trending upward in the second half of the year, that those estimates have been provided for or considered in our guidance. As we look into next year, if there is anticipation in further bankruptcies, decreases in occupancy, recognize that we have to provide and will be providing our normal bad debt reserves through the process into next year.

I think the point that I wanted to make is that because we have a substantial amount of reserves. In effect anticipating that there are going to be increased losses and to the extent that there are, that our reserves will be sufficient to cover those increased losses. So that the affect on the profit and loss statement will be somewhat muted, that there will be a more historic charge-off of issuing expensing to the P&L.

So that’s why we’re not expecting a large spike or reductions in NOI from credit losses because of existing reserves built over a period of years. With respect to impairments, the process essentially, in particularly for those assets, which are acquired to be estimated at fair value on discounted cash flow basis.

We essentially look to the marketplace, we looked at studies for average cap rates and discount rates, using things like core past studies and the like things that are in affect verifiable from an audit perspective. As you know, cap rates on strip centers and other assets and as they range across the board and depending on whether it’s a development deal or not.

The discount rates associated with associated with DCF can range from anywhere from 12% to 15% and beyond. So every asset was evaluated using the methodologies in accounting and if you needed to create a fair value estimate on the assets it was a discounted cash flow using current cap rates and discount rates, but also to the extent there was debt. You fair value the debt as well using current interest rates in relation to what interest rates were on the underlying debt.

We did review over $2 billion of assets on our balance sheet and we came up with these adjustments. Certain items I mentioned, Valad, we had done an analysis of the Valad balance sheet, and came to the conclusion that as with respect to our debt instrument that it was recoverable. As you know from previous quarters, we have written off the common stock.

Jay Habermann - Goldman Sachs

Great, thank you.

Operator

We’ll go next to Mark Biffert with Oppenheimer & Co.

Mark Biffert - Oppenheimer & Co.

Good morning. I was wondering, if you could talk a little bit. You made a statement in your release about rent guarantees supporting some of the performance during the quarter. I’m just wondering, how much exposure you have to rent guarantees? What the potential impact would be if those roll off?

Then also if you could talk a little bit about any exposure that you may have or conversations that you’ve had with banks that announced or come out and saying that they’re going to be closing branches, and the potential impact to the portfolio and what you could do for alternative uses in that regard?

Mike Pappagallo

I’ll cover the first part, with respect to some of the bankruptcies. There are about ten leases, of which there is a guarantee for the predecessor corporation. It’s announced about $600,000 a quarter of rent. The obligations continue through the term of the leases. So that in effect helps the support. Notwithstanding the fact that it’s reported as a vacant space which it is. The strong parent guarantee underlying some of those leases helps keep the NOI going.

Dave Henry

With respect to the banks, they’ve certainly been a couple of articles in the past week about, banks kind of closing some of their locations and retail formats, but there has been no affect to-date. I would say that the pad leasing for banks pretty much shutdown six to eight months ago. That’s not a necessarily bad thing, because for a long time a lot of traditional pad users were simply out priced in the market by the banks that were expanding.

So, what we’re likely to see is other types of traditional pad users still be active. For instance, a Walgreens, Fast food retailers, items of that sort. So most of the banks that are in our portfolio tend to be on out-parceled and those usually are the first spaces to get released.

Mark Biffert - Oppenheimer & Co.

Okay. Thanks.

Operator

We’ll take our next question from Quentin Velleley with Citi.

Quentin Velleley - Michael Bilerman

Good morning, I’m here with Michael Bilerman. My questions just relate to the Prudential Joint Venture. It looks like you still are holding at a book value cap rate around 6.5%. I think the debt yield is around 10%. I’m wondering if you can give us an update on the debt refinancing situation and the projected capital commitments by Kimco. Secondly, whether there has been any progress on the $500 million of assets that you’ve been trying to sell. Thirdly, if Prudential did want redemption, if it’s possible what the options are there. Thanks.

David Lukes

I will reiterate to you Quentin that with respect to the obligation to pay the remaining $600 million or so of guaranteed debt, of which over a little over $100 million is due this August, that Kimco and Prudential are committed and prepared to make that payment. I guess maybe the question could be asked again at the end of August, once Kimco and Prudential have made their respective payments.

In our capital plan, we have assumed that we will be responsible for 15% of that remaining obligation and Prudential 85%, with respect to the sales bucket, Dave if you’d like to talk about where we are with respect to the assets.

Dave Henry

Sure. In conversations with Prudential they’ve accelerated their efforts to sell not only some properties that were designated as sale assets, but also several properties that were in what we call the whole bucket. We have had some success recently on the sale bucket closings.

