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Kimco Realty Corporation (NYSE:KIM)

Q1 2008 Earnings Call

May 1, 2008 10:00 a.m. ET

Executives

Barbara Pooley – Vice President of Investor Relations

Milton Cooper – Chairman and CEO

Dave Henry – Chief Investment Officer

Mike Flynn – Vice Chairman and President

Mike Pappagallo – Chief Financial Officer

David Lukes – Executive Vice President

Ray

Analysts

Paul Morgan – Friedman, Billings, Ramsey & Co.

Jonathan Habermann – Goldman Sachs

Christine McElroy – Banc of America Securities

Ambika Goel – Citigroup

Christeen Kim – Deutsche Bank

Steve Sakwa – Merrill Lynch

David Harris – Lehman Brothers

Michael Mueller – J.P. Morgan

Bridget Adams – Argus Research

David Fick – Stifel Nicolaus & Company

Jim Sullivan - Green State Advisors

Operator

Please stand by. We are about to begin. Good day, ladies and gentlemen. Welcome to this Kimco First Quarter Earnings Conference Call. Please be aware today’s conference is being recorded. As a reminder, all lines will be muted to prevent background noise. After the speakers’ remarks, there will be a formal question-and-answer session. (Operator Instructions). Now at this time I would like to introduce your host Ms. Barbara Pooley. Please go ahead, ma’am.

Barbara Pooley

Thank you, Jake. Thank you all for joining the First Quarter 2008 Kimco Earnings Call. With me on the call this morning are Milton Cooper, Chairman and CEO; Dave Henry, Chief Investment Officer; Mike Flynn, Vice Chairman and President; Mike Pappagallo, Chief Financial Officer; and David Lukes, Executive Vice President. Other key executives are also available to take your questions at the conclusion of our prepared remarks.

As a reminder, statements made during the course of this call represent the company and management’s hope, intentions, beliefs, expectations, or projections of the future, which are forward-looking statements.

It’s 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 statements is contained in the company’s SEC filing.

During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco’s operating results. Examples include but are not limited to funds from operations and net operating income. Reconciliations 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 a limit of two questions with appropriate follow-up so that all callers have an opportunity to speak with management. Feel free to return to the queue if you have additional questions. I’ll now turn the call over to Mike Pappagallo.

Michael Pappagallo

Thanks, Barbara, and good morning. First off, I’d like to take a moment to acknowledge the passing of our Co-founder and Chairman Emeritus Marty Kimmel, who after living 92 years of what can only be called a complete life, left us two weeks ago.

Marty was not only the consummate real estate man, but more importantly, someone who had great vision, character and benevolence. Much of Kimco’s reputation for integrity and fair dealing can be traced directly to Marty. He will be missed, and we thank those of you who offered us your condolences and respects.

We were pleased with our operating performance in the first quarter and the resiliency of our shopping centers despite the weight on consumers from high gas prices, food inflation and the psychology of incessant bad news influencing their confidence.

FFO per share was $.64. While this represented a significant drop versus the first quarter of last year, comparability was dramatically influenced by the substantial distribution last year from the Albertson’s investment. As indicated in the earnings press release, Albertsons contributed $.21 per share of FFO in the 2007 quarter, while only $.03 in this year’s quarter. Excluding that effect, operating results showed a solid 7% increase in 2007.

Certainly the question most often asked of us is how the forces affecting consumer spending are impacting tenants and shopping center performance. Occupancy levels dropped slightly from 96.3% at the end of last year, which was a historical high, down to 96%, which is actually encouraging considering that this is the first measurement period post-Christmas. To put it in perspective, this occupancy level is two ticks higher that the post-Christmas period one year ago, despite very different economic conditions.

Same-store net operating income grew by 3.3%, and while lower than the past few quarters, is still a solid result in a more difficult leasing environment. As encouraging was the fact that almost 300 leases were signed, new or renewed, at an average increase of over 11%.

Redevelopment and expansion projects of our existing portfolio base continue to be a focus of our asset management teams. During the quarter we completed four projects and added four others with the existing 21 projects representing an investment of about $325 million with about half spent already. We evaluate new opportunities continuously and have 12 other projects in the design or entitlement phase.

Shopping center acquisition and disposition activity continues to be muted, reflecting uncertainty over cap rates and financing availability. Our single largest investment transaction was the purchase of a convertible debt instrument issued by the Live Property Group in concert with our initiation of a strategic alliance with them. We also closed deals on our preferred equity business and acquired long-term value play assets in Kimco Select investments.

As Dave will describe shortly, our pipeline of opportunities continues to grow in Latin America, including 18 new deals approved and an additional purchase for the Kimco Land Fund during the quarter.

As we discussed in the prior conference call, liquidity and financial flexibility remain a top priority because credit availability is still a significant issue in our view. This careful capital management is manifesting itself in a very judicious approach to new business origination.

And as the first quarter activity level shows, our investments were biased toward internal portfolio spending, special strategic situations such as the investment in Valad and continuing our aggressive investment development program in Mexico.

With respect to the earnings for this year, we continue to provide as much visibility as possible as to the composition of our earnings guidance and recognize that a component of those estimates are predicated on transactions that are facilitated by real estate markets that are either liquid and active or severely distressed, neither of which describes the current environment. It’s more akin to a standoff.

