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Kimco Realty Corp. (NYSE:KIM)

Q3 2007 Earnings Call

October 26, 2007 10:00 am ET

Executives

Barbara Pooley - Vice President of Investor Relations

Milton Cooper - Chairman and Chief Executive Officer

Dave Henry - Chief Investment Officer

Mike Flynn - President and Vice Chairman

Mike Pappagallo - Chief Financial Officer

David Lukes - Executive Vice President

Analysts

Ambika - Citigroup

Jay Habermann - Goldman Sachs

Christine McElroy - Banc of America Securities

Jeff Donnelly - Wachovia Securities

Craig Schmidt - Merrill Lynch

Matt Ostrower - Morgan Stanley

Michael Gorman - Credit Suisse

Michael Mueller - JPMorgan

David Harris - Lehman Brothers

Lou Taylor - Deutsche Bank

David Fick - Stifel Nicolaus

Scott O'Donnell - MetLife

Operator

Good morning, ladies and gentlemen. And welcome to theKIMCO's Third Quarter Earnings Conference Call. Please be aware today'sconference is being recorded. As a reminder, all lines are muted to preventbackground noise. After the speakers' remarks there be a formalquestion-and-answer session (Operator Instructions).

At this time it is my pleasure to introduce today's speakerMr. Barbara Pooley.

Barbara Pooley

Thank you. Thank you all joining third quarter KIMCOearnings call. With me this morning are Milton Cooper, Chairman and ChiefExecutive Officer; Dave Henry, Chief Investment Officer, Mike Flynn, Presidentand Vice Chairman; Mike Pappagallo, Chief Financial Officer; and David Lukes,Executive Vice President.

Several other executives are also available to take yourquestions at the conclusion of our prepared remark. As a reminder, statementsmade during the course of this call represent the company and management'shope, intension, beliefs, expectations or projections of the future, which areforward-looking statements.

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

During this presentation, management may make reference tocertain non-GAAP financial measures that we believe help investors betterunderstand KIMCO's operating results. Examples include, but are not limited tooperation in net operating income.

Reconciliation of these non-GAAP financial are alsoavailable on our website. Finally, during the Q&A portion of the call werequest that you respect the limit of two questions with appropriate follow-upso all of our callers have an opportunity to speak with management. Feel freeto return to the queue if you have additional questions.

I'll now turn the call over to Mike Pappagallo.

Mike Pappagallo

Thank you Barbara and good morning. It certainly has been aneventful three months in the market, since our last earnings report. Perhaps wehave hope that a few billion dollars writedowns by financial institutions andan accommodating fed will clear the decks and bring a degree of business asusual back into real estate, sales and financing market.

But at this point, that's probably is wishful thinking asthere still appear to be more questions than answers including thosesurrounding the health of the consumer.

For KIMCO, there were three major themes for the pastquarter. First, building as much liquidity and capital availability aspossible. Focusing on the blocking and tackling of leasing and portfoliomanagement, and also tempering our acquisition pace in light of moreopportunistic transaction that may be available in the future.

The liquidity action took various forms, the mostsignificant being the renewal of our credit facility to renew four-year termswith a one-year extension option, and upsizing it from $850 million to $1.5billion.

Despite turbulent markets, we were encouraged by thecommitments provided by so many of our relationship banks, such that we wereable to obtain commitments of almost $2 million before we reduced it to thedesired level.

And a reduction in the spread pricing to a level of 37.5basis points over LIBOR plus a 12.5% facility fee, and increase the covenantsflexibility was also a positive in light of what is going on in the markets.

We also issued a new series of preferred stock for $460million, which allowed us to race a more permanent form of capital to furtherincrease balance sheet flexibility without issues common shares.

We also recashed our existing Canadian dollar creditfacility to include a U.S. dollar borrowing option, and in Mexico we're in theprocessing of increasing our peso facility and have begun to place U.S.-stylenon-recourse financing on our complete Mexico developing project to helprecycle capital.

Overall we continue to position the balance sheet to captureopportunities in changing markets. With respect to the third quarter operatingresults, FFO per share of $0.57 were $0.02 higher than consensus, and $0.01above last year's third quarter.

As you are aware we captured a significant portion of ourtransactional or related activity in the first half of the year, including asignificant Albertson's distribution as well as large profits from themonetization our preferred equity position in Canadian self-storage and ourmixed-use asset in Lower Manhattan.

This resulted in a relatively small quarter-over-quarterincrease this go-around, but on year-to-date basis FFO per share is up 26% to$2.50. We have also tightened the full year guidance range to $2.56 to $2.59,which represents a fourth quarter range of between $0.50 to $0.53, and thefactors include timing on merchant building sales currently under contract aswell as a few other transactional items schedule for the last couple of months.

Looking past the quarterly variation, the portfolio metricsonce again points a solid execution on asset management strategies. Portfoliofundamentals remain intact as evidence by another increase in occupancy to96.2%; same-site net operating income growth of 4.2%, spreads on new leases of17%, and an overall increase of 12% once factoring in options and renewals. Andwhile there is real concern about the health of the consumer from the stress inthe housing market, we believe that our centers are well positioned towithstand these issues, particularly in California and Florida, the two statesmost closely associated with the subprime mortgage mess.

While those states have experienced declines in the value ofhousing, the resiliency of our property type, primarily focused on consumeressentials, and the strong demographics of our locations will mitigate anypotential issues on occupancy or rental rates.

As I noted earlier, we have not been as aggressive onpricing in the acquisition market, which has slowed the number of transactionsclosed into our investment vehicles. That said, our management business remainson solid footing, and Dave will highlight some of the initiatives to respond tothe changing landscape.

