Kimco Realty Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 16 speakers on the call.

Operator

And welcome to the Kimco Realty First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Dave Bujnicki, Senior Vice President of Investor Relations and Strategy. Thank you, Mr. Bujnicki. You may begin.

Speaker 1

Good morning, and thank you for joining Kimco's quarterly earnings call. The Kimco management team participating on the call today include Conor Flynn, Kimco's CEO Ross Cooper, President and Chief Investment Officer Glenn Cohen, our CFO Dave Jamieson, Kimco's Chief Operating Officer as well as other members of our executive team that are also available to answer questions during the call. As a reminder, statements made during the course of this call may be deemed forward looking, and it is important to note that the company's actual results could differ materially From those projected in such forward looking statements due to a variety of risks, uncertainties and other factors, please refer to the company's SEC filings that address such During this presentation, management may make reference to certain non GAAP financial measures that we believe help investors better understand Kimco's operating results. Reconciliations of these non GAAP financial measures Can be found in our quarterly supplemental financial information on the Kimco Investor Relations website. Also, in the event our Call was to incur technical difficulties.

Speaker 1

We'll try to resolve as quickly as possible, and if the need arises, we'll post additional information to our IR website. With that, I'll turn the call over to Conor.

Speaker 2

Good morning, and thank you for joining us today. I will begin with an overview of the environment and share how we are strategically well positioned for long term growth. Ross will then cover the transaction market and Glenn will close with our key performance metrics And updated guidance. We are off to a great start to the year with solid first quarter results, including over 4 point 5,000,000 square feet of leasing as we benefited from our combination of high quality grocery anchored assets, emphasizing off price retail and everyday essentials In First Ring Suburbs, that makes us uniquely positioned to benefit from what we believe to be longer term trends relating to consumers and retail strategies. We accomplished this leasing in the face of high interest rates, bank failures, signs of a weakening economy and troubled retailers.

Speaker 2

Our dedicated team and resilient portfolio not only withstood these pressures, but outperformed. First, the consumer, While inflation remains stubborn, the Kimco shopper remains sturdy as we continue to see healthy traffic reported across our portfolio. According to our large national retailers, the demand for essential goods, services and groceries continues to be strong. In addition, the flexible hybrid work environment is creating more opportunity for shoppers to frequent our centers. Finally, Omnichannel shopping continues to outperform pure online shopping as optionality is a winning formula by providing consumers the convenience of shopping online And picking up or returning at the local store.

Speaker 2

Requests to expand our nationally recognized curbside pickup program Continue to grow from our entire stable of national, regional and small shop tenants. In addition to the resilient consumer, Leasing demand and the ability to push rents continues at a robust pace due to the lack of new supply and high barriers to entry at our highly desirable locations. The demand for new space is well diversified, with a mix of new deals this quarter spread among off price, grocery, sporting goods, fitness, As part of our focus on attaining the highest and best use of our properties, We also secured 2 new entrants to the Kimco portfolio this quarter, a Tesla dealership in Austin, Texas and a market by Macy's in San Diego. Strong leasing supported by this robust well rounded demand is reflected in our new leasing spreads of 44%, a 5 year high. Occupancy bucks the seasonality trend of dipping after the holidays and gained 10 basis points.

Speaker 2

Thanks to our team's stellar efforts and our small shop leasing initiatives. During the Q1, we anticipated some space coming back from underperforming retailers, including Bed Bath and Beyond, who just filed for bankruptcy this past week. This has been widely expected and we've been well prepared for this outcome as we have actively marketed all of our Bed Bath spaces for some time. To highlight our successful efforts, we started the year with 30 bed bath leases. During the Q1, we sold one location and released 3 boxes, including 2 we recaptured With a mark to market spread of 24%.

Speaker 2

Regarding the remaining 26 Bed Bath leases, we are either in lease or LOI negotiations on 22 locations With a mark to market spread similar to what we have executed to date, which exemplifies the strong activity from a diverse pool of retailers looking to expand. The remaining four locations are either being marketed for lease or a potential redevelopment candidate. The lack of supply and inability to meet new store targets It is a constant refrain from our retailers during our portfolio reviews and remains key catalyst for the lease up of these locations. It is also why our retention rates for the portfolio continue to remain well above historical levels at 90% this quarter. With this pace of retention and the strong leasing demand, we believe that over the long term, we should see an improved underlying growth rate for our business.

Speaker 2

Further enhancing the value of our First String suburb locations is the increased demand for industrial and residential assets. This competition for land or conversions Makes the cost of new retail development even more prohibitive, which will further reduce supply for potential new retail. And when you combine the rising rents in the residential sectors with the competitive redevelopment advantages at our existing locations in the First Ring suburbs, The opportunity to add more mixed use density provides us the long term opportunity to drive further growth and value creation. In the end, strategically, we are well positioned for what could be a choppy second half of the year and beyond. With our Open Air high quality grocery anchored portfolio Producing record results, our leverage metrics at all time lows, along with our significant cash position, we are positioned for growth and will look to be opportunistic When others cannot, in our quest to outperform on a sustained basis.