2008 full-year FFO guidance range remains unchanged, but the completion of our merchant development sales, harvesting of profit participations from the preferred equity and Kimco Select asset base are dependent on more stable transaction and financing markets for buyers.

As far as timing, we see much more of this execution taking place towards the latter part of the year as well as the sourcing for more U.S.-based new business. We believe that our in-place real estate portfolio will prove resilient through an economic downturn. That is the nature of quality strip retail. There will continue to be some pressure on occupancy in spreads, but overall, the relatively low existing rents, the profile of the centers and the redevelopment opportunities will serve us well.

The continuing new business investment in Latin America will provide increasing and sustainable earnings flow. Recurring fees from existing institutional management programs will remain intact, underscoring the quality of those portfolio flows, and the transactional activity will return, but in this market it is clearly a question of timing. With that, I will turn it over to Dave.

Dave Henry

Thanks, Mike. As noted by Mike and many of our peers, U.S. acquisition activity has slowed dramatically in 2008 as investors, lenders and property owners all wrestle with the right cap rate and equity yields for core real estate given a softening economy and a wide-ranging credit crisis.

While many institutions still have substantial funds and allocations for real estate, there is a widespread belief that this is a good time to be cautious and wait for the real estate markets to stabilize.

At the same time, our international activity, particularly in Mexico and South America, has accelerated as we see the positive results of many years of relationship building with local operating partners, retailers and institutional clients.

In the first quarter Kimco approved 18 new transactions in Latin America totaling $271 million. Looking at the details, we approved eight Mexico retail development projects for $175 million; three Mexico land fund transactions for $24 million; three net leased industrial buildings for $34 million; and four South American deals totaling $38 million.

Overall, we are very proud of our existing portfolio in Latin America, which now consists of equity interest in 146 properties comprising more then 21 million square feet of rentable space. Latin America now exceeds our Canadian portfolio of roughly 18 million square feet.

Mexico and South America both still appear to be strong markets for us. While there is a housing bust in the United States, Mexico continues to enjoy a housing boom, and Mexico retail sales are expected to grow 6% to 8% in 2008. Walmart Mexico reported an 11% earnings growth in the first quarter, and they now have more than 1,000 stores in Mexico.

Kimco’s international strategy remains focused on countries that have growing economies and are rich in natural resources with stable governments, trade and fiscal surpluses, increasing populations and respect for property rights. As a result, we are concentrating our efforts in Canada, Australia, Mexico, Brazil, Chile and Peru. In general the country risk is low in these markets, and the real estate opportunities are substantial.

Over the years, we have carefully and methodically built relationships with strong and reputable local operating partners in these markets, and we are very optimistic about the long-term potential to create value and recurring FFO in these countries. We currently have offices and resources in Toronto, Mexico City and Santiago, and we hope to add San Paulo by the end of 2008.

While acquisition activity of core retail real estate has declined substantially in 2008, we continue to be committed to the institutional fund management business, and we are working on ways to increase our assets under management. This week we finalized our new comingled fund for South America, which will have a targeted size of $500 million of equity and will be seeded with our existing investments in pipeline for Chile, Brazil and Peru.

Similar to our existing Mexico Retail Land Fund, our South America Real Estate Fund will be our exclusive vehicle to invest in retail acquisitions and development opportunities in South America.

We are also working on an urban fund, which will be focused on redevelopment projects and opportunistic investment in the Long Island and New York City metro area, where Kimco has a long, 50-year history.

During the quarter we closed or previously announced $200 million Aussie convertible debenture investment with Valad Property Group in Australia. We are actively working with the company to cross-sell our respective fund products and explore co-investment opportunities together.

We continue to believe that both companies will benefit greatly from sharing institutional relationships, fund product ideas, marketing strategies and investment opportunities. Valad also provides Kimco with a wonderful window on a wide range of Asian real estate markets and investment possibilities. Thank you and now I’d like to turn to Milton.

Milton Cooper

Well, thanks, Dave. Just a few brief comments. Retailers are directly affected by the consumer and housing starts, and the consumer is feeling the pain of inflation every time the gas tank is filled and every time the family goes to the supermarket, so shopping for non-essentials will take a back burner.

The absence of a vibrant housing market has reduced demand for furniture, appliances, linens, et cetera, so the retailers are suffering from a double whammy: the consumer in pain and the absence of a vibrant housing market.

Retailers have told us that California, Florida, Arizona, Nevada have been particularly difficult. The Midwest and Northeast have not been as negatively impacted. And when the cash register sales are not ringing with sales, the retailers become more cautious on expansion and tougher on negotiating rents. And for those retailers with highly-leveraged balance sheets, store closings may follow.

On a relative basis, I believe supermarkets, drugstores and discount stores will do better than department stores and apparel stores. Indeed, the value of real estate leased to tenants who sell food and other essentials and whose credit is strong may increase in value in a period where there’s a flight to safety.