Despite the origination slowdown, the business plans of theexisting asset base continue to move forward. Two properties were sold out ofthe GE venture, one of which was acquired by the KIMCO-SEB partnership, andthose sales generated an additional $6.2 million of promote income to KIMCO.

We also continued the disposal of selected assets from theformer Pan Pacific portfolio, with six assets sold in the quarter netting toabout $110 million. KIMCO Developers sold a completed Phase II of a project inTexas, as well as a land plan in Arizona during the quarter, and is well on theway to delivering approximately $25 million in post-tax gains for 2007.

The operating businesses of KIMCO Capital Services did notexperience any large single transactional items in the quarter. Although, wedid receive additional distributions from the Albertson's investment, as wellas contributions from the recent investments in the extended-stay hotelportfolio and our structured financing of a net lease portfolio with U.S.realty advisors.

Insofar as providing guidance for 2008 earnings per share orFFO per share, I would much prefer to wait a bit longer to flush out timing andextent of transaction volumes, as well as to account for any uncertaintiessurrounding the consumer, but if I didn't say anything, you might read too muchinto it.

So for now, I'm providing an FFO range between $2.70 to$2.78. Just for perspective, I’d like to point out that the midpoint of thatrange tracks ahead of the average annual 10% growth rate we rolled out duringour investor day in 2006, with a target of $3.50 a share by 2011. With that,I'll turn it over the Dave.

Dave Henry

Thanks, Mike. As you mentioned, I think all of us in theREIT world have had a very interesting third quarter. For KIMCO, despite thebumpy ride, we continued to make excellent investments in a wide variety of newbusiness activities. For our listeners' consideration and review, I would liketo highlight the following this morning.

Number one, Brazil. I'm pleased to report that we haveformally expanded our presence in South America by signing a joint ventureagreement with real estate partner, SA, a Brazilian shopping center developerbased in Sao Paulo, Brazil. The company developed small neighborhood shoppingcenters in the Sao Paulo market. The company had a strong pipeline ofneighborhood shopping centers, and we anticipate closing on our very firstproject together in December.

The planned KIMCO REP shopping center is located inValinhos, a city located 40 minutes north of Sao Paulo, and will contain atotal of 135,000 square feet. In Brazil, we plan to focus on acquiring anddeveloping small neighborhood retail properties rather than developing orbuilding large high-end enclosed malls.

Brazil, with a population of 186 million people, is theworld's tenth largest economy and is projected to become the fifth largest economyin the world by 2050. With a record trade surplus in 2006, the largest foreigndirect investment in Latin America, 3% inflation rate, a stable currency, and agrowing middle class, Brazil represents an attractive long-term investmentopportunity for KIMCO.

Wal-Mart, McDonald's and other American retailers arefocusing on growing their presence in Brazil, and we hope to join many of ourexisting tenants as they expand into Brazil.

Number two, net lease portfolio. In a signature-structuredparticipating loan transaction this quarter, KIMCO invested approximately $78million, giving us a 50% residual position in a large portfolio of 403 netleased properties in 33 states. The portfolio is divided into 30 master leasedpools of properties with each pool leased to a single corporate credit,collateralized by all of the assets in the pool.

The properties represent a diverse collection offree-standing restaurants under 20 different brands and represent a veryattractive long-term investment for KIMCO due to the low market rents, lowinvestment per square foot, substantial amortization under the existingmortgage loans, and generally strong corporate guarantors. As the leases expireover time, we believe there will be substantial opportunity to create additionalvalue in this very large portfolio of more than 400 net leased properties.

Number 3, KIMCO Mexico retail land and development fund.During the quarter we successfully closed and upsized twice our previouslyannounced Mexico retail land and development fund. The fund represents a newproduct for KIMCO in that it is a fully discretionary commingled fund of $324million.

The fund will acquire retail sites in Mexico, which aretargeted for future expansion by large U.S. and Mexican retail tenants. These landparcels, which will either be developed within the fund or sold to thirdparties over a three to seven-year period will be selected by KIMCO's operatingpartners or retail anchor tenants in Mexico.

Land which is planned for future development rather thanimmediate development is comparatively inexpensive in Mexico, and we believethat KIMCO and the fund investors will achieve attractive returns through thisinvestment vehicle.

Institutional investors committed to our fund include NewYork common, ABP, Case Depo (ph), GE Real Estate, Northwestern Mutual andWellington Management. Building on the success of the Mexican fund, we areintroducing a $250 million U.S. land fund, which will be jointly sponsored byKIMCO and the Rockefeller Group.

Combining forces, KIMCO and the Rockefeller Group will beable to acquire large mixed-use sites and leverage KIMCO's expertise in retaildevelopment, and the Rockefeller Group's experience in office and industrialproperties.

The fund will target land and specific selected marketswhere either KIMCO or the Rockefeller Group have a strong track record. Thesemarkets include Florida, California, Arizona, New Jersey and Texas. TheRockefeller Group has an 80-year history of developing commercial real estateand is wholly-owned by Mitsubishi Estate, one of the world's largest realestate companies.

We are very pleased to be working with them on this newfund. Overall, we believe the growth of our institutional asset managementbusiness will be based on delivery of new joint venture and commingled fundproducts to meet the real estate objectives of a growing list of institutionalclients.

In 2008, we plan to introduce a new fund for South Americaretail properties, and a New York urban investment and development fund. We havereached agreement with UBS Wealth Management, a valued existing institutionalclient, to form a $300 million joint venture to acquire core stabilized retailproperties in Canada.