Speaker 2

Ross?

Speaker 3

Thank you, Connor, and good morning. I'll begin with the market for transactions, which remains restrained given the volatility in the capital markets and elevated borrowing costs. Transaction volume was down across the board in the Q1. However, what has remained constant is the significant demand from both institutional and private investors For high quality Open Air Retail, a healthy level of equity capital remains patiently waiting on the sidelines for opportunities to acquire our product type As the property fundamentals continue to improve within this retail sector. Notwithstanding the improving operating fundamentals, Investors are seeking higher cap rates to offset higher cost of capital.

Speaker 3

At the same time, however, supply remains limited With sellers holding out for higher pricing unless they face refinancing or other pressure to sell. How long this stalemate lasts is the ultimate question. Despite these broader market conditions, we have found ways to selectively and accretively put capital to work. On the last Earnings Call, we mentioned the 2 Southern California grocery assets we acquired from one of our JV partners. Subsequent to the call, We were successful in buying out a 3rd grocery anchored site in Southern California from the same partner.

Speaker 3

This property is a dual grocery anchored site With a Smart and Final Traditional Grocer in addition to a Trader Joe's, we are excited to add these 3 strong performing grocery assets to our wholly owned portfolio Despite the market conditions I described, we also added a new structured investment into our program in the Q1, an $11,200,000 subordinated loan on a Sprouts anchored shopping center outside of Orlando, Florida. As with all of our structured investments, we retain the right to acquire the asset in the future This property is another great addition to the structured portfolio with a very attractive return At a very appealing basis on our investment. As it relates to dispositions, we previously mentioned the 2 Savannah, Georgia power centers we sold back in January. Prior to quarter end, we sold a 3rd power center in Gresham, Oregon. To my point earlier that it is taking longer to transact, We have been working on this since the Q4 of last year and successfully closed at the end of March.

Speaker 3

While we don't anticipate a significant number of dispositions in 2020 3, the sale of these 3 centers reflects our efforts to ultimately own a portfolio consisting of primarily grocery anchored retail centers And mixed use destinations in our top major metro markets. All in all, we are in a great position to continue to be opportunistic should current owners start to Our strong liquidity allows us to move quickly and aggressively on the right acquisitions or joint venture buyouts and to be financially helpful to owners that need an infusion of capital for debt paydowns or asset repositioning utilizing our structured investment program. I will now pass it off to Glenn for an update on our financials and outlook.

Speaker 4

Thanks, Russ, and good morning. Our solid first quarter results demonstrate the strength of our high quality operating portfolio as evidenced by increased occupancy, Robust leasing spreads and positive same site NOI growth. Furthermore, we bolstered our sector leading liquidity position and improved our leverage metrics with additional proceeds received from our Albertsons investment. Now for some details on our Q1 results. FFO was $238,100,000 or $0.39 per diluted share as compared to last year's Q1 results of $240,600,000 or $0.39 per diluted share.

Speaker 4

Notably, last year's figures include a charge of 7,200,000 or $0.01 per diluted share for early repayment of debt. Our first quarter results were driven by strong NOI growth, largely due to higher consolidated minimum rent of $14,500,000 This increase was offset by Higher bad debt expense of $7,100,000 as the current period had a more normalized credit loss level as compared to last year, which benefited from credit loss income due to reversals of reserves. In addition, pro rata NOI from our joint ventures Was lower by $3,000,000 mostly attributable to asset sales and higher bad debt expense. Other factors related to the change in first quarter results were higher G and A $4,800,000 and pro rata interest expense of $6,600,000 Although interest expense was higher in the current period, Last year included a $7,200,000 charge for early repayment of debt. The uptick in G and A expenses was largely driven by higher staffing levels following the Weingarten merger as well as greater expenses related to the value of restricted stock and performance units awarded.

Speaker 4

The increase in interest expense stemmed from lower fair market value amortization linked to the previously repaid above market Weingarten bonds, as well as higher interest rates associated with floating rate debt in our joint ventures. Turning to the operating portfolio, Which continues to produce positive metrics fueled by the increase in occupancy and strong leasing spreads mentioned earlier. Same site NOI growth was positive 1.4% for the Q1. However, it's worth noting that this figure would have been even stronger At 4.2%, if we excluded the impact of $4,600,000 of credit loss income from the previous year compared to $4,300,000 of credit loss expense for the current period. Nonetheless, we are encouraged by the composition of the same site NOI growth, Which reflects a 430 basis point increase from minimum rents and reduced abatements as well as a 100 basis points boost from Higher percentage rent and other rental property income, offset by lower recoveries of operating expenses of 110 basis points.