I think three or four have closed over the last couple of months after there being no acquisition activity for more than six months. So, the market’s picked up a bit on the sale assets and Prudential has encouraged us to put certain selective hold assets on the market as they try to increase the liquidity of their various funds that are invested with us in the Pan Pacific Venture.

Operator

We’ll take our next question from Michael Mueller - J.P. Morgan.

Michael Mueller - J.P. Morgan

Hi, at first Mike I was wondering, can you clarify what you said at the tail end of your comments with respect to two edge leasing spreads. And then the question is, when we look page 40 in the supplemental, the $1.6 billion of book value for the non-core investments. Can you give us a sense as to how much current recurring income or NOI that pool of assets in aggregate is throwing off?

Mike Pappagallo

With respect to the non-core asset, in the supplemental, you have a guidance range. For 2009 with respect to recurring and non-recurring income, from the page 38 for the non-core portfolio, so that will give you some guidance into how much income is left available. Can you repeat the first part of your question again, Michael?

Michael Mueller - J.P. Morgan

Yes, it was second half leasing spreads that you’ve talked about at the back end of the guidance, I missed that.

Mike Pappagallo

Yes, the only reason why we made that assumption is, because as you probably heard David talk about from time-to-time, that in terms of leasing spreads on some of the junior anchors, the former Linens ‘n Things and Circuit Cities and the like that some of those rents were, relative to current market, above market.

So as we start to release some of those locations the chances are good that you will see some negative absorption or negative leasing spreads on those assets. So, to contemplate or to anticipate that phenomenon, I looked at the second half of the year of potentially being negative and therefore the full year to be flat.

Michael Mueller - J.P. Morgan

Okay. Going to the page 38, so if we’re taking a look at that, it’s about $50 million it looks like. Is that correct? $50 million or $70 million, okay, I see it. I see it. Thanks.

Operator

We’ll go next to Alexander Goldfarb with Sandler O’Neill.

Alexander Goldfarb - Sandler O’Neill

Hi, good morning. Can you just remind us what your loan loss reserves are, your provision on the preferred equity in the loan portfolio and then also as what percent you’ve already marked down, so from the original value that it was to where it stands down what that markdown represents?

Milton Cooper

Recognize that with respect to mortgage receivables, or other financing receivables, we have in relative number, few of them. So, we look at them on a specific asset-by-asset basis, so unlike core shopping center credit losses we don’t need to apply averages or historical experience. Overtime to the extent that there have been write-offs; we have taken them on a specific asset basis.

Preferred equity again even though you may contemplate it as a loan, we are treating it and evaluating it from a real estate perspective as an equity investment and applying any of the impairment criteria that we did for other assets. So, of the total impairment charges that we took this quarter, probably about $40 million of it relates to the preferred equity portfolio.

Alexander Goldfarb - Sandler O’Neill

So, you don’t take loan loss reserves against the either loans or preferred equity.

Mike Pappagallo

Let me repeat with respect to loans we don’t take reserves, because we have so few loans we make specific determination as to whether they are collectible or not. With respect to preferred equity, we don’t apply loan loss reserves, we evaluate them as we would any other real estate investment and if we deem that we cannot recover our investment, we are going to take an impairment charge and in this quarter we took a $40 million impairment charge, the total related to those preferred equity recoveries.

Alexander Goldfarb - Sandler O’Neill

Thank you.

Operator

We’ll go next to Ross Nussbaum with UBS.

Ross Nussbaum - UBS

Hi, good morning everyone. My question on page 40 of your supplemental, as I the go through your non-core investments and try to think about the billion of deleveraging that you’d like to occur from that basket. It would seem to me that outside of the Westmont investment we are talking about a lot of let’s call it nickels and dimes in terms of sizing of these investments. What do you think is a reasonable timeframe to work through this I guess that’s part A and then part B is how much of this portfolio if you will is on the market today?

Dave Henry

We are trying to target maybe a 24 month accelerated period to really make a major bite out of this. I think report card that would be reasonable would be somewhere in the $600 million to $700 million bite out of this within a 24 month period. You’re right some of these are very illiquid investments and in the sense they are non-income producing.

Others are income producing assets or in some cases we have certain development assets that will be coming on stream and clearly have value in excess of our basis. That’s just one example we have a senior housing development venture of seven assets that will be coming on stream over the next 12 months.