Thus far, the stress on the consumer and the illiquidity in the financial markets have not produced any juicy opportunities or transactions. I suspect that they may come about later in ’08, and you can count on us to jump on them. Over the years, I’ve seen the truth in the adage that patience is a virtue, and indeed we are patient investors. We are patient to seize opportunities and patient in planting seeds for the future.

And this, of course, is a time not only to be patient but cautious. It’s a time to follow the essentials of the Hippocratic oath, which is do no harm to the patient. And with that we’ll all be delighted to answer any questions you might have.

Barbara Pooley

Jake, if you’ll open up the lines for questions, please?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Paul Morgan, Friedman, Billings and Ramsey.

Paul Morgan – Friedman, Billings, Ramsey & Co.

─way they deal with their real estate in a difficult situation and it may require you to─

Michael Pappagallo

Paul? Paul, we were cut out in the beginning of your question.

Paul Morgan – Friedman, Billings, Ramsey & Co.

Okay.

Michael Pappagallo

Could you repeat it from the start? Thank you.

Paul Morgan – Friedman, Billings, Ramsey & Co.

All right. Sure. I was just asking whether you think retailers, you know, that are going through difficult times are being more efficient now in this cycle with their real estate and it would, you know, cause you to need to take more risks to get involved with the types of transactions you made a lot of money on the in the past and then how you may try to get involved this time around.

Milton Cooper

Well, retailers will be more cautious, and I think with the money that we’ve made in the past have been where there’s been distress in the retailers and where there’s been a bankruptcy process and they have to dispose of leases or need financing and particularly debtor-in-possession financing. And I suspect that you will see some of those transactions early on, so that’s, Paul, what we see and I think there’ll be substantial volume early on.

Dave Henry

And I would also add on the new business side the development, it’s clearly more difficult today. We’re seeing fewer development opportunities as retailers are more cautious about expanding in markets, so the number of deals we do in KDI and some of the other areas are going to slow down at least for now.

Paul Morgan – Friedman, Billings, Ramsey & Co.

I mean that gets to my other question on development. I mean you’ve got about $2 billion you list in your pipeline. A lot of that is pretty far along and either completed or under the construction process. And where do you think that number goes, you know, over the next year and a half, say, and what do you think the composition will become between Latin America and the United States?

Dave Henry

Well, it’s been very limited in the U.S. I can only think of one deal that we’ve approved so far this year in terms of new development, and it was a grocery-anchored shopping center in Charlotte, a very small food anchor grocery store.

So we—at least for now—we see very little in the U.S. that meets our current criterion. At the same time, Latin America the pipeline is very strong, so it will continue—the percentages of Latin America versus the U.S. look like they’re going to continue to grow for Latin America and down for the U.S. Now, that may change, but for now, that’s what we see.

Paul Morgan – Friedman, Billings, Ramsey & Co.

Do you think there will be enough growth in your pipeline in Latin America to, you know, backfill kind of what falls out of the U.S. pipeline.

Dave Henry

Absolutely, absolutely. It’s very strong. In fact that’s one of the reasons we decided to go the comingled fund route in South America because the opportunities are just so substantial that we had an opportunity to bring in other institutional partners and still meet our targets in terms of investing our shareholders’ capital.

Paul Morgan – Friedman, Billings, Ramsey & Co.

Thanks.

Operator

We’ll now take a question from J. Habermann with Goldman Sachs.

Jonathan Habermann – Goldman Sachs

Hey, good morning, and certainly Milton and the team, my sincerest condolences on the passing of Marty. I just wanted, obviously, to comment on Home Depot and sort of updated CapEx plans. It sounds like they are no longer pursuing 50 store openings in the U.S. It sounds like they’re taking a pretty significant write-down and perhaps scaling back development by as much as a billion dollars over the next several years.

Do you see this trend as something that you’ll continue to see happen more broadly in the industry or it is really focused on specific segments? And I guess alternatively, could you just comment on perhaps, you know, where you’re seeing some positive news and where there’s actually some strength in terms of expansions?

Dave Henry

Sure. Obviously, the retailers that are closest to housing are probably suffering the most, so the Home Depots of the world are obviously one of the first to cut back. Interestingly enough, though, they have accelerated their plans in both Mexico and in Canada. So the number of stores they plan to build in both those markets has actually increased from prior years’ targets as they look at those countries as opportunities for growth.

As Milton referred to, the grocery stores actually seem to be doing okay in this market. Maybe food price inflation helps them or the people concentrating on eating at home and back to basics. We see the grocery stores actually pretty healthy these days. David, do you have any comments as well?

David Lukes

Yes, well, if you look at the positive side, I would say that there are a couple of tenants that fit categories that are on the right side of demographic trends. For instance, pharmacy, pet supplies, discount apparel and those types of tenants in the markets that weren’t overheated by housing growth are still trying to grab market share, and so we’ve seen some continued strength in some of those markets.

Jonathan Habermann – Goldman Sachs

And, Mike, in your comments and this is just sort of a follow-on question. You sounded a little bit positively surprised that occupancy stayed as high as it did in the first quarter. I mean obviously given your sort of modest adjustment to same store and OI growth, I mean are you assuming some reduction in occupancy and then it picks up toward the latter half of the year?

Michael Pappagallo

I let—David, I think you’re probably better served to give a view on the occupants.