Speaker 4

Overall, these results demonstrate our continued focus on driving strong revenue growth across our portfolio. As it relates to our Albertsons investment, during the first Quarter, we received a special dividend of $194,100,000 which is included in net income, but not FFO. The Albertsons special dividend is considered ordinary income for tax purposes. Thus, we are evaluating the need To make a special dividend to our stockholders at some point this year to maintain our compliance with REIT distribution requirements. In addition, we sold 7,100,000 shares of Albertsons stock generating net proceeds of 137,400,000 It is our intention to pay the tax on the capital gain from the sale and have recorded a $30,000,000 tax provision, which is also excluded from FFO.

Speaker 4

This strategic move will allow us to retain approximately $107,000,000 for debt reduction and or accretive investments. Subsequent to quarter end, we sold an additional 7,000,000 shares of Albertsons stock And received net proceeds of $144,900,000 In the second quarter, we will record a tax provision of Approximately $32,700,000 for the capital gain component. While it is great that we have significantly monetized this investment, It's worth noting that we also benefited by approximately $0.01 per share of FFO per quarter from the ACI common dividends paid. Going forward, we will no longer benefit from the same amount each quarter given the significant monetization to date. Currently, we hold 14,200,000 shares of Which has a value of approximately $300,000,000 We ended the Q1 with over $2,300,000,000 of immediate liquidity, Comprised of over $300,000,000 in cash and full availability of our recently renewed $2,000,000,000 revolving credit facility.

Speaker 4

Our leverage metrics continue to improve with consolidated net debt to EBITDA of 5.8 times And 6.2 times on a look through basis, including our pro rata share of joint venture debt and perpetual preferred stock outstanding. The look through metric of 6.2x represents the best level since we began reporting this metric in 2,009. As I just touched on, during the Q1, we renewed our $2,000,000,000 revolving credit facility with 20 banks. The facility now has an initial maturity date in March 2027 with 2 6 month extension options bringing the final maturity date 2028. This is a green facility initially priced at adjusted SOFR plus 77.5 basis points.

Speaker 4

The borrowing spread can increase or decrease up to 4 basis points based upon our success in reducing Scope 1 And Scope 2 Greenhouse Gas Emissions. Based on our current progress, the borrowing spread has already been reduced by 2 basis points to 75.5 basis Turning to our outlook. Based on our Q1 results, the monetization of Albertsons shares And expectations for the balance of the year, we are tightening our FFO per share range to $1.54 to 1 $0.57 From the previous range of $1.53 to $1.57 we are lowering our lease termination income assumption by $10,000,000 To a range of $4,000,000 to $6,000,000 with more than half already received in the Q1. Initially, we believe that transaction in the Q1 would result in However, when we reviewed it in more detail, given the complex accounting treatment, we arrived at a different conclusion. Our previous assumptions remain intact regarding same site NOI growth of 1% to 2%, which includes credit loss of 75 to 125 basis points.

Speaker 4

And now we are ready to take your questions.

Operator

Yes, thank you. We will now begin the question and answer session. We ask that you limit yourself to one question and one follow-up. If you have additional questions, please re queue and we will take as many questions as time allows. At this time, we will pause momentarily to assemble the roster.

Operator

And our first question comes from Michael Goldsmith with UBS.

Speaker 5

Good morning. Thanks a lot for taking my question. My first question is on Bed Bath and Beyond and just kind of the shape of How these closures and then potentially coming back online, how that's going to affect the financials? So does this mean that we should expect kind of 60 basis points of rent coming off and 100 basis points of occupancy coming off. And then Over time, we get that back kind of next year and the $8,500,000 of rent kind of comes back in like a $10,500,000 See, like does that and then what would be the timing of when

Speaker 6

that would kind of come back online?

Speaker 7

Yes, good question. So I would say what you just articulated would be sort of the worst case scenario in the sense that everything went out, nothing was The purchase at auction were assigned, which is an event that is yet to occur, and we anticipate happening in June End or July, so there could be some impact to that to the positive considering the competitive landscape that is a very real possibility. In In terms of the activity, as Conor articulated, less the 3 boxes that we've already leased, 26 that remained, 7 of those were rejected in the day 1 motion, where at least with over half and have LOIs on the balance, all of which are Single tenant backfills, which helps reduce the conversion and the downtime to get a tenant reopened, so that's positive. On the balance of the boxes, the majority of those are all also single tenant backfill opportunities and we're either at lease or at LOI stage. The handful that Connor mentioned in his script, we are assessing real redevelopment opportunities For those as a potential or we'd love to do a single tenant backfill.

Speaker 7

So we are in a great position from where we see obviously the lack of muted Slide knows no retail development on their horizon for the years to come. Retailers are really seeing this as the opportunity Grab that market share and expand their portfolios in these key markets.