Those assets still trade at very low cap rates and we think there is an embedded gains in that portfolio. So, there maybe an opportunity to mix and match certain non-core investments that are above water with some that are illiquid and make an opportunistic sale of those assets.

So, we are accelerating those efforts. A number of these properties are physically in the market, others we have joint venture partners and we’ve had very active discussions with these partners about the best way to disengage or monetize these investments and we believe we will make progress overtime on those activities.

Another example of course, we like to point to positive ones in Canada many of our preferred equity investments have substantial unrealized gains of those investments. Those are other areas that we could use to help facilitate the sale of other investments that maybe more difficult.

Ross Nussbaum - UBS

If I could ask just a related follow up, it looks like your detailed FFO guidance you kept the low end of the range you trimmed the high end a bit and looks like it’s sort of a little here, little there, nothing major as you go through all the line items. I’m just curious from a macroeconomic perspective, as we think about the trims to each of these line items. What has changed from 1Q to 2Q in terms of taking the high end off the table, is it just the continued economic weakness and job losses?

Dave Henry

I think it’s the advantage Ross, of three more months of actual recognizing that even more transactional activity that we had contemplated is less and yes, the fact that in certain of our initial forecast, particularly in the non-core part of the puzzle and thinking about say, the hotel portfolio that we have, the economics continue to decline and occupancy struggles.

So, we’ve ratcheted down, our expectation for FFO. So, it’s a combination of everything and to your point it is a lot of nickels and dimes and we attempt to be as precise as we can, but there’s not been one big thing that’s changed the upper end of the guidance range.

I think the other thing though to consider is in my prepared remarks is that, since you are dealing with at least in the second quarter outside of the impairment charge, is been pretty much as a steady quarter, very little transactional activity or noise. That’s why I think as we get to the second half of the year, as long as we continue to shift steady that we can get to the low end of the range.

Operator

Our next question will come from Craig Schmidt with Banc of America/Merrill Lynch.

Craig Schmidt - Banc of America/ Merrill Lynch

Good morning. I was wondering how you may be viewing joint ventures any differently given some of the write downs in the recent past.

Milton Cooper

I think there’s two aspects. We learned in retrospect, one is that leverage levels, we’re very conscious of leverage levels going forward in our joint ventures, whether they be in connection with an institutional joint venture or a one-off joint venture and secondly, with respect to debt, we want to make sure as I said that debt is kept completely separate from Kimco itself.

As most of the analyst community knows, there is a couple of occasions where Kimco stepped up on behalf of a partnership and guaranteed an amount of that debt. We won’t do that in the future for sure, but the aspect of using other people’s capital to be competitive and then buyer properties and enhance our returns, reduce risk still makes sense to us long-term.

We make a little over $40 million a year of fee income on our long-term recurring basis from our current joint venture partners. Almost all of these partners are wonderful institutions that are very sophisticated investors. They realized in many cases they invested near the top of the market. They do not begrudge that fact.

They are disappointed in the mark-to-markets they’ve taken, but they still remain committed long-term to have a certain proportion of their assets invested in real estate and a certain portion of those assets invested in retail real estate. We would like to be the partner they turn to invest their money in retail real estate.

In addition, we have lenders and banking relationships, which are beginning to turn to us for help, in understanding and underwriting troubled retail that they are beginning to struggle with. We would like to provide services on a fee basis for them and perhaps opportunistically acquire assets. These banks may find themselves in ownership of over time.

So, we still believe in joint ventures. We are trying to learn from things that have occurred over the past couple of years in our ventures and certainly the accounting is another aspect. Maybe Mike can comment a little bit about the preferred equity accounting, but in general I think, we still believe in the venture concept.

Mike Pappagallo

Craig, I just want to make one point to that, joint venture accounting and the impairment analysis certainly if you have joint ventures it’s much more pronounced. By no means am blaming or pointing to the accounting literature as the cause of the problem, but let’s face it. If you think about how investors and analysts are looking at REIT balance sheets and trying to apply current valuation, they are marking down things to market and it certainly has been reflected in everyone’s stock price.

I think the disadvantage with joint ventures is that marking is now manifest itself into P&L. So, our markdown is obvious and hits the bottom line whereas for those REITs that they have a consolidated portfolio, you’ve marked them down in your valuation, because of different rules they are not flowing through the income statement.

So, I’m not diminishing or minimizing the affect of the impairment. All I’m saying is that it’s a recognition on the financial accounts or something, which is already underlying the valuation of real estate right now.

Craig Schmidt - Banc of America/Merrill Lynch

Thank you that’s helpful.