David Lukes

Yes, I think as far as the occupancy goes, the visibility we have on new leases is fairly strong and as well as renewals simply because the duration it takes to negotiate and execute a new lease gives you about a 60-day visible window. And for the second quarter our visibility is still very good, so that’s positive.

What we don’t know obviously is, you know, bankruptcies and what effect that will have on the total occupancy, and we also don’t know to the vacates whether they’ll be mostly shops or they’ll be mostly junior anchors. And because they’re vastly different in square footage, that mathematic equation will change our occupancy a little bit.

But when we take everything into consultation and we look throughout our whole leasing pipeline, we’re still fairly comfortable that barring any sizeable bankruptcies, you know, we’re going to be holding okay on our occupancy.

Jonathan Habermann – Goldman Sachs

Okay and just a final question. In terms of just how far off buyers and seller are today, can you just give us a sense of how wide that is and obviously the impact of the credit markets thus far? I mean clearly with preferred issuances over 7% and debt today in the mid-sixes?

Dave Henry

It’s a very wide bid-ask spread. You know, a year ago, good quality centers were selling in the low sixes. Not that many transactions at that level are happening. The bids are more in the low sevens, and sellers aren’t ready to sell at that kind of level, and buyers certainly don’t want to buy at yesterday’s prices. So there’s been very little acquisition activity happening as people wait to see who wins.

And part of the reason is the financing markets are still very, very difficult, so buyers can’t get the financing, so they’re not willing to stretch at all. And sellers with deep pockets like institutions or REITs aren’t prepared to accept the lower prices today.

Jonathan Habermann – Goldman Sachs

Okay. Thank you.

Operator

(Operator Instructions) We will now move to the next question, which will come from Christine McElroy, Banc of America.

Christine McElroy – Banc of America Securities

Hi, good morning. Just following up on Latin America. On the leasing side, are you generally only strengthening new relationships with local retailers or are you also finding that traditional U.S. retailers have an interest in expanding to those markets as well?

Dave Henry

Both, both. I mean retailers on both sides of the borders are recognizing that Mexico has been underserved for many, many years. I think a number of researchers have noted when you have less than a thousand shopping centers in a country of over 100 million people versus the United States with 50,000 shopping centers, there is an enormous opportunity. And people like Walmart and Home Depot and Costco and HEB have jumped on the opportunity, and many more U.S. retailers like Best Buy and Lowe’s have announced plans to going down there.

So you have the U.S. retailers rushing down there. You have strong Mexican retailers like Bamsa and Electra and Soriano also growing tremendously there. And you also have some South American retailers that are looking at Mexico to jump in.

You have a growing middle class. You have a country that’s doing quite well, and they need basic shopping centers that are more like U.S. centers versus the street vendors and the people selling out of small street shops that were there historically, so it’s still a great time to grow retail in Mexico.

Christine McElroy – Banc of America Securities

Great, thanks. And then can you talk a little bit generally about what you’re seeing on the debt financing side? Where are well-capitalized borrowers finding capital most readily available today and at what spreads? And now that there have been a couple of public unsecured debt deals and it seems like the market’s opening up a bit, have you gauged pricing in that market and would you consider doing a deal today?

Mike Pappagallo

As it relates to Kimco’s corporate credit and looking at opportunities in the debt market, yes, we agree that spreads are starting to tighten. CDS is getting to more rational levels. So as we look at our business plan, as we look at building the balance sheet and as opportunities come to bear, we certainly would expect that we would be back in the capital markets on both debt and whatever other available capital opportunities there are.

Still, the pricing is starting to come back. We’ve seen deals that have been done by Westfield and AMB, and they’re starting to be more traction, but I still think on balance there’s still some degree of uncertainty in the marketplace, and we have enough capital sources and our balance sheet has enough liquidity that I think we can afford to wait for I think a more optimal time or when the markets gets even more established and more firmed up to enter the markets. We really don’t need immediate capital today.

Christine McElroy – Banc of America Securities

That’s helpful. Thank you.

Operator

And now moving to the next question, Michael Billerman with Citigroup. Go ahead.

Ambika Goel – Citigroup

Hi. This is Ambika with Michael. In your annual report there was mention of a new development opportunity fund in the U.S. for potentially busted development deals? Can you talk about the potential size of this fund and where you are on setting it up?

Dave Henry

The only thing we’re really looking at in terms of a fund in the U.S. today is more of an urban redevelopment fund in our backyard, so to speak, in the New York metro area and Long Island where we’re particularly strong. That’s the most immediate thing we’re working on now in terms of development or redevelopment or taking advantage of opportunities in our own backyard.

Ambika Goel – Citigroup

Okay and how far are you along in setting that fund up?

Dave Henry

Well, the one that just launched this week—and we’re happy to talk about it, especially in such a wide audience—is our South American fund. So that is a comingled fund that launched this week.

The urban fund we’re still toying with the parameters and business model and exactly how to target the fund investments, but we are intrigued with the possibility of introducing an urban fund because we think we know our local markets very well. We see lots of opportunities here. We’ve managed to take advantage of them over the years, and it seems to fit our strengths.