Speaker 2

Yes, Michael, we're a bit ahead of where we thought we'd be. As you saw, we raised the lower end of our guidance Even without the termination income that we anticipated and a lot of that is attributed to the environment that we're in today for High quality locations like Bed Bath and Beyond have. So as you see, the diversity of demand is quite strong and we're in a good spot To really by June, we'll really have a better understanding of which ones are coming back to us, but we're not waiting for that. We're being proactive in lining Replacements with very strong leasing spreads.

Operator

Thank you. And the next question comes from Craig Mailman with Citi.

Speaker 5

Good morning, everyone. Conor or Glenn, maybe I want to follow-up on that last point. You guys effectively raised guidance to 0.5 Penny, at the midpoint, despite having a drag from the Eastern fees, so it looks like effectively a $0.02 raise. Could you just walk through Exactly what's driving that because the operating assumptions didn't look like they changed all that much?

Speaker 4

Yes, sure. Again, it's really driven by the rent commencement. So we are a little bit ahead of plan, Which is what's driving it. Also, the timing of investment activity and then the impact of what we looked at in terms of bankruptcy So we are a little bit ahead of schedule from what we had budgeted. So we're comfortable with raising that lower end of the range.

Speaker 2

Yes. I think one of the big drivers too for us to get comfortable with raising the bottom end is the retention rate, as I mentioned earlier. That's really driving Significant amount of cash flow growth for us. And when you look at where we thought we'd be versus where we are today, we are ahead of schedule there.

Operator

Thank you. And the next question comes from Forrest Van Dijk with Compass Point.

Speaker 8

Great, guys. I've got a Question, I guess, in 2 parts. Number 1, I'd like maybe if you can walk us through The lower NOI margin and expense recovery for the quarter and what was behind that And how does that impact your views towards maybe fixed chem or having Pure, just on an inflation adjusted basis, your recoveries struck. And then the second part is in terms of Philadelphia, I noticed there was your Philadelphia portfolio is lagging Yes, quite a bit. I think something like 480 basis points in terms of occupancy relative to the rest of the portfolio.

Speaker 8

Just if you can give us maybe Some more details behind that and if that's specific to maybe potential redevelopments or some other opportunities or is that just market It's been less good than some of the other ones.

Speaker 7

Orest, I'll take the second one first And then I'll kick it over to the rest of the team to address the margin. As it relates to Philadelphia, it's just related to the Kohl's transaction where we took back 2 of the Kohl's leases as part of that transaction in Q1, which we knew were already vacant. So that was the add there.

Speaker 2

The rest of the Philadelphia portfolio is quite strong and actually trending at or above when you look at it from the whole portfolio.

Speaker 9

And Bloorish, just on your NOI margin question and your expense recovery question. If you look at the NOI margins and you actually take a look at the credit losses in there and you pull that out from both Your margins are more in line. So that's really the driver on that decrease that you're seeing on the page. And then when it comes to the recoveries, There were some expenses that we front loaded for the quarter. But when you look at where we're going to land for the year, we're still comfortable with that same site NOI of 1% 2%.

Speaker 9

So it will level out on the recovery side as the year goes on.

Operator

Thank you. And the next question comes from Juan Sabreira with BMO Capital Markets.

Speaker 5

Hi, good morning. Just hoping you could talk a little bit about the investment market, What asset values or cap rates you're seeing for what's being transacted? You had a couple of deals both on the buy and the sell side in the Q1 And how that compares to the mezz lending opportunity that seems to be a growing opportunity set for you?

Speaker 3

Sure. As I mentioned in the remarks, I mean, it is a little bit of a stalemate right now. So the transaction volumes are way down. You are seeing certain deals get done. In the Q1, we did see some transactions occur in the 5s similar to pricing from last year, but they are fewer and farther between.

Speaker 3

When you look at sort

Speaker 2

of the bid ask spread, it's

Speaker 3

very deal specific. So as I mentioned, there are buyers that We're still looking for higher cap rates and sellers that are holding firm because there's really not any sort of forced situation with lenders or Cash flow situation or challenges. So, from that perspective, we were successful in acquiring 3 shopping centers from a joint venture So it's really just about staying opportunistic and ready with the capital which we have. As it relates To EMEA's financing and our structured investment program, that is also something that we're obviously very focused on 1 transaction in the Q1, but again, because there really hasn't been any forced sales or Distressed situation as it relates to the lending community, they are a little bit more challenging in terms of sourcing right now, but Having lots of conversations hanging around the hoop and we're ready to move as soon as those opportunities present themselves.

Speaker 2

And the only thing I would add is that we are seeing Pretty significant capital formations for our product. I think for a period of time, certain folks are on the sidelines looking at Open Air, specifically grocery anchored shopping centers. And we're having a lot of inbound requests for dialogue to potentially have new capital At our call for investment purposes. Obviously, we're sitting with tremendous amount of cash today. So we're looking at the opportunity set internally, but It is nice to see a significant amount of capital formation for our product.