All of these areas represent growing sources of investmentopportunities for KIMCO with attractive yields for our clients and ourpartners. Now I would like to turn to Milton for his comments and thoughts.

Milton Cooper

Thanks, Dave. George Bernard Shaw once said, when I wasyoung and foolish, I thought that money was everything, and now that I'm olderand wiser, I know it is. Two weeks ago, Mike Flynn, Dave Henry, MikePappagallo, David Lukes and I met in an off-site strategy session in aWestchester Hotel conference room, and we agreed with George Bernard Shaw.

Our job is to deliver the money to our shareholders and ourpeople, and since our shareholders do not receive large annual dividends, andsince no one at KIMCO receives large cash salary, the money has to be in theform of a growing share price. Now the fact that since our IPO, we have doubledthe price of our shares every five years is history. What do we do from here?

Our company has never, never, ever accepted the status quo.Innovation is our mantra. And so our focus is to chart the course for futuredouble-digit growth over time, and here is our road map. One, our shoppingcenter portfolio. We constantly review each asset with the following in mind.Where can we creatively add value? Is there growth in cash flow from the asset?

Some of our centers have substantial built-in growth.Shopping centers that were built in the '60s and the '70s had then prevailingrents under leases that are to expire within 10 years. Permit me to illustrate.We own a 212,000-square-foot shopping center in Staten Island.

A lease for 100,000 square feet was entered into in 1970under which the tenant paid an annual rent of $3 per square foot, gross. Thatwas the then-market. New leases for smaller tenants are in the mid-40s persquare foot. The 100,000-square-foot lease expires in 2011, and our estimate isthat the rental value is at least $30 per square foot.

Now, most of our income streams are generated fromproperties in urban areas, and those that were developed in the '60s, '70s, and'80s are in mature suburbs that do not have land for new housing and are not asvulnerable to the slowdown in new-home construction. It is my view thatshopping centers with long-term leases with below-market grants are superbinvestments with bond-like characteristics that will attack investors worldwidewho seek safety in hard assets.

David Lukes refers to some of our centers as land banks thatare carried by our tenants' rents until leases expire. Now, there are othercenters whose growth is more appropriate for an investor with a lower cost ofcapital and a more patient time horizon. And these centers will be placed in ajoint venture with such institutions. And we will sell any center that we feelmay have risk.

Two, our global expansion. Our global expansion is designedto deliver higher yields and diversify our risks from being completelydependent on the U.S. dollar. Our first entry into the Canadian market was sixyears ago. We were and continue to be very optimistic about real estate inCanada. By the way, at the time of our initial investments, C$1 was equivalentto $0.66. We now have interest in over 145 properties in Canada.

Mexico. We began our acquisitions in Mexico in 2002, thanksto Dave, and we continue to believe that Mexico has good growth prospects. Wehave interests in 127 properties and anticipate continued substantial returns.We have interest in 21 developments that should come on stream by 2009. Whilewe are pleased with what we own, we recognize that there now is very largedemand to own real estate in Mexico, and as a result, we now are faced withsubstantial competition.

Our timing in the past was good, but it will be moredifficult to create more opportunities in the future. And in addition to Canadaand Mexico, as you have heard, we are exploring and acting on additionalinvestments in Chile and Brazil.

Three, our institutional investment management business.This is a growing business, and we are adding new institutional relationshipsand new products. Dave has mentioned our land fund in Mexico, and our new jointventure on a U.S. land fund.

Four, our development business. We have a solid developmentbusiness that has been consistent in its earnings. The contribution from ourdevelopment business is a little less than 5% of our EBITDA. We do have over 20projects that should be completed between 2008 and 2010.

Five, KIMCO retail services. Retail services providesfinancing and other services for retailers. Some examples are Montgomery Warddesignation rights transaction and our Venture Stores transaction. KIMCO Selectis, in essence, an opportunity fund that takes into account the underlyingvalue of real estate and leases. Some examples are the Albertson transactionand the Frank's Nursery transaction.

Six, preferred equity. Our preferred equity programcurrently is approximately $465 million invested in over 260 properties. Weexpect to realize approximately $200 million in residual profit participationout of this portfolio.

Seven, our New York City, Boston and Philadelphia urbanprojects. Patrick Flynn has headed up our effort to create value and profitswith selected investments in New York City, Boston and Philadelphia. During theyear, over $15 million of profits were generated out of the sale of twoManhattan properties.

So, we believe that we can deliver the goods over time at acombination of these buckets and any new bucket and opportunities that we maybe able to seize upon. Our view is that the times ahead will bring some pain tothe consumer, and there will be turbulence in the markets.

We have prepared for this cycle by keeping up balance sheetand liquidity very, very strong. We have been through cycles before and havealways found that opportunities arise out of dislocation in the marketplace.And with that, we would be delighted to entertain any questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll take our first questionfrom Jonathan Litt with Citigroup. Please go ahead.

Ambika - Citigroup

Hi, this is Ambika (ph)with John. Given the uncertainty onwhen transaction volume will pick up, how should we think about that beingfactored into 2008 guidance?

Mike Pappagallo

Ambika, this is Mike. I think historically we have looked attransactions, separating it between core shopping center acquisitions and theneverything else. I think where we have a little struggle with visibility iswhat form and structure these transactions are going to take.

In coming up with the preliminary guidance numbers that Ihave provided, I am expecting somewhere over $1 billion of investment activity,but that's not necessarily going to be all of the core shopping center typeassets that you have seen us acquire over the past couple of years.