Ambika Goel – Citigroup

And then on the opportunistic investment side, you mentioned that at this point you’re still waiting on the sidelines and you could potentially see opportunities later in the year. Are there any signals that you’re looking for in the marketplace or any indicators that, you know, we as analysts to look at to expect a ramp up? What kind of distress are you looking for in order to start to put capital to work?

Dave Henry

As you know, we have a long history of working with retailers that struggle and look to finance or purchase on a sale lease-back basis their real estate. Subsequent to the end of the first quarter, we are participating with a consortium providing financing to 84 Lumber Company, and that is one where this company owns most of their facilities. We think we’re very well secured, and it’s a very generous rate of interest, and it’s an example of the type of opportunities we think are developing, and we’ll tell you a little more about it at the end of the second quarter.

Ambika Goel – Citigroup

And could you just review the size of that investment?

Dave Henry

Our participation is $25 million. The total facility is $590 million, but it includes inventory and receivables and things besides real estate. Do you know how much the real estate portion is?

Ray

The real estate portion was $195 million.

Dave Henry

The real estate portion was $195 of which we took $25.

Ambika Goel – Citigroup

Okay, great. Thank you.

Operator

Now Christeen Kim with Deutsche Bank will have the next question.

Christeen Kim – Deutsche Bank

Hey, good morning. Just in terms of U.S. development and how much you’ve changed your criteria for new projects, how much have you changed your underwriting in terms of yields or what have you?

Dave Henry

Well, I think we’ve changed or we’ve become more selective and more discriminating in two ways. One is we’re trying to be disciplined about making sure that we’re building to a yield on cost in the double digits. So we’re looking for 10% or greater unleveraged return on cost using today’s rents and today’s expenses and the estimated cost of the project.

Secondly, we’re trying to make sure we’re back to basics. We’re looking for either grocery-anchored or pure retail development projects. We’ve done a couple mixed use over the years where we relied on perhaps a residential component or an office component with some mixed success there. So I think we’d like to focus more on pure retail development, and we’d like to make sure the yields have plenty of room, plenty of cushion in them.

Christeen Kim – Deutsche Bank

Great and, Mike, I think you mentioned that some of your assumptions for merchant bill gains and profit participation for this year was based on the assumption that a more stable financial environment going into the second half? If the credit markets stay where they are, how much does that impede your ability to reach those merchant bill and profit participation targets?

Michael Pappagallo

It’s very difficult for me to put a specific dollar target on it and what the degree of risk is. Certainly, there is transaction activity, and we’re not suggesting that nothing is going to happen, but I guess the best place to look when you think about our earnings guidance—in the press release we indicated that between new business and transactional activity, there’s probably

$150 million left for the balance of the year. There was about 40 to 50 that we completed in the first quarter, so that represents the area that has the most variability over the course of the balance of the year.

And, really, one of the things I was trying to get to was that because of where the markets are, I would guess that a lot of that activity is going to happen in the second half of the year as opposed to over the next few months.

Christeen Kim – Deutsche Bank

Great, thank you.

Operator

Now moving to Steve Sakwa with Merrill Lynch. Go ahead, please.

Steve Sakwa – Merrill Lynch

Thanks. Well, I guess, Mike, just to kind of follow up on that question, I’m just trying to understand what the capital deployment sort of required to hit these targets is because it’s not clear from the release sort of how much capital you’re sort of looking to put out.

Michael Pappagallo

Most of that activity, Steve, is actually existing assets on the balance sheet today that we’re looking to dispose of in the normal course. And what I mean by that is the Kimco developer’s profits $20 to $25 million, say, assets on the books that we need to just execute on sale transactions. Excuse me.

In our preferred equity business it’s a matter of finalizing and executing certain transactions where we either refinance our existing participation or the underlying property is sold outright, and we recover our kicker, so those are the primary drivers in the transactional side of the business.

You know, in different periods of time we’ve talked about new business origination and levels of new business origination, but as I’ve said, there’s not a lot. The impact on the current year is much more muted because of the timing of the transactions. So even if we talked about a $400 to $500 million investment base, the impact this year is not going to be as significant.

So for us it really is existing assets, turning them over as part of our operating plan for the preferred equity business, our Kimco Select investment assets, our development business and then some transactional activity in terms of acquisition fees and promotes on the disposals of some of our joint venture projects.

Steve Sakwa – Merrill Lynch

Okay so it’s really more dependent on you selling a lot of assets and refinancing and less about deploying a billion or $2 billion of new capital.

Michael Pappagallo

Absolutely.

Steve Sakwa – Merrill Lynch

Okay and can you just talk a little bit about the organization and build out of the international program and how you’re staffing that and, you know, what sort of risks you see in some of these countries?

Dave Henry

Sure. Let’s see where to start. We have offices in Toronto, Mexico City, Santiago, but most of our people for Latin America are headquartered in San Antonio. That’s where our back office and our asset management folks are.

We probably have more than 25 people now for our Mexico and Latin America operations, and we will probably finish the year around 30 would be a rough guess. Milton has a heart attack every time we add people, but we do need to add a few more people. We hope to open an office and have a physical presence in Brazil by the end of the year.