Operator

Thank you. And the next question comes from Alexander Goldfarb with Piper Sandler.

Speaker 10

Hey, good morning. So question on the depth of demand across your portfolio. Would you say it's pretty evenly spread among anchor, junior anchor, Small shop, etcetera, and outparcel or is one area much deeper and actually more focused on Which areas are sort of the lightest in backfill demand and how you sort of gin up if those are spots that you would Expand or subdivide, I'm just trying to think about where the areas of the least amount of demand are in space across the portfolio?

Speaker 7

Sure. Good question, Alex. So I'd say we're seeing pretty consistent demand across the square footage at this Historically, sort of that at Tweener's 6,000 to 8, 69,000 square feet has historically been a little bit lighter than the smaller shops, We're from 1,000 to 5,000 and then the anchor box is 10,000 and over. But even in that category, we've seen great demand, a lot of people coming out of the malls, whether it be Sephora And others that are looking to backfill that particular box category has really been a benefit. So we'll continue to Push that.

Speaker 7

As it relates to the anchor activity, less out the Kohl's impact for anchor boxes this quarter, we would have been up another 20 basis points from last quarter. So we would have been at 9 instead of 98, we would have been at 98.2. So we continue to see that. And it goes back to I earlier point that there's just no new development supply that's coming online here in the coming years. And so these rare opportunities where you get Availability and good locations, people are going to jump on those, and stretch a little bit to make sure they secure it because they don't see anything else on the horizon.

Speaker 7

And they have to have that growth profile in their book.

Speaker 2

The only thing I would add is that the retailers are getting less rigid on their square footage requirements. So when you look at the typical prototype, whether it's a small shop, a midsize box or an anchor box, Typically, it's now opportunistic where they're looking at the space available versus their prototype and making it work, which obviously Lends itself to our business because if you can backfill the entire space with 1 tenant, the CapEx load goes down dramatically and that's what we're experiencing on the Bed Bath Boxes.

Operator

Thank you. And the next question comes from Samir Khanal with Evercore.

Speaker 4

Hey, good morning, everyone. Connor, can you talk about the shop leasing environment and how you think that will fare in this sort of this cycle? We've seen the bank failures here and that impacts the smaller tenants. So how are you thinking about credit environment for the shops that go into a potential slowdown here? Thanks.

Speaker 2

Yes, the shop space as you've seen with our occupancy growth continue to be the bright spot. I mean, it's really interesting. If you think about the diversity of demand of what's Driving that, it's pretty remarkable. I think we're at a point in the retail evolution where the last mile or the closest retail destination

Speaker 11

to where you live and where you work has really

Speaker 2

adopted, I would say, Nations where you live and where you work has really adopted, I would say, a hybrid retail environment where it's medical, it's services, it's Essential goods and services, it's grocery, it's health and wellness, it's physical. It really is interesting to see The diversity of demand driving that small shop growth opportunity for us. And I think when you look at The ingredients of where we see the demand drivers, I think it gives us a lot of confidence to say that with this portfolio, we can drive a higher Small shop occupancy rate than we've ever experienced before. And again, it's because of that diversity of demand. Now it's going to be interesting If the economy really does get worse and there's a pullback, some of the small shops that didn't make it through COVID, I would say we're still in a position where we're backfilling those locations Higher credit, better operators.

Speaker 2

And so we I think we're starting from a higher quality, higher credit portfolio of small shops today.

Operator

Thank you. And the next question comes from Haendel St. Juste with Mizuho.

Speaker 6

Hey, good morning. So, Conor, I guess we understand the timing of bad debt is one of the factors That can play a key role, a swing factor in how core growth plays out here in the next year or 2. But I was hoping you guys could talk a little bit The cadence for same store NOI growth this year and then as we look ahead given the snow related occupancy visibility and the demand that you're seeing, What type of ballpark same store NOI growth does that could that get you to for next year?

Speaker 2

I think most of us

Speaker 6

see this as a long term 2%, 2.5% Same for the line business, curious if you think you can top the long term average next year? Thanks.

Speaker 2

Sure. Thanks for the question, Haendel. I think when you look at, Again, the fundamentals of our business. Now there's going to be some lumpiness, obviously, quarter to quarter, with the Bed Bath and maybe some of the other retailers that we're watching, And how the auction process plays out, because that will really determine the lumpiness of how much NOI comes offline. But I do believe, as I said earlier, that the fundamentals of our business are quite strong and with virtually no new supply and very high retention rates, We should see a, I think, a longer term growth rate that's above the historical average.

