Kimco Realty Q2 2022 Earnings Call Transcript

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Provided by Quartr
July 27, 2022

Key Takeaways

  • Kimco reported pro rata occupancy of 95.1% in Q2, up 120 bps year-over-year, while small shop occupancy rose 370 bps—the largest annual gain in over a decade.
  • The company surpassed 80% of annual base rent coming from grocery-anchored properties ahead of schedule, underscoring its “last-mile” strategy and strong pricing power.
  • Q2 NAREIT FFO was $0.40 per diluted share, a 17.6% increase versus last year, leading Kimco to raise its 2022 FFO guidance to $1.54–$1.57 per share.
  • Kimco’s balance sheet remains robust with a look-through net debt to EBITDA ratio of 6.4x, $2.3 billion of liquidity, and over 99% of consolidated debt at fixed rates.
  • The company deployed capital opportunistically, including a $55 million JV interest buyout, $50 million in mezzanine loans, subsequent grocery-anchored acquisitions, and $100 million of non-core asset dispositions.
AI Generated. May Contain Errors.
Earnings Conference Call
Kimco Realty Q2 2022
00:00 / 00:00

There are 15 speakers on the call.

Operator

Greetings, and welcome to the Kimco Realty Corporation's Second Quarter 2022 Earnings 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 is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

David Bushnicki, Senior Vice President of Investor Relations and Strategy, thank you. Mr. Bishnicki, you may begin your presentation at this time.

Speaker 1

Good morning, and thank you for joining Kimco's quarterly earnings 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 As a reminder, statements made during the course of this call may be deemed forward looking, and it's 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 factors. 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 the Investor Relations area of our website. Also, in the event our call were to incur technical difficulties, We'll try to resolve as quickly as possible.

Speaker 1

And if the need arises, we'll post additional information to our Investor Relations website. With that, I'll turn the call over to Conor.

Speaker 2

Good morning and thanks for joining us. I will lead off today's call with an update on our strategic initiatives and a review of our Q2 leasing highlights. Ross will cover the transaction market and our recent activity and Glenn will follow with our financial metrics and our updated guidance.

Speaker 3

We had

Speaker 2

another solid quarter, thanks to the efforts of our outstanding team, the high quality nature of our portfolio and our disciplined strategy, The initiatives we put in place more than 5 years ago to upgrade the quality of our portfolio, streamline our organization and enhance our platform continue to drive exceptional results. Our investments in Leasing and Property Management, Human Capital, ESG, community outreach, technology, data analytics and entitlements Have generated solid positive returns and created value for all of our stakeholders. We remain focused on executing our plans We're putting up numbers that help to further differentiate Kimco and our approach. It is with cautious optimism that we highlight our considerable accomplishments this past quarter, While remaining cognizant of the macro issues impacting our country, our economy, our retailers and our consumers. While our strong second quarter numbers are reflective, our leasing team continues to report that demand for space across our portfolio remains robust and should continue to grow.

Speaker 2

For the right space and the right location, pricing power remains strong even in this period of economic uncertainty. One of the key drivers is our focus on last mile locations, which are seeing positive traffic patterns at 101.3% Relative to the same period last year, the Kimco consumer lives in the 1st string suburb of the top major metro markets, where employment and spending power remains strong. While we can't ignore the impact of inflation, the consumer remains resilient for now. And more importantly, our portfolio focused on essential goods and services Puts us in a sound position to better withstand the ever changing environment. On the leasing front, pro add occupancy finished up 40 basis points, Reaching 95.1 percent due to positive net absorption.

Speaker 2

Year over year, pro rata occupancy is up 120 basis points. Anchor occupancy is up 30 basis points quarter over quarter to 97.6% and up 70 basis points year over year. Small shop occupancy is up 80 basis points quarter over quarter to 89.2% and up 370 basis points year over year. That is our largest year over year increase in small shop occupancy in over 10 years. During the quarter, we signed 150 new leases totaling 711,000 square feet, our new lease spread was 16.6% with notable positive drivers coming from medical, off price, Beauty and Salon Services.

Speaker 2

We completed the quarter with 348 renewals and options totaling 1,600,000 Square Feet. The 2nd quarter renewals and options spread was 5.6 percent with options ending at 6.4% and renewals at 5%. Total second quarter deal volume was 4.98 deals totaling 2,300,000 square feet with the combined leasing spread of 7.1%. We executed 2 new gross releases this quarter, which helped us cross the milestone of 80% of annual base rent coming from grocery anchored properties ahead of schedule. And we continue on the path to hit our goal of 85% by 2025.