In terms of the—well, let me make another comment on resources. We are partnered, for instance, in Mexico with G.E. Real Estate. G.E. Real Estate has over 30 professionals in Mexico City, and we leverage their expertise and their 20 years of experience in Mexico as well as our own folks. So we think we’re pretty well covered, and between the two firms, we hope we know what we’re doing in those markets, and we have lots of experience.

In terms of risk, there’s obviously political risk in Latin America. Mexico came close to electing a very leftist presidential candidate, which could have caused some turmoil. But as Jack Welch used to tell us that G.E. Mexico was the 51st state in many ways, and it’s not going backwards. There’s an enormous economy down there. It’s doing quite well. It has the natural resources like oil. It has a labor cost advantage that’s absolutely amazing.

We also have interest in about 10 million square feel of industrial space now in Mexico and more than 70 net lease buildings, and we are 98% occupied, and things are going very well on the industrial front in Mexico.

So I think the economy’s fine and not a major risk. They do have their share of problems, everything from crime to drug, and they need a lot of reforms in the legal system, all of which are somewhat at risk.

And then as you go farther south into Brazil, for instance, Brazil has an interesting lease law that says any tenant can cancel any lease on 90 days’ notice, so that makes for an interesting risk as you underwrite an income-producing property with leases.

So there’s certainly risk, and we try to offset that by making sure that we get much higher returns. So when we look at these deals, we’re looking for much bigger cushions than we would in the U.S. for issues.

But we’re excited about the fact that these places have very growing economies. They’re resource rich. They’re very underserved with retail. Our own tenants from the U.S. are down there, so we can leverage relationships with Walmart and other people as they expand to these countries, so it represents a good opportunity for us notwithstanding the fact that there are risks any time you go outside of the U.S.

Michael Pappagallo

Jake, we’ll take the next question.

Operator

(Operator Instructions) Now moving onto David Harris, Lehman Brothers.

David Harris – Lehman Brothers

Yes, I can count to two. Dave, just to extend the point on Steve’s question, is it reasonable to assume that your working assumption is as you look at Central and South America, these economies are going to be relatively untouched by the slowdown in the United States over the next year or two and that’s not going to have any ripple effects in terms of property pricing?

Dave Henry

I would never say untouched. Absolutely not because Mexico is, you know, or U.S. is Mexico’s largest trading partner by far, so there will be impacts. I’m saying on a relative basis, they are going to do better than the U.S. on the economy.

As I referred to, it’s amazing to me housing is still booming in Mexico with a million-unit shortfall of housing down there, and there’s a growing middle class. And we are not seeing the strains on retailers and local shop space that we see in the U.S., so I think they’re holding up relatively well.

And I think countries with strong natural resources like Canada, you’d be amazed what’s going on in Canada, especially the western part of the country where you have the oil sands projects and the energy projects and Quebec with it’s hydropower and so forth.

So we think emphasizing countries with strong natural resources, trade surpluses, fiscal surpluses, relatively stable governments, that’s a good place to invest our shareholders’ capital for the time being. If the U.S. becomes very opportunistic, then we’ll be happy to aggressively invest here.

David Harris – Lehman Brothers

Okay. Mike, was there any FX impact in the numbers in the numbers in the quarter and correlate to that, is there any FX impact implied in your guidance for the full year?

Michael Pappagallo

If you look at it, David, over a year-over-year basis and primarily the effect of our Canadian cash flows, which had the most dramatic FX, probably about $1.4 million of increased earnings this quarter versus last due to FX. I do not factor in any further strengthening of foreign currencies to help the numbers in ’08.

David Harris – Lehman Brothers

Great. Thanks, guys.

Operator

And now moving onto Michael Mueller of J.P. Morgan.

Michael Mueller – J.P. Morgan

Yes, hi. With respect to the South America fund, what’s the anticipated split between money invested via development versus acquisition?

Dave Henry

I’m sorry. Which fund did you mention?

Michael Mueller – J.P. Morgan

The one you’re starting in South America.

Dave Henry

South America? It will be largely development although we have had opportunities to buy existing assets in Chile, but I anticipate Brazil will be largely development, and Chile will be a mix.

Michael Mueller – J.P. Morgan

Okay and second question. Can you just comment on preferred equity pricing these days and just kind of any trends we should be aware of?

Dave Henry

Sure. We, like most lenders, when we put on our lender hat, we’re trying to take advantage of increasing spread. So I’d say our typical preferred equity deal we’ve increased the base preferred return by 100 to 200 basis points, perhaps from 8-ish to 10-ish. And we’re looking for larger pieces of the deal, and we’re looking for things like IRR lookbacks and things like that that we weren’t able to get over the past couple years.

A number of our competitors in this business are out of business like Merrill Lynch Capital and Barclay’s Capital and some others that used to compete actively with us, so our pricing has changed as we try to make sure we get well paid for deals today. We jokingly tell all our originators we just want very safe deals with very large profit.

Michael Mueller – J.P. Morgan

Okay. Thank you.

Operator

And now our next question Bridget Adams, Argus Research.

Bridget Adams – Argus Research

Yes, hi. Congratulations on the quarter, and I also would like my condolences …

Barbara Pooley

Bridget, can you speak up a little bit, please?