Speaker 2

And we're also pushing for higher annual increases. When you look at the bumps we're getting on our Small shops, they're higher today than they were in the trailing 4 quarters. The same goes with our anchors. They're higher today than they were in the trailing 4 quarters. And if you look back Multiple years have been trending higher.

Speaker 2

So that bodes well for obviously a fundamental rerating of our growth rate Going forward, but there's a lot of things that may or may not occur for that to happen. So it's hard to extrapolate what the future is going to hold, but where we stand today, We're very confident about the strategy we put in place and executing on that strategy is showing up in the internal growth rate and the pricing power that we have today. In terms of the cadence of the same site, I'll turn it over to Glenn.

Speaker 4

Yes, I mean, I think if you look at bad debt Component to it, again, we're comping against bad debt income from last year for the current year. So when you look forward, We really have a more normalized or we expect to be a more normalized bad debt level. So I think that that part at least Should keep us in good shape to be able to grow the same site NOI growth really organically from the rent bumps

Operator

Thank you. And the next question comes from Anthony Powell with Barclays.

Speaker 2

Hi, good morning. I guess, question on percentage rents. I saw that ticked up to close to $6,000,000 in the quarter. Is that good run rate? And what's really driving the growth in that segment?

Speaker 4

It's a great question. Look, some of it is timing. We've been very proactive on getting sales reports out to tenants And the collections in the Q1 were higher than what we had originally budgeted, but some of those collections that were from tenants that we had budgeted to be in the 2nd quarter. So you'll see it start to dip down as we go through the year. So the Q1 is a little bit ahead of where the budget was.

Operator

Thank you. And And the next question comes from Caitlin Burrows with Goldman Sachs.

Speaker 12

Hi, good morning, everyone. Maybe just a follow-up on the small shop side. I know there's a concern that Small shop tenants may be more negatively impacted by tighter lending standards. So what are you hearing from them? Has there been any change in their ability To run their business and then at the same time, do you have a breakdown of what portion of the small shop tenants are actually small businesses versus larger Small businesses that happen to operate in small space.

Speaker 7

Yes. It's a great question and it's something that we're Very closely monitoring because we would anticipate that they would be the ones that would be most impacted by the pullback of local and regional banks and And their ability to lend, right now we haven't seen a material impact on obviously on the deal velocity, hence our Q1 numbers and those businesses' ability to operate, but it's something that we're closely watching and monitoring through the course of this year To anticipate, see if there's any cracks

Speaker 4

in the system.

Speaker 7

But right now, things are holding up pretty well.

Speaker 2

And we do have a breakout in our investor presentation of the small shops that are really more local, versus really the national and regional players, and we

Speaker 11

are heavily weighted towards

Speaker 2

the national And we are heavily weighted towards the national and regional players. The only thing I would add is we have better communication than we've ever had with all of our retailers, Primarily because of what the pandemic really forced a lot of us to do, which was again have constant dialogue with our retailer partners. And handling the PPP program as we did, gaining access to our smaller shops in the way we have, Giving them the opportunity to access capital in times of need. I think we have very close ties now with our partners and our retailers that We believe we'll hopefully be able to weather this next storm.

Operator

Thank you. And our next question comes from Ki Bin Kim with Truist.

Speaker 13

Thanks. Good morning. Two questions. First, I noticed that you guys started the development on Coulter Place. It looks like it's a preferred equity investment with the Basuto Group.

Speaker 13

I was just curious if you can provide some more color on the structure pricing And if the income from that preferred equity investment is based on the dollars they put to work or is it kind of all upfront? And second question going back to Bed Bath and Beyond, I guess what is part of your thinking in your budget? Are you Meaning that they all eventually shut down and you get it back? Or I was just curious about how that configures your budget?

Speaker 7

Sure. I'll take the first one on Coulter. So yes, the Coulter project Is our 1st multifamily activation in our preferred equity structure. As per the SEP, you'll see that the gross cost Yield for that investment will be approximately 5% to 6%, which is consistent with what you'd see historically as multifamily projects Developing towards, as a result of our preferred equity structure that we're able to contribute the land, as well as our pursuit costs at a preferred And then blended together with some additional contribution to common equity, we're able to achieve a yield that exceeds our current cost of capital, which makes it And hit that low double digit return that we're looking for. So right now, we're excited.

Speaker 7

Brazuta is a wonderful partner, very, very Qualified and established player in the business, and it's a great property. So it's a good first effort on this structure.

Speaker 2

On the Bed Bath question, we are anticipating getting them all back. I think that's the better way to budget is to just not anticipate anything being sold in the auction process And having the associated downtime and leasing costs with each box. So I think that again is incorporated in our budget and our guidance.

Operator

Thank you. And the next question comes from Greg McGinniss with Scotiabank.

Speaker 13

2 parties here as well. First, Ross, apologies if I missed this, but could you discuss the cap rates achieved on the acquisitions and dispositions this And then for the follow-up on cost of capital. Are you willing to use the low cost Albertson cash to offer lower Cap rates to sellers and potentially get them off the sidelines or how are you thinking about your cost of capital and targeted investment yields?