So that's a generic assumption, volume assumption, but theform and content of what business unit it falls in to, we have preferredequity, our opportunity fund, some of the other funds that Dave has talkedabout, that is to be determined.

Ambika - Citigroup

So given that is below your historical acquisition volumesin the past couple of years, you would assume that that's more of aconservative target at this point that could be revised upwards if the market'stransaction volume resumes.

Mike Pappagallo

Yes, that is true, and it has been pretty much the custom hereat this point in the year or before the year, to take a relatively conservativeview, because conditions do change, and you saw it over the past three or fourmonths on how dramatic the credit markets were impacted.

So we have a long-term business strategy. We have talkedabout it often. We have clear objectives that Milton articulated, and strategy.But we will continue to do is refine these assumptions set into thosecomponents as the year proceeds.

Ambika - Citigroup

Okay. And could you give color on the marketable securitiesgains in the quarter?

Mike Pappagallo

The 10 million is -- 10 million for the quarter.

Ambika - Citigroup

Any breakdown on where that is coming from?

Mike Pappagallo

No, we generally don't give a list of specific securities.

Ambika - Citigroup

Okay. Thank you.

Operator

And we'll take our next question with Jay Habermann withGoldman Sachs. Please go ahead.

Jay Habermann - Goldman Sachs

Hey, good morning, everyone. Just, I guess, continuing onthe '08 guidance front, can you just comment, are you assuming any impact therefrom Albertson's. And, I guess, Mike, as well, since you did open the subject,can you talk about same-store NOI growth assumptions?

Mike Pappagallo

With respect to Albertson's, I have more of a genericassumption as it relates to our group of businesses in KIMCO Capital Services,which is preferred equity, KIMCO Select, and Retailer Services and piecingthose together. And in looking at those three businesses, if you tally up the2007 contribution, or expected contribution, it's probably about $225 millionworth of transaction and flow within those three components.

And we're expecting $30 million or so increase in ouroriginal business plan for those three businesses together. So it's going tocome from a variety of sources as it has traditionally, and some of it will beAlbertson's, but at this point we don't have an exact number, because there area series of financing and strategy at the Albertson's level that haven't beenfinalized and are subject to market conditions. So, Jay, that's how I look atthe guidance in terms of taking the three businesses together, understandingtheir aggregate profitability, and then planning off of that larger base as wego into next year.

Jay Habermann - Goldman Sachs

Great. Thanks. And just one follow-up, I guess, for Milton,in terms of the recent disruptions in the credit markets. Can you just commenta bit on outlook for distressed store closings? Have you seen any growing signsthat might make you more nervous than before?

Milton Cooper

Nothing could make me more nervous than before. No, wecontinue to worry about the consumer and there are certain retailers that webelieve may have issues in '08, but we really, David, couldn't identify them.

Mike Pappagallo

Jay, I just wanted to circle back. You also asked on thesame-store, we're forecasting 4%, and that's based on our ground-up budgetprocess that we just completed with respect to our core shopping centers.

Jay Habermann - Goldman Sachs

Okay. Thank you.

Operator

And we'll take our next question with Christine McElroy withBanc of America Securities. Please go ahead.

Christine McElroy - Banc of America Securities

Hi, good morning. If you look at over the next few years atyour expectations for future supply growth for shopping centers, would you sayit's coming at all in the new financing environment given that it has becomemore difficult for smaller developers to obtain financing?

And does this have any impact at all on your expected yieldsfor projects in your future pipeline, if overall supply growth declines?

Dave Henry

It's still early to tell, I think. The credit crunch isrelatively short-lived at this point. If it continues, I would agree with yourpromise that smaller developers will have more difficulty.

Plus if Jerry is on the line, he can comment, as well, butthe projects themselves these days are much larger and take much longer to getthrough entitlements and the zoning process, so retail in general is done on apre-leased basis. Speck projects are not generally done to any large degree.

Jerry Friedman

Dave, this is Jerry. I would agree with you. I would alsostate that if the credit crunch does continue, it gives greater opportunity forKIMCO to take over, at a later stage, those projects from smaller developers.

Christine McElroy - Banc of AmericaSecurities

Okay. Great. And then just a follow-up on Ambica's questionwith regard to becoming more aggressive on acquisitions. What types of changesin the private market are you looking for?

When we should expect you to become more aggressive whetherit's pricing changes or more stability or different types of opportunities?

Dave Henry

Well, I think we, like others, are being careful today.We're watching with interest. We're in the market every day. It's stillcompetitive for Class A properties, which our investors want.

The bid/ask has widened a bit, and there's been retradinggoing on and the debt markets, as you know, have been a bit dicey. So ouracquisitions people are in the market every day. We continue to lose deals onoccasion, which indicate to us that the market is still competitive for thevery best properties.

Cap rates have moved around a little bit. But we're notexactly sure where they are settling. So, at this point, we're trying to becareful. But one way or another, it will settle out in due course, and KIMCOwill continue to see opportunities and we will continue to team with ourinstitutional partners to grow our portfolio.

Christine McElroy - Banc of AmericaSecurities

Great. Thank you so much.

Operator

And we'll take our next question with Jeff Donnelly withWachovia Securities. Please go ahead.

Jeff Donnelly - Wachovia Securities

Good morning, guys. Mike, maybe just another way of askingabout your same-store NOI growth expectation for 2008, with your occupancy inan all-time high and retail, or appetite for your store opening, I guess, isrelatively softer than it was perhaps a year ago.

What leads you guys to be so confidant that rate growthwould be this robust now? You can argue that perhaps most aggressively seen isKIMCO being NOI growth in sometime.