Speaker 2

The benefits of our portfolio transformation to a dominant grocery anchored portfolio And the top metro markets are numerous. Most notably, Crafts is a robust small shop leasing activity driven by the halo effect of our strong grocery anchors, which helps drive cross shopping and more leasing demand and pricing power. An important takeaway this quarter is that our portfolio retention rates continued to shine. Our portfolio GLA retention rate during the Q2 was 93%, with anchors in small shops both 10% above the respective 5 year average retention rate. The high retention rate is why we only had 91 total vacates for 223,000 square feet this quarter, making it the lowest GLA vacated during a quarter over the past 10 years.

Speaker 2

Further, we're maintaining pricing power As 96% of all renewals and options were at a positive rent spread, we believe these high retention rates are directly related to our efforts to optimize our last mile locations for our retailers and further highlight the value proposition of our portfolio. We also believe that if we continue to make the Last Mile store more valuable, Over the long term, our retention rates will continue to improve. Occupancy will rise and tenant churn and CapEx will decrease, all of which will result in a higher long term growth rate for the portfolio. In closing, our strategy remains straightforward: Focus on leasing, work to expedite our tenant openings, entitle our assets for future density opportunities, maintain a strong balance sheet and liquidity position and be patient identifying investment opportunities in which Kimco is uniquely positioned to add value. We believe these initiatives will lead us to sector outperformance And reinforce the Kimco differentiator that drives total shareholder return.

Speaker 2

Ross?

Speaker 4

Good morning, and I hope everyone is having an enjoyable summer. As we always say in this business, the only constant is change and the Q2 has showcased the unpredictability of the macro economy and how quickly things can pivot. To that point, the mantra we continue to follow emphasizes the importance of maintaining a nimble and opportunistic strategy and a balance sheet that supports both organic and external growth at any point in the cycle. The quality of our portfolio, Balance sheet and liquidity position puts us in a prime spot to be opportunistic. On previous earnings calls, we identified a pipeline of activity in all three elements of our transaction strategy, which are the buying out of JV Partners, providing mezzanine and preferred equity financing via our structured investments program, as well as the outright third party acquisition of high quality shopping centers that offer further opportunities for value creation.

Speaker 4

In the Q2, we closed on several transactions in support of this strategy. In terms of partnership buyouts, We acquired an additional 3.6% interest in our longest standing institutional joint venture, the Keyer Partnership, thereby increasing our ownership percentage of that fund to 52.1%. The net payment for this was approximately $55,000,000 The assets consist of a geographically diverse portfolio of high quality long term hold properties for Kimco. On the structured investment side, during the quarter, we closed 3 mezzanine loans for approximately $50,000,000 providing double digit returns. The assets included a Safeway anchored regional center in Fairfax, Virginia, a mixed use pedestrian friendly power center in a high income Super Zip part of Dallas and a unique irreplaceable center along the 105 freeway in Los Angeles in a dense infill location with a culturally immersive experience anchored by a supermarket, pharmacy, a Mercado and others.

Speaker 4

All of these investments have a right of first offer or right of first refusal in the event of a sale, putting us in a prime position to potentially own these assets in the future. Subsequent to quarter end, we acquired 2 premier grocery anchored centers from Cedar Realty As part of their portfolio transaction with DRA and KPR Centers, the properties which we view as the 2 best assets in the Cedar portfolio Are located in Massapequa, New York and Philadelphia, PA. Both assets have tremendous upside potential that we look forward to unlocking. Separately, we also made a $22,000,000 participating loan on 3 grocery anchored centers in Pennsylvania as part of our structured investment program. This is a prime example of our ability to utilize our various investment components to opportunistically deploy capital with a unique deal structure.

Speaker 4

Also post quarter end, we were able to negotiate a $21,200,000 The transaction enables us to collapse the leasehold and create substantial net asset value on the property by converting our ownership to a fee position. On the disposition front, we sold approximately $100,000,000 at Kimco share of non core assets where the value had been maximized. This included several joint venture assets, which we elected to sell to a third party rather than meet the pricing. We will continue this strategy where appropriate with all of our joint venture partners and make a disciplined decision whether to sell the asset or negotiate a buyout of our partners' interests. While the market has quickly become a bit choppy on the transaction side, with the bid ask between buyers and sellers starting to widen And the lender is becoming more conservative as interest rates and inflation rises, we continue to see a healthy demand for core grocery anchored product that provides everyday goods and services.