Speaker 3

Sure. I didn't mention that, but I'm happy to address it. The acquisition cap rate on the grocery and income centers that we acquired in Southern California were landed right to around a 6. And when you look at the spread on the dispositions, it was about 150 basis point spread. So that's really a year 1 cap rate.

Speaker 3

What we're most focused on is The

Speaker 4

growth profile of those assets are, you

Speaker 3

can find them up compared to each other. So we see outsized growth from the grocery anchor that we acquired, whereas the power centers that we sold would either be flat or even potentially moving negative. So that's really the focus when thinking about recycling Into growth high quality grocery anchored centers versus the power centers that we sold. In terms of the low cost of capital from the Albertsons, I mean, it's a great position to be in. Obviously, the hurdles are a little bit lower from the Albertsons capital that was achieving around a 2% dividend yield.

Speaker 3

Now that

Speaker 7

being said, it really is

Speaker 3

a balance for us between trying to move aggressively and put the capital to work and being patient for opportunities that we expect We'll present themselves here in the back half of the year. So we're not looking to necessarily overpay or set the market just to get people off the sidelines, We can move very aggressively and quickly if opportunities present themselves that we really like. So it gives us a lot of flexibility with the liquidity position that we have.

Operator

Thank you. And the next question comes from Ronald Kamdem with Morgan Stanley.

Speaker 14

Hey, just one quick question and a follow-up. So the first is just on capital allocation Priorities, can you just remind me how you guys are thinking about STACK ranking it? Is it sort of acquisitions in the fixed range? Is it Some of the structured investments, given tightening lending conditions, what sort of makes the most sense right now? If you could sort of flip your wand, what would you ramp up on?

Speaker 14

And then the follow-up question is sort of a related Bed Bath and Beyond question. But it seems like you guys are sort of ahead of that 15% 20% mark to market, really interesting. But as we think about sort of what's coming down the line, what's coming next, Party City and things like that, can you just compare and contrast how you guys are thinking about that box size, Mark to market demand, anything would be sort of helpful, so we can get a sense what that potentially could look like?

Speaker 2

Sure. So on capital allocation priorities, 1, 2 and 3, we always say are leasing, leasing, leasing. So you start there and obviously the fundamentals of our business continue to shine. Followed by that, the highest return for us are these smaller redevelopments where we can activate parking lots and create a pad parcel or expand an existing shopping center. Those typically yield in the double digit range, and so we like to activate those as many as possible.

Speaker 2

We typically run-in the range of $80,000,000 to $90,000,000 a year or so of those projects. We're looking through the portfolio to try and generate more of those unique opportunities. After that, typically, it's a blend of the structured investment program as well as core opportunities, as well as the preferred equity and the mixed use redevelopment potential. You look at The suite of opportunities there and you try and make sure you blend to a cost of capital that obviously Reflects where we are today. We are in a unique position where we have a lot of Albertsons capital to deploy.

Speaker 2

But as Ross mentioned, we're continuing to be patient there and look for those That's a fat pitch, that unique opportunity to really take advantage of dislocation. And we've done it before and we'll do it again. And we continue to think we're well positioned to be opportunistic there.

Speaker 3

Thank you.

Speaker 7

Sorry, repeat the question, Vivek.

Speaker 1

It was related to the other Tenants coming down Party City in their box size.

Speaker 7

Sure. Yes, sorry. Party City is in terms of box size 12,000 to 14,000 square feet. Right now, we don't anticipate none of them have been rejected. So we're in pretty good shape there.

Speaker 7

And then with Tuesday Morning and David's Bridal, Tuesday Morning is similar in size. David's Bridal is smaller in nature, more in that Under 10,000 Square Feet.

Operator

Thank you. And the next question comes from Lynn Tsai with Jefferies.

Speaker 15

Yes. Hi. Sorry if I missed it earlier. How much of your full year credit loss expectation of 75 basis points to 125 basis points was realized in 1Q?

Speaker 4

So the credit loss for the Q1 was around 95 basis points. So again, in line with where guidance is And it accounts for the impact of the Bed Baths that we had in Party Cities and some of the David's Bridle.

Operator

Thank you. And the next question comes from Craig Schmidt with Bank of America.

Speaker 6

Thank you. Looking at the operating goals for mixed use, I guess I was surprised That it wasn't going to grow a little bit more from the 13% to 15%, given the added multifamily resi units You're projecting. And then as you get past the 2025 goal, may you accelerate the mixed use Redevelopment, I mean, you have a pretty extensive list of things you have that you're pursuing, entitlements and future projects.