Mike Pappagallo

I think its consequence, Jeff, of many of the rollovers thatwe're seeing in terms of our projects, the ongoing programs and redevelopmentprojects that David and his team have underway. Because it's not, your point isvalid.

It's really not going to be driven by occupancy. It's goingto be driven more by active management, rent bumps, step-ups and the programswe have got underway. That really is the short answer.

When we think about the same-store growth, part of thatanalysis is that there are a -- continues to be a group of properties that aretargeted for this position in our – in that base portfolio that are theslower-growth assets.

And it's incumbent upon us, as a strategy to move those outdirectly or into funds that they are solid properties but just slow growth. So,that's really part of what makes up the number.

Dave Henry

I think, we're particularly excited about some of theredevelopment efforts, and the added resources that we have focused on theredevelopment within our portfolio. With such a large portfolio, as you mightimagine, we have got some nice opportunities to create value in some of ourexisting shopping centers. And that's a great program, and that should help usdrive some nice value.

Jeff Donnelly - Wachovia Securities

Do you have a sense of what your NOI growth would be if youexcluded those assets that are benefiting from redevelopment capital?

Mike Pappagallo

I would pencil that -- and every one -- any one quarter,there's a different answer in terms of the relative impact, but as a generalmatter, I would say it's lifting the base rate from a 2.5% to 3% level up tothe 4%-plus level.

Jeff Donnelly - Wachovia Securities

One last question. Mike, I think you mentioned at the verybeginning of the call, that you guys were tempering your acquisition activityto wait for larger, and I guess, implicitly, better deals that may come downthe road.

Are you seeing those opportunities now, or do you think theyare still a few quarters away? And who drives the decision within the fundsbusiness to decide to buy assets or not? Is it KIMCO or its partners?

Milton Cooper

Well, there's -- we team with our partners in looking atopportunities, especially large portfolios, either public or private. If yourecall over the last five or six years, KIMCO has bought five other publiccompanies, which has driven our assets under management very nicely.

I personally think, there will be some more M&A activitycoming up with smaller companies, either public or private. Those type ofopportunities do appeal to our institutional partners, because in one fellswoop, they can get a large portfolio of properties.

That's very difficult for Mike to factor into his numberswhen we'll buy a small public company or something like that. So we also have aone-off business that's more predictable and Tom Caputo and his team have donea nice job.

And we do have a pipeline of acquisition activities, butit's tougher to predict in this market, which ones will win at which kind ofcap rates and which investors have an aggressive appetite for that. But we'reconfident we'll deliver Mike's base case.

Jeff Donnelly - Wachovia Securities

Okay. Thanks, guys.

Operator

We'll go next to Craig Schmidt with Merrill Lynch. Please goahead, sir.

Craig Schmidt - Merrill Lynch

Good morning. I was looking at your portfolio statistics bycountry page and the United States has the lowest average rent per square footrelative to Canada, Mexico and Chile. I wondered if that was because of the ageof the centers or is something else driving that statistic?

Milton Cooper

That's the age of the centers. One of the sad realities isthat, we have been around for such a long time. We've been in business for 50years, so that it distinguishes us -- many of the properties I mentioned werebuilt in the '60s, '70s, '80s, and acquisitions, so that it's a factor of theage of the center, and that they're encumbered with long-term leases at lowerrents.

B>Dave Henry

And as we've mentioned previously, in Mexico, it's mostly adevelopment game. These are new shopping centers coming on stream. The existinginventory of shopping centers to buy in Mexico is very limited.

Craig Schmidt - Merrill Lynch

So, if I'm thinking about this correctly, it would seem tosuggest that the United States has the best opportunity for growth relative tothe four countries you primarily do business in.

B>Dave Henry

I would argue the opposite. If you look at the U.S. leasesfor new properties, you are talking about very flat leases. For instance, whenwe sign a Home Depot lease today, it is flat for 20 years, and sometimes flatfor the option period.

When, we sign a Home Depot lease in Mexico, we have possibleincreases every single year and in some cases we have percentage rent. So, itdepends on the country and the lease structures.

Mike Pappagallo

I think your point is that on the older properties, there ismore room for growth because those rents are lower. Dave, is right on the neweracquisitions. On the old properties, we do have below-market rents.

Craig Schmidt - Merrill Lynch

Thank you. That's helpful understanding that Home Depotsigns different types of leases by country.

Dave Henry

Yes, it depends on where they are trying to grow. Forinstance, we get very different leases from Wal-Mart in Mexico than we do inthe U.S. In the U.S. they like to own their own property.

That's very difficult to lease a Wal-Mart in the U.S. Whereasin Mexico, where they are tripling the number of stores they want to open, bydefinition, they are forced to lease in many cases.

Craig Schmidt - Merrill Lynch

Thank you.

Operator

And we'll take our next question with Matt Ostrower withMorgan Stanley. Please go ahead.

Matt Ostrower - Morgan Stanley

Good morning. Could you talk about why you chose to use thepreferred market instead of the unsecured market, and specifically was it anissue with rate or covenants there? And secondarily, at a 7.75% rate on thepreferred, isn't that really signaling that you guys have an expectation thatcap rates are going to move up very significantly given the kind of going-inyield you need to get to make that accretive?

Milton Cooper

We elected to go into the preferred market, because wewanted to put a form of longer term or permanent equity on the balance sheet,in that we felt that for an additional 100 basis points or so relative to whatwe could do at the tenure at the time that it was well worth it.

And it would build capacity in the future for furtherexpansion on the debt side. And along with our preferred equity offering as Imentioned, we have done a variety of other things to expand the debt capacity.