Operator

We’ll take our next question from David Schick with Stifel Nicolaus.

David Schick - Stifel Nicolaus

Good morning. Two accounting related questions. Are bad debts included in your same store numbers? What are the fixed charges and interest charges just looking at JVs?

Mike Pappagallo

Bad debts are included in same store coverages. I believe the fixed charge coverages ratios, David, are contained in our supplemental, page 10. We give you debt service and fixed charge including per added JV, those numbers are 2.0 and 1.8 respectively.

David Schick - Stifel Nicolaus

Thank you.

Operator

We will now take a follow up from Jay Haberman - Goldman Sachs.

Jay Haberman - Goldman Sachs

Good morning again. Question on Mexico, I know Dave you gave comments and continue to like the market. Obviously, leasing continues to be pretty slow and a bunch of the portfolio stabilizes in the next year or so. I guess just from Mike, is TALF something you’re looking to consider just given that perhaps DDR and Bernardo are moving in that direction?

Milton Cooper

I’m sorry?

Mike Pappagallo

TALF.

Milton Cooper

TALF. No, for Mexico?

Jay Haberman - Goldman Sachs

No that was for Mike. In terms of the U.S. [Multiple Speaker]

Milton Cooper

With respect to Mexico, again I’m slightly biased here. In the U.S., we do not have leases with cost of living increases. In Mexico, every single one of our leases has cost of living. I believe five years from now you will not see that in Mexico. You will not see tenants being willing, you’ll see them migrate to what is happening in the U.S., and percentage rents and cost of living increases will not be there.

So to the extent we have that in Wal-Mart and Home Depot, ground leases, as an example. I think long term will be wonderful assets for our shareholders to hold on to. We still believe that Mexico in many ways is under retail. Our tenants are still expanding down there and things are okay.

I mean, leasing activity is still active. We’re signing lots of leases. They have not been immune to the slowdown that we see in retailing and consumer spending in the U.S. and certainly some of the original lease up projections are not being achieved.

Long term we do believe we are creating value for our shareholders in Mexico, through the development of the program. We are going to complete that development program over the next year, and there is upside as these spaces are leased and income comes on stream. In TALF, we’ve taken a hard look at it. Perhaps Glenn and Mike do you want to comment on it.

Mike Pappagallo

I would just say for TALF, Jay that on the corporate balance sheet we really don’t see a need to do it. We are dealing with the particular leverage levels in question. I think our strategy ultimately we need to refinance debt maybe a little more to the unsecured markets.

Our capital plan doesn’t anticipate needing to go get a heck of a lot more new mortgages other than refinancing, those are existing today. I would love to go back to the unsecured bonds market as the pricing continues to come in.

TALF was built for being considered perhaps maybe for some of our joint venture maturities, again loan to values are going to be an issue. We’re looking at it, but right now I would not consider it a critical part of the refinancing plan on the joint venture line.

Jay Haberman - Goldman Sachs

Well, imagine you wouldn’t use it in a case where you plan to dispose of the assets. It would be more for Keer longer term hold portfolios?

Mike Pappagallo

It would be something that where the loan in effect refinances and assets that are already at loan to values that are roughly within the TALF scheme. You mentioned Keer, which is a perfect example, because many of the mortgages mature in Keer over the next few years all at that low loan to value. TALF is not going to solve maturities coming due where current LCD’s are 60%, 70%, 80%.

Jay Haberman - Goldman Sachs

Thanks.

Operator

We’ll go now to a follow-up from Mark Biffert with Oppenheimer.

Mark Biffert - Oppenheimer

Yes, Mike I was wondering if you could talk about, you guys may mention that you would reassess your dividend in January. I’m just wondering looking at what your good run rate would be in terms of our forecasting, do you think would be a good number for a dividend or minimum payout number?

Mike Pappagallo

Come on, Mark. It is too premature to talk about a 2010 dividend. We are going to go through the rest of the year, evaluate and look at our projections for next year and certainly need to have the board weigh in and provide their approval, what I can say is, what I said in previous forums is that as we move forward our dividend rate which will become a more normalized level, you won’t see 44 and 6 in opposite quarters is going to be based on our expectations of recurring cash flow. Ignoring any potential transactional activity or one timers. I’m really not at the point yet where I can provide insight in terms of what that level would be.

Mark Biffert - Oppenheimer & Co.

So, in terms of a payout ratio, I mean would it be back to say historically what it would be if we could get back to whatever that core number is and use an historical payout ratio that would be equivalent?