Speaker 2

Yes, it's a good question, Craig. Obviously, we've ramped that program from virtually 0 to where it is today in the last 3 to 4 years. So We have seen continued growth in the mixed use platform, and we like the fundamentals of really how they drive value to each other. Retail really drives value to the residential and the apartments because of the amenity base that it provides. And the apartments drive a lot of to the retail because you have a built in shopper base and the traffic patterns continue to uptick there.

Speaker 2

So it is one that we'll continue to monitor. Sure. We did activate a project this quarter as you saw. We like the opportunity to activate using our CapEx light structure. So again, it doesn't weigh down our growth opportunities.

Speaker 2

We have a select few that are still active right now on the ground lease that are going to be stabilizing later this year. The same goes for the Milton at Pentagon is about to open here. And we're excited about Suburban Square having a mixed use component with the residential there. We think we can really Hopefully drive a lot of value there. Going forward, we'll continue to obviously hopefully crest that goal of 15% from mixed use and then reevaluate Really the master plan for each asset and how much we can ramp that, again, using a CapEx light structure where we can showcase the growth of the underlying portfolio And still create value for our shareholders longer term.

Operator

Thank you. And the next question comes from Alex Fagan with Baird.

Speaker 3

Hello. Thank you for taking my question. So quick question on We plan to use the pretty big cash position that's been built up. Should we expect that that large cash position balance Be there throughout the year or at least until the potential special dividend? What's the plan there?

Speaker 3

Yes. So the plan is really to be opportunistic. And again, we're going to be patient. If the opportunity doesn't present itself, then we're very comfortable maintaining the cash position until it does. But in the interim, we're having lots of conversations with all of our JV partners, talking to a lot of brokers and owners that may need capital as the year progresses.

Speaker 3

So to the extent that we can utilize that capital accretively, we're very comfortable doing so. Otherwise, we'll just wait for the right opportunity.

Operator

Thank you. And the next question comes from Mike Mueller with JPMorgan.

Speaker 3

Yes. Hi. Two quick ones here. First, how diversified is the tenants that you're talking to for the Bed Bath releases. And then is it safe to say that you're largely finished with the Albertsons monetizations this year?

Speaker 4

I'll do the Albertsons first. With both Transactions that we did 1 in March, 1 in April, we are done for the year. Those proceeds and the gains from them are about as much as we can do, including the special dividend that we received relative to our gross income. So We will hold on to the shares for the remainder of the year and then look for a further monetization in 2024.

Speaker 11

Yes.

Speaker 7

In terms of the diversity, it is a healthy and diverse pool. You have your usual suspects, obviously, in the off price category, Grocer interest, furniture, fitness, entertainment uses, and then within each of those categories, you're getting a variety of names as well. So it's It's nice to see that type of diversity for these boxes.

Speaker 2

Mike, one thing to keep in mind too is there are some With the off price wars that are going on right now and they have a lot of demand for new space, you could see some of them being very aggressive in the auction process because of the Unique attributes of the Bed Bath leases, which would allow them to get into centers that they may previously not be allowed to because of Use provision. So it will be interesting to watch what happens there.

Operator

Thank you. And the next question is a follow-up from Linda Tsai with Jefferies.

Speaker 15

Hi. Just a follow-up on the off price wars. Are you seeing rental rate increases result From the offprices competing with each

Speaker 11

other?

Speaker 7

Yes. I mean, when you have more than one bidder at the table, it creates a competitive environment. So Obviously, as a result of that, you can see some price increases on rents for boxes.

Operator

Thank you. That is all the time we have for today's question and answer session. I would like to turn the floor back over to management for closing comments.

Speaker 1

Thank you very much for joining the call today. Enjoy the rest of your day.

Operator

Thank you and thank you for attending today's presentation. You may now disconnect your lines.

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Key Takeaways

  • Kimco completed over 4.5 million square feet of leasing in Q1, achieving a 44% mark-to-market spread and driving occupancy up by 10 basis points despite a challenging retail backdrop.
  • The grocery-anchored, open-air portfolio saw resilient consumer traffic and strong demand for off-price, essential goods, omnichannel services (e.g., curbside pickups) and fitness, fueling robust rent growth.
  • Kimco proactively addressed 30 Bed Bath & Beyond leases, selling one location, re-leasing three boxes at a 24% spread, and is in lease or LOI negotiations on 22 of the remaining 26 sites.
  • Amid a restrained transaction market, Kimco deployed capital on three Southern California grocery-anchored acquisitions and an $11.2 million subordinated loan, while disposing of three non-core power centers to sharpen its portfolio focus.
  • The balance sheet remains strong with over $2.3 billion of liquidity, consolidated net debt/EBITDA of 5.8x (6.2x look-through) at the lowest level since 2009, and a renewed $2 billion green revolving credit facility.
AI Generated. May Contain Errors.
Earnings Conference Call
Kimco Realty Q1 2023
00:00 / 00:00