So in very basic terms, we viewed the preferred as oneelement of a global capital structure, and liquidity enhancement, and did notlook at it in the view of issued this in lieu of unsecured debt and the like.As to your other point, that assumption or that theory is just simply not thecase.

Mike Pappagallo

As we pointed out before, Matt, where we are investing mostof our own capital is places like Mexico and preferred equity in development,where we do get higher returns, and it is accretive to our shareholders. Whenwe buy existing shopping centers, we are teaming up with an institutionalpartner who is putting up the lion's share of the equity.

And we make very good returns because in addition to ourshare of the cash flow from the property, we are getting management fees, andasset management fees, and acquisition fees, and construction management fees,and leasing conversions, and a promote -- and so forth. So it's actually a veryprofitable piece of business for us.

Matt Ostrower - Morgan Stanley

And if I could just follow-up real quick on the unsecured,were you able -- I know a little while back, you switched to sort of acovenant-light structure on a whole bunch of your unsecured debt.

And I guess the question I have is would you be able to getthat today if you did go into the unsecured market today? And if the answer tothat is no, what does it mean for the money that you spent or the cost youincurred to get the covenant-light structure on your existing debt?

Mike Pappagallo

We feel that if we wanted to go into the unsecured marketstoday, we feel we could execute a bond with a similar characteristic as weraised in April.

Matt Ostrower - Morgan Stanley

Great. Thank you.

Operator

And we'll take our next question with Michael Gorman withCredit Suisse. Please go ahead.

Michael Gorman - Credit Suisse

Good morning. Milton, if you could just go back to thedistressed side of things again but more looking at the opportunities, can yousort of quantify what kind of pipeline of deals you're looking at on thealternative investment front?

Milton Cooper

What we're looking at is -- it's really very large. Whatwe'll get is so speculative it wouldn't be fair for me to answer it. It mightbe misleading. So I don't know. We're looking at an awful lot. What willhappen, I don't know.

Michael Gorman - Credit Suisse

If you look back at the history, then what is your typicalconversion rate of what you look at versus what you get?

Milton Cooper

I'm going to guess, maybe a third of or less.

Michael Gorman - Credit Suisse

And.

Milton Cooper

And it varies.

Michael Gorman - Credit Suisse

And, Dave, just a question on the Prudential joint venture,going back to the questions about cap rates and institutional demand, it lookslike the sales volume in the third quarter slowed down. Can you just give us asense for what the pricing was like on those deals, and also any number ofdeals that may have fallen through during the quarter?

Dave Henry

Well it's -- I think we have mentioned before, the PanPacific acquisition with Peru was really divided in two portfolios. A wholeportfolio and a self portfolio. On the self portfolio, Tom, correct me if I'mwrong, was about $1 billion.

We are about halfway through that self portfolio, and wecontinue to sell those properties, which by definition are properties that wehave decided not to hold long- term. The markets have been turbulent, I wouldsay, and the Cap rates have been a little higher than we had hoped, but wecontinue to feel that we will dispose of that, the rest of that portfolio, overthis next 12-month period.

On the other side of the coin, the whole portfolio, theother $3 billion, has outperformed what we thought, and the rent growth hasbeen outstanding in these A-plus properties in California.

So, we have been very happy with the whole buckets, and thesell bucket is going perhaps a little slower than we had hoped.

Michael Gorman - Credit Suisse

If I could just push a little bit there, I mean, lastquarter you characterized it as 6.25% -- that's 6.75% on the sale. Are youstill in that range with your third quarter sales, or are we talking north ofthat?

Michael Gorman - Credit Suisse

Yes, I think we're still in the probably 6.5% to 7% range.It just depends on the property and the location and where it might be. And oneof the other things that we have been doing with the sale bucket is some of theproperties we actually held off the market while we released them.

If we had big anchors, we just held them off, and we'rebringing them to the market now so.

Dave Henry

And it's no surprise the best ones of the sell bucket gofirst. So, we fully expect that for the last batch of these assets that the caprates are going to be higher.

I mean, in effect the blended Cap rate, when we underwrotethis portfolio, was a little north of 6.5%. And I think when the dust settles;we'll be roughly to that number. But certainly, as it relates to the timetableof doing that, the best assets on that sale bucket have gone first, and thetougher ones are going to bring up the rear.

So that will certainly -- there will certainly be differentCap rates as you go through these individual sales.

Michael Gorman - Credit Suisse

Thanks, guys.

Operator

We'll take our next question with Michael Mueller withJPMorgan. Please go ahead.

Michael Mueller - JPMorgan

Couple of questions, first, Mike, in terms of guidance,should we think of the preliminary '08 number as kind of just a levered coregrowth rate with, I think you said, maybe a $30 million year-over-year increasein capital services. So, not a lot of external-driven spread in the numbers atthat point.

Mike Pappagallo

Mike, I think -- Just rephrase the question for me. BecauseI understand one of the points you are making was with respect to the basket ofour operating businesses, but maybe if you could just rephrase your question,so that I could give you a coherent answer.

Michael Mueller - JPMorgan

Yes. I guess, first, you said, just confirming what yousaid. KIMCO Capital Services, about $30 million, you were thinking, higher thanthe '07 level. So, if we are taking your core growth and levering that up, andjust tacking that on, that kind of gets you around to where the midpoint of '07to midpoint of '08 is.

So, is that the right way we should be thinking about the'08 implied guidance at this point?

Mike Pappagallo

We'll probably assume a bit more KDI gains than the currentyear's $25 million. There will be more projects that are in their completionphase or going to be completed in early '08, so I think there will be a littlebit more activity there.