Speaker 4

Pricing remains relatively sticky for our property type, especially when compared to other asset classes that were either previously priced to perfection or contain greater risk in today's environment. We believe with our multiple verticals, We can be opportunistic when dislocation or softening occurs. With that, I will gladly pass it off to Glen to provide the financials for the quarter.

Speaker 5

Thanks, Ross, and good morning. We are pleased to report another strong quarter highlighted by brisk leasing volume, Higher occupancy, positive same site NOI growth and a healthy increase in leasing spreads. These operational achievements led to double digit FFO NAREIT FFO was $246,400,000 or $0.40 per diluted share for the Q2 2022. This compares favorably to Q2 2021 NAREIT FFO of 148,800,000 or $0.34 per diluted share, which included a $3,200,000 charge or $0.01 per diluted share in connection with the Weingarten merger. FFO per diluted share grew by 17.6% compared to a year ago and 14.3% The strong increase in FFO was primarily driven by higher consolidated NOI of $97,100,000 including $87,300,000 from the Weingarten acquisition, $4,700,000 from other property acquisitions and $6,600,000 from core portfolio growth.

Speaker 5

FFO contribution from our joint ventures Was $9,300,000 higher than the same quarter last year, comprised of $8,200,000 from the newly acquired Weingarten JVs and improved credit loss from our other joint ventures. This growth was offset by higher interest expense of $9,700,000 and G and A of $3,200,000 primarily due to the 150 Property Weingarten acquisition. Our operating portfolio delivered positive same site NOI growth of 3.4%, which included a 30 basis point benefit from our redevelopment projects. This is a strong result as we were comping against a 16.7% level last year. An additional encouraging sign from the same site NOI growth was The contribution from the minimum rent component of 4 70 basis points and lower abatements of 70 basis points.

Speaker 5

This was offset by the change in credit loss due to the significant level of credit loss reversals recorded in the prior year quarter. Certainly, our same site NOI for the next two quarters will also be challenging given our prior year comps of 12.1% for the 3rd quarter And 12.9 percent for the 4th quarter, which resulted from large reversals in credit loss in 2021. Furthermore, our outlook for the remainder of 2022 doesn't anticipate additional reversals of bad debt or collections from cash basis tenants for prior periods. Notwithstanding, we expect same site NOI growth to be positive for In terms of our ABR from cash basis tenants, it is now down to pre pandemic level of 4.3% in which we over 76% that was due during the Q2 2022. Turning to the balance sheet.

Speaker 5

Our look through net debt to EBITDA, which includes our pro rata share of joint venture debt and NOI and our perpetual preferred issuances stands at 6.4 times, which remains the best level achieved since we began disclosing this metric over a decade ago. This level does not include any potential benefit from monetizing our Albertsons investment, which has a current market value of over $1,000,000,000 As mentioned earlier, our liquidity position remains strong with $2,300,000,000 of immediate availability, comprised of $300,000,000 in cash And our $2,000,000,000 revolving credit facility as well as our Albertsons investment. With respect to capital activity, During the Q2 2022, we judiciously utilized our ATM program to issue 450,000 shares of common stock At a weighted average price per share of $25.30 raising $11,300,000 In addition, we repurchased $36,100,000 of our 3.8 percent notes due in June of 2023 $11,000,000 of our 3.8th notes due in October 2022. We also repurchased $3,600,000 of our outstanding preferred stock. Lastly, we repaid $30,000,000 of consolidated mortgage debt during the quarter and have a $290,000,000 bond as our only remaining consolidated debt Also worth noting, over 99% of our outstanding consolidated debt is at a fixed rate, Having a weighted average maturity of nearly 9 years.

Speaker 5

Based on the strong results for the first half of twenty twenty two and our Expectations for the remainder of the year. We are again increasing our 2022 NAREIT FFO per share guidance range to $1.54 to $1.57 from the previous range of $1.50 to 1 $0.53 The new range is based on the following assumptions: positive same site NOI growth for the full year a range of $1,000,000 to $6,000,000 of credit for the remainder of the year. No additional charges associated with debt prepayment or the redemption of our callable preferred issuances that are outstanding and no monetization of our Albertsons investment. Separately, we want to call out something important with respect to interest expense For your 2023 models, as a reminder, the reduction in the fair market value adjustment associated with the Weingarten debt we assumed Will result in approximately $13,000,000 more of interest expense over that in 2022. To better illustrate this, we expanded our disclosure on the consolidated debt detail page in our supplemental package.