Bridget Adams – Argus Research

Sure. First of all, I’d like to congratulate you on the quarter and also give you my condolences for the passing of your founder. My first question is as far as—I’m looking at your average rent per leased square foot in Mexico and that versus the U.S. And I would like you to kind of explain the differences between the relationships you have with, you know, the core store, your main store owners like Home Depot in the U.S. versus that in Mexico as far as leasing in concerned? That’s my first question.

Dave Henry

Well, you’re fading in and out a little bit, but the leases are very different in Mexico and the U.S. We’re still able in many cases to get, for instance, percentage rent, and every single lease in Mexico has a full cost-of-living increase. We very rarely get either of those in the U.S.

And we get it in Mexico because there’s still a shortage of retail space down there, so developers and property owners have more leverage. It’s going away though. People like Walmart are much less willing to pay percentage rent than in the past, so again, that explains why we’re so anxious to get a lot of these projects completed while the window of opportunity is open.

Also similar to the U.S. the local stores or the smaller stores pay much more rent than the anchor tenant, and that’s probably magnified in Mexico because local stores are only 400 square feet whereas the U.S. has 2,000-square-foot local stores. So you’re talking about very small local mom-and-pop stores, and on a per-square-foot basis you can charge a very high rent if you have a good shopping center. In the U.S. the local stores are a little bit larger, and the difference between the anchor tenant and the local tenant is not quite as great.

Bridget Adams – Argus Research

Okay and just as a follow-on, I noticed that most of your Mexican development pipeline is expected to be delivered in 2008, and I was just wondering if you could potentially quantify or estimate the approximate added value it will have on your total portfolio. I think it’s …

Dave Henry

It’s very hard. It’s a moving target. We have an enormous pipeline behind the stuff that we closed and behind the stuff that will be completed late this year and early next year. Common sense tells you though with cap rates declining from 13% to almost 8% now or 8.5% in Mexico, when we developed these shopping centers to a 13% to a 15% unleveraged yield, there’s enormous value creation in these shopping centers.

Bridget Adams – Argus Research

Could you give an estimation at all? I mean it’s just I don’t think that a lot of people consider that in their net asset evaluation.

Dave Henry

It’s very hard because we don’t know how many will be complete in which years and exactly which of our pipeline deals are going to close and how fast they’re going to lease up. If you look back at what we did in Canada, we aggressively bought properties in 2001 and 2002 at an average cap rate of nine and three quarters. Those same properties are worth in the sixes.

We also invested $.63 dollars then, and the Canadian dollar’s now up to a dollar, so we did create, hopefully for our shareholders, enormous unrealized gains in Canada. We hope to do the same thing in Mexico.

Bridget Adams – Argus Research

Okay, thank you.

Michael Pappagallo

Bridget, I guess the best way I would help you look at it is just take a look at our existing projects. We have about 24 projects with about $750 million of aggregate costs.

Bridget Adams – Argus Research

Yes, I see that.

Michael Pappagallo

Our target is 12% to 14% yield. As Dave mentioned, stabilized shopping centers in Mexico are selling south of 10%, and that’d probably give you just a quick—you can do the math to kind of figure what the embedded value creation is at least on the existing projects. As Dave said, the pipeline is a little more difficult.

Bridget Adams – Argus Research

All right. Thank you very much.

Operator

David Fick of Stifel Nicolaus will have the next question.

David Fick – Stifel Nicolaus & Company

Thank you. I was wondering if you could comment a little bit more on where you see retailers today in terms of your distressed retail program: A) What kinds of things are you currently involved in and what do you anticipate going forward and what will your posture be vis-à-vis how aggressive you should be, given the forward economic view? Do you think this is short issue? Is it a long issue and will that change how you approach distressed retail?

Dave Henry

Let me give you a little more detail on 84 Lumber because I think that is right up the strike zone, and I anticipate we’ll see more of this. 84 Lumber is a company with 380 lumber yards, if you will, or lumber stores. And 85% of these stores the company owns outright, so these are not leased locations.

So as this company struggles with the housing problem, they needed to recapitalize, and so we took a hard look along with some others at the underlying value of their real estate, and these average sites are eight acres and they’re in some great locations.

So our team, given our 20-some offices we have in the United States, we were very quickly able to evaluate these sites and make a very conservative loan at a very high interest yield to us, and that was an opportunistic transaction and we just funded $25 million.

We think we’re going to see more of that stuff, and as Milton referred to, you’re also going to see companies that are actually in bankruptcy where we can provide debtor-in-possession financing, exit financing, inventory receivables. We piggyback with our partners that are very good in that business like Schottenstein and G.E. that know how to underwrite the inventory liquidation.

We participation in the Levitz going out of business sale. I think—Ray, help me.

Ray

Sofa Express.

Dave Henry

Sofa Express, things like that. So we anticipate we’re going to have more opportunities to do that, and again, we’re going to try to make sure that these are very safe deals but very rewarding to us in order to justify using our capital for that.

David Fick – Stifel Nicolaus & Company

What is your basic economic assumption if you just take 84 Lumber? And I know you can’t presume here that, you know, they’re going to not survive, but I’ll presume that. There’s so much competition. What are you presuming about alternative use and, you know, the length of period that it would take you to work out this kind of a transaction, assuming they don’t survive?