And then you will certainly have to factor in thatestimation of volume, some level in some business lines, but also increase theearnings.

So, I think it's really a combination of that increase inthe operating business that I talked to you about, an increase in thedevelopment profits, some volume activity, as well as the leveraged internalgrowth of 54%.

So, that's in broad terms, the four components that drivethe numbers for next year, midpoint-to-midpoint.

Michael Mueller - JPMorgan

Okay. Maybe switching gears to the preferred equitybusiness, can you talk about recent trends in pricing since -- given what hasbeen happening with the debt markets over the past quarter or so, as pricingmoved back up?

And then second part of that question, if you are looking atthe $200 million of equity kickers that I think you mentioned on the call, how muchof that is split between stuff driven just by pure Cap rate compression versusstuff that wasn't necessarily reliant upon Cap rate compression?

It really just comes from the value creation from taking aproject from development to stabilization.

Mike Pappagallo

Sure. On the pricing side today, it's definitely a muchbetter time for us. Some of our traditional mess, composition, I would call itstraight mess. We're charging an interest rate without an equity kicker.

Those guys have all gone away for the moment, and so ourteam is starting to see more opportunities with better pricing and moreconservative underwriting on our part.

So, we're actually pretty optimistic about our preferredequity business going into next year, and we think we'll benefit from theturmoil that's happened in the credit market. Some of the crazy risk-rewardpricing has gone away.

So we think we'll do better in terms of volume in preferredequity both in Canada and the U.S., which are both good markets for us. In termsof the equity kicker estimates, we have taken a look at some of them. I don'tstatistics on the whole portfolio for you, but if I were to guess, it would behalf is cap rate compression and half is growth in net income.

Michael Mueller - JPMorgan

Okay. Okay. Great. Thank you.

Operator

We'll take our next question with David Harris with LehmanBrothers. Please go ahead.

David Harris - Lehman Brothers

Hey, good morning. Sorry if I missed this. Dave, as you werepicking up your air miles traveling north and south, down the Americas, Iwonder if you could just give any comment as to any change in the investmentattitude of folks in the marketplace in Canada or down in Mexico in SouthAmerica?

Are people concerned in those markets about changing caprates and financing? And secondarily, somewhat associated with that, is theretoday a more of a reserve and a caution about tenants signing up for space thanthere would have been, say, three, six months ago?

Dave Henry

Let me take them in three parts. Looking at Latin Americafirst and I'm very proud, because American Airlines did give me a littlecertificate saying I have hit three million miles with them. So I'm very proudof that.

David Harris - Lehman Brothers

(inaudible) of the plane, doesn't it?

Dave Henry

The investor appetite to invest in Mexico and South Americais actually escalating and increasing. Real estate investors are looking forhigher returns, given the turmoil of today and the apprehension about where thereal estate markets in the U.S. are going.

So the investor appetite, to look at markets like Mexico andSouth America, is escalating, and you can see that in the number of new fundsthat are being offered. Everybody from JE Roberts to O'Connor to ING toPrudential, they are all offering Latin America funds of one type or another anincreasingly oriented towards retail, which is hard.

And as Milton mentioned in his remarks, we're seeing morecompetition in Mexico and more competition for our operating partners, and soforth. We have such a great lead in Mexico and we have such established dealflow that we think we'll do rather well, but if anything, I would say it hasescalated in terms of investor activity.

Canada is a different matter. Canada, the debt turmoil hasdefinitely impacted. CMBS is out of business, for sure, in Canada, andhistorically Canadian banks have always been rather conservative.

So I’d say there is a little more apprehension about what isgoing to happen in Canada than perhaps the Latin America. Your last part ofyour question in terms of the tenants, again, if anything, the Home Depots andthe Wall-Marts, and the Costco’s of the world are increasingly looking atMexico and South America as opportunities for growth.

Best Buy and Lowe's have both announced going to Mexicorecently. So, if anything, that also is accelerating.

David Harris - Lehman Brothers

If you just think about the discussions you're having todaywith potential joint venture or around new joint ventures and funds, is thereany change in the fee structure promotes that you’ve been traditionally puttingin place over the last couple of years? And I guess that is probably morefocused domestically than overseas.

Dave Henry

Well, again, the fee structure today is very different thanit was five years ago, and much more attractive for the operator for our sideof the equation. We really haven't had a lot of pushback on fee structures,especially things like our Mexican land and retail fund.

The investors are really looking at that wonderfulopportunity to drive double-digit IRRs for themselves. So promote structuresare really not that, no that controversial and our fees are, we keep them onthe modest end. We're not a hedge fund. We're not even an opportunity fund inmany cases in terms of our fee structure.

So as you look at our funds, our fee structures are veryreasonable and we don't get a lot of pushback.

David Harris - Lehman Brothers

Is the typical threshold 9 or 10?

Dave Henry

Yes, I would say that's fair. In the US, in some cases it'slower, and in Mexico and Latin America, it may be higher.

David Harris - Lehman Brothers

Okay. Great. Thank you.

Operator

We'll take our next question with Lou Taylor with DeutscheBank. Please go ahead.

Lou Taylor - Deutsche Bank

Thanks. Dave, can you just go back to the acquisitionactivity you should think and talk about

Dave Henry

Lou, you are going to have to speak up little bit.

Lou Taylor - Deutsche Bank

Yeah. Can you just go back to the acquisitions commentaryearlier, and just talk a little bit about your return expectations? Have yourIRRs risen at all?

Dave Henry

You mean on our side of the equation?