Mike Pappagallo

I think that’s a fair approach, because when you consider FFO payout ratio I think, we have about things like CapEx, and loan amort, probably a reasonable consideration.

Mark Biffert - Oppenheimer & Co.

Okay. Thanks.

Operator

We’ll go next to a follow-up from Mike Bilerman with Citi.

Mike Bilerman - Citi

Good morning. It’s Mike Bilerman. I had a question, Mike in your opening comments you talked about one of the ways to delever was potentially to go out and buy assets and issue equity for those assets. I’m just trying to sort of put that into perspective of still raising equity at that point as sort of diluting the rest as a whole that isn’t it just better to issue the equity to get the balance sheet in the position and evaluate future opportunities on a leverage neutral basis. I think you get to the same spot.

Mike Pappagallo

I understand that approach Michael, but I do think that considering where the stock price is and considering where the potential opportunities are, I think it makes more sense to wait until the opportunities are there and then to be able to issue the equity to the investment community, recognizing that they’re going to have positive spreads, that they are going to have value creation as opposed to just saying give me the money now, at very compressed and depressed levels of stock pricing let’s hang on and wait.

As what somebody in the investor community or the analyst community said, dilution is forever. I recognize that we needed to dilute the company’s equity position to get out of the large levels that we had back in March, but I don’t think that that’s, we should be doing it as a steady diet.

Dave Henry

We do have those two other alternatives, which is making progress on selling and monetizing non-core, which could produce cash to that we could then reinvest in retail properties and, also selectively using institutional JV partners, if it would provide us capital.

Mike Bilerman - Citi

Just to clarify, the $1 billion of non-core sales you’re talking about. How much EBITDA is there on that $1 billion today versus sort of what is to come in the future? As we’re thinking about the deleveraging obviously, there’s some income level on these. I think there’s probably some capital left to spend to get to the billion.

Dave Henry

I used the billion as that hypothetical, knowing where we are. It’s hard to say, when you go with the actual billion, which assets they’re going to be, but maybe the best thing to do Michael is just look at I guess I think with page 38, where we have the guidance range of what the EBITDA coming from the non-core is and then speculate how much EBITDA will be lost if we sold a proportion of those total non-core assets.

Mike Bilerman - Citi

If I think you made mention also that your pool of assets that you’re going to draw from is not just that non-core page and it could be developments that are on the development page right now that are going to stabilize, it could be some Mexico assets.

Mike Pappagallo

I think what Dave was saying is that, within the context of the non-core, we would be drawing from that. The example that he gave was, within the non-core there certain assets under development like the senior living assets that might be conducive to putting into a pool because there will be future cash flows coming from it.

Milton Cooper

We also have another category of preferred equity that are retail investments that do have unrealized gains in those, and we might be able to use some of those as well. They’re not technically non-core, but they are still preferred equity and they represent somewhat of a drag on our balance sheet due to the accounting that Mike talked about.

Mike Bilerman - Citi

If I could just clarify just the Prudential, the last question on Prudential for now. You mentioned that they have asked you to sell more of the whole bucket of assets. Is there any potential, I don’t know if there is any put call or a buy sell upon which just given the reduced equity in that fund, that they may just say, we will trigger the buy sell, we’ll take it and we’ll just liquidate because we want out.

Mike Pappagallo

No, there is certainly no put or call feature in our joint venture and we are working on a cooperative basis with them across the board.

Operator

Ladies and gentlemen, we have time for one more question. Our final question today will come from Jim Sullivan with Green Street Advisors.

Jim Sullivan - Green Street Advisors

Thanks. During the prepared remarks Mike said, your intention is to sell non-core assets and use the proceeds to de-lever. During David comments, you talked about selling non-core assets and recycling the capital opportunistically. Those comments strike me as a bit contradictory; can you clarify what the strategic plan is at this point?

Mike Pappagallo

Well, I think what my point was that selling non-core provides an option to use as capital. Since money is fungible, to the extent we have proceeds from non-core that could be used as well as raising equity or using joint venture capital, remains one of three options we have, if we purchase properties on a selective basis.

Jim Sullivan - Green Street Advisors

Okay. Thanks.

Operator

Ladies and gentlemen, this does conclude our question-and-answer session, Ms. Pooley I will turn it back to you for closing remarks.

Barbara Pooley

Thanks Debby, as a reminder, our supplemental is on our website at www.kimcorealty.com. Thanks everybody for participating today.

Operator

Ladies and gentlemen, we thank you for your participation. This does conclude today’s conference.

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Source: Kimco Realty Corporation Q2 2009 Earnings Call Transcript
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