Ray

Yes, sure. I mean the interesting thing with 84 Lumber is because they’re all owned sites, the carry costs for the properties are very low. For example, on average the real estate tax are $25,000 a year for each property. So when we look at this, we basically value the property only on a land value, and you know, we value it very, you know, conservatively.

You can’t sell 325 properties if they were liquidated at once, but you try to say what can you—you know, you value it on a short, you know, almost a liquidation fire sale. And from that valuation we really only, you know, lend 50% to 55% of that, so we get ourselves at a very comfortable position.

Additionally, when we do these type of transactions, they’re not pure first mortgages. We also get certain rights with respect to getting information on the company’s operations and things like that. You do a typical first mortgage the only time you find out there’s a problem with the borrower is when they don’t pay the mortgage that month.

But we get monthly operating reports and financial statements from the company, so if things are going in the wrong direction, we’ll know, you know, months, you know, three to six months ahead of time, and we’ll be able to react even earlier on that. So it gives it an additional comfort level on our transactions.

Dave Henry

And I think it’s interesting because we’ve teamed up with people like G.E. Capital that are specialized in the inventory and the receivables, and they give us a second lien or subordinate position on the inventory and receivables. And we give them a second mortgage or a subordinate position on our first position on the real estate, so it’s a nice synergy of interests. And so far our track record has been very good in this business.

David Fick – Stifel Nicolaus & Company

Thank you.

Operator

And it looks like we have time for one more question. That will come from Jim Sullivan, Green State Advisors.

Jim Sullivan - Green State Advisors

Thanks, good morning. Linens ‘n Things is one of your bigger tenants. They’ve been in the news quite a bit recently. Can you comment on your outlook for what might happen there?

Dave Henry

Not good.

Ray

Yes, I mean actually I just got an e-mail. I was looking at it a minute ago from one of the bank attorneys saying there were three articles about Linens ‘n Things today, and the rumor mill, you know, is that they, you know, fired counsel and are going to be filing any day, but there’s not assurance of whether that happens or not.

But when the bonds about three months ago were trading at $.30 to the dollar, you know, we kind of were concerned about it and actually, you know, working with David Lukes we’re kind of on top of our sites and what we can, you know, do with them if we get them back.

Milton Cooper

Yes, we have monitored that, Jim, very carefully. We’ve analyzed which of the locations have Melville guarantees because you may recall that Linens ‘n Things was once a subsidiary of Melville, which is now CVS. So we have anticipated this and we’re on top of every one of them.

Jim Sullivan - Green State Advisors

Thanks. That’s helpful. I didn’t know that.

Dave Henry

And it’s interesting as we look at our portfolio, for instance, the Canadian Linens ‘n Things stores are extremely strong, and they will probably survive in some part no matter what happens.

Milton Cooper

They will probably not file in Canada.

Ray

That’s what I’m hearing.

Milton Cooper

That’s our impression, yes.

Dave Henry

And the one in the U.S. we have a number of good stores. We don’t expect them to reject those leases. And the ones that they might reject based on their sales per foot, we think we can handle.

Jim Sullivan - Green State Advisors

And then my second question. Milton, earlier you said that what you’re hearing from retailers is that many of them are having their greatest challenges in some of the housing bust markets. You cited Florida, I think Nevada, Arizona and Southern California. Is there a direct correlation with what you’re hearing from retailers with respect to the operating performance of your own portfolio? Are those the markets where you’re having the toughest time maintaining occupancy and pushing rents?

Milton Cooper

I’m going to ask David to answer that. David?

David Lukes

Yes, I think there’s a certainly a direct correlation between where the retailers are having trouble and where we start to see occupancy declines. If you start from the premise that the report card is the tenant sales and that the rent growth is a function of how their sales are growing, you know, we’re hard pressed to see rents escalating when their sales are declining.

So the areas that had a housing exposure like the ones you just mentioned are also the ones this last quarter that we had the most vacates. What’s interesting is that when you look at the vacates on two areas of the country that we had the most occupancy change to the negative, which is the Southeast and the Southwest, one of those markets, the Southeast, was primarily junior anchors, and the other market, the Southwest, was primary shop spaces.

So I think what’s going to be something we’re looking heavily on the next few quarters is what is driving each individual submarket and what can we do to change our marketing and make sure we’re doing all we can to keep our occupancy afloat.

And some of that might just be changing the tenant mix in the center so it’s, you know, less oriented towards carpet stores, flooring, furniture and more geared towards the long-term demographic trends, you know, like pharmacy and discount apparel so certainly a correlation, and we’re trying to keep a very close eye on it.

Jim Sullivan - Green State Advisors

Thank you.

Operator

At this time, I’ll turn the call back over to your hosts for closing remarks.

Barbara Pooley

Thanks, everybody, for participating today. Just as a reminder, our supplemental is on our website www.kimcorealty.com. Have a great day. Bye.

Operator

And once again that does conclude your conference for today. Everyone, please have a wonderful day.

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Source: Kimco Realty Corporation, Q1 2008 Earnings Call Transcript
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