Lou Taylor - Deutsche Bank

Yes.

Dave Henry

On our side of the equation, remember, we're investing 15%to 20% of the equity on a co-investment basis with our institutional partners.So, in addition to the levered or un-leverage return from the property, whichmay be 6%, 7%, 8%.

We are getting property management fees, we're gettingacquisition fees, we're getting asset management fees, and so forth, whichdrives those returns somewhere between 15% and 20% over time.

Lou Taylor - Deutsche Bank

I mean, on your consolidated on-balance sheet acquisitionsthat you do on your free flow account.

Mike Pappagallo

As general matte, Lou, we're generally not acquiring for ourown balance sheet anymore for those very reasons. Now, that said, the growth inthe balance sheet at any one point in time will generally be due to two things.One, that we do continue to take on inventory in anticipation of the placementinto those programs, and there certainly is that phenomena in our currentbalance sheet.

And secondly, there are assets on what is called theopportunities side, where we're going direct, because we see an arbitrageopportunity. Of course, the example is some of the things we've done in LowerManhattan, as well as some of the most recent investments in the Philadelphiametro markets. And those assets are on the books.

There's a high IRR, 15%, 20%, and beyond if we can executeon our strategy, and those assets are on our balance sheet as well. At thispoint you think about on-balance sheet, that's primarily what we're focused on.

Lou Taylor - Deutsche Bank

As a follow-up, in terms of your merchant developmentpipeline, in terms of cap rate on those dispositions, if you will, have youseen any movement in those cap rates?

Dave Henry

Jerry, I'll let you answer, but we only have a fewproperties that are in the market today. There is a good list of people biddingon these properties, and I would say that the bid/ask is a bit wider than ithas been in the past.

But we have sold properties and continue to sell propertiesin the 6’s that we developed in the 10% to 11% on leverage return on cost. Sothe profit margin is still pretty wide in development, and we like thatbusiness. It's a got room, if necessary, for cap rates to move up a bit.

Jerry Friedman

Dave, you are correct. We have -- All of our properties havebeen selling in the 6’s in the cap rates, the ones we have marketed. And thereis aggressive -- several bidders for all of the properties.

Lou Taylor - Deutsche Bank

Okay. Thank you.

Operator

(Operator Instructions) And we'll go next with David Fickwith Stifel Nicolaus. Please go ahead.

David Fick - Stifel Nicolaus

Yes, good morning. Can you talk a little bit about yourexternal partner relationships, and what you are seeing in terms of themapproving deals, where we're hearing from some of your peers that there's morepushback on proposed transactions?

Milton Cooper

I think it's fair to say that core investors have taken ahard look at the markets today, and are being careful about what they are goingafter. They are taking a look at the credit markets. They are trying tocarefully price transactions. They are working with us.

They want to know what we think is going to happen withpricing. They want to understand carefully the upside of properties as we workwith them in looking at opportunities. The same way we are.

We're not exactly sure where these markets are going toshake out. So we're both being very careful as we look at opportunities. Ithink that's fair. But whether it shakes out with cap rates being a littlehigher, or it settles back down to where it was, we'll just have to see.

But we do have great relationships and a great roster ofpartners that we continue to work with looking at all kinds of opportunities,whether they are large portfolios or one-off transaction.

David Fick - Stifel Nicolaus

How big a factor is that external appetite in your externalacquisition guidance, which is obviously pretty conservative?

Milton Cooper

Yes, Mike has made a very conservative number, so it's ourjob, Tom and mine and others, to beat that number.

David Fick - Stifel Nicolaus

Okay. Thank you.

Milton Cooper

Sorry for giving them such a low bar, David. I'm going torethink it.

Operator

And we'll take our next question with Scott O'Donnell withMetLife. Please go ahead.

Scott O'Donnell - MetLife

Yes. Hi. Good morning. A question for Milton, please.Milton, you have been around a long time, you have seen many financial crisesin the past, and whatever the flavor of financial crisis, you can always pointto the root of it being poor underwriting.

And I guess in that context, whether you are looking at thefinancial sector or the REIT sector, they do share several characteristics overthe last few years. It seems that people are paying too much for assets,they're financing more and more of these risks off-balance sheets, and they aretrying to generate returns that may not be sustainable in the long run.

So with that as a background, can you comment on theappropriateness of, and also in the context of Mike's earlier comments thatmore and more of KIMCO's balance sheet will be represented by joint ventureinvestments, can you comment on the appropriateness of being an unsecuredlender to a company like KIMCO from an underwriting perspective?

Milton Cooper

Well, let's analyze that for a moment. One, the ratio ofdebt to total debt and equity is very, very small, and we have kept it that way.Two, the portfolio is a portfolio that has pretty solid income streams. Andthree, you have a very conservative management, who have their lifeblood,estates and wealth in KIMCO.

So the combination of all of that factor, diversifiedsources of income, since so many sources and geographic sources, it makes it asgood a bed as I know. And if I'm comfortable with the equity, I would imaginethat unsecured lenders should be very comfortable with the debt.

Scott O'Donnell - MetLife

Thanks. Okay.

Barbara Pooley

Daryl?

Operator

And there are no further questions. This does conclude ourquestion-and-answer session. I like to turn it back over to management for anyadditional or closing remarks.

Barbara Pooley

Thanks, everybody, for participating today. Just a remind, asupplemental is on our website at www.kimcorealty.com. Thanks.

Operator

And once again, ladies and gentlemen, this will concludetoday's conference. We thank you for your participation. You may now disconnect.

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Source: Kimco Realty Q3 2007 Earnings Call Transcript

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