Speaker 5

Moving on to our dividend. Based on our strong second quarter results and favorable outlook, our Board of Directors has again raised the quarterly cash dividend for the 3rd consecutive quarter to a new level of $0.22 per common share. This represents an increase of 10% from the previous level of $0.20 per common share and 29.4% over the $0.17 per common share Paid a year ago, we continue to maintain a dividend distribution level, which is in line with estimated taxable income from recurring operations and expect to generate over $200,000,000 of free cash flow after the payment of both dividends and leasing CapEx. We truly appreciate and thank the entire Kimco team for their outstanding efforts and drive to create shareholder value. And now we are ready to take your questions.

Operator

At this time, we will be conducting a question and answer session. Thank you. One moment while we poll for questions.

Speaker 6

Our first question comes from

Operator

the line of Craig Schmidt with Bank of America. You may proceed with your question.

Speaker 7

Thank you. I'm just wondering, the maintain the maintenance of the strong new demand and pricing power, Is this strength from your Groceryessential based shopping centers? Or is it just a reflection of a Positive run rate on leasing completed and put to bed for 2022?

Speaker 8

Yes. It's a great question, Greg. Appreciate it. Yes. I mean, I think that the quality of our real estate, the grocery anchor at Essential Shopping Center, Last Mile, closest to the customer is really at the forefront.

Speaker 8

That's And then in terms of the demand side with the retail base, despite obviously the headwinds that we're all Discussing in the current environment, there's still a need long term to position your real estate portfolio in the best centers possible. I think what you're seeing is a lot of retailers observing that opportunity now and wanting to take advantage of it and sort of fight through the current headwinds here. So I think we continue to see that the strong demand not only out of Q2, but as we progress through the balance of the year. And then it's also coupled with obviously the lack of any new In terms of retail construction, I believe year over year this last quarter, it's down about 56%, only just over 3,000,000 square feet of new retail construction was So when you have that, you have this COVID inventory and high quality real estate, all sort of comes together and puts us in a really good position.

Speaker 6

Our next question comes from

Operator

the line of Adam Kramer with Morgan Stanley. You may proceed with your question.

Speaker 9

Hey, guys. Thanks for the question and appreciate all kind of the commentary. And especially kind of the I think Connor, some of your earlier comments, I think you kind of outlined clearly right there's some cracks showing in the macro and I think you're Maybe a little bit more open than others about kind of recognizing that in your comments. And so I think I particularly hope I'm not putting words in your mouth, but I think you kind of called out cautious optimism Regarding kind of the quarter and how you see things going forward. I'm wondering maybe what some of those puts and takes are that kind of caused you to use that phrasing of

Speaker 8

Sure. Happy to expand on that. So I think where we are today is you're seeing our product really resonate with the consumer. They're prioritizing value and convenience. And I think it's really resonating with sort of the new age of retail with how people are shopping and the convenience and value proposition that we can provide to our customer.

Speaker 8

And the convenience and value proposition that we can provide to our customer. I think where we are having cautious optimism is obviously there's a lot of stress on the consumer right now with inflationary environment that we're dealing with. When we look at the Kimco consumer, which again is more affluent than the traditional sort of U. S. Average shopper, they're holding up quite well.

Speaker 8

And where our portfolio is positioned in that 1st ring summer of the major metro markets, Employment is strong. The wage increases that we're seeing are resilient. And the shoppers are continuing to gravitate towards our product. And so I think we're all wondering what the future is going to hold. Everyone has a different crystal ball.

Speaker 8

We feel We're in a position to be an opportunist if cracks emerge where we can obviously pounce on opportunities where we can create a lot of value. But to date, what we've seen is a continued traffic towards our centers, continued demand for our limited vacancies that are remaining, pricing power remains squarely in the landlord's camp. And we're cautiously optimistic that it's going to continue as we see the pipeline continuing to expand With the right retailers that are creditworthy that have integrated e commerce and are using their stores as last mile distribution points.

Speaker 6

Our next question comes from

Operator

the line of Greg McGinnis with Scotiabank. You may proceed with your question.

Speaker 10

Hey, good morning. Conor, I just want to talk quickly on the decision to extend the lockup on the Albertsons Shares, just curious what the kind of drivers were there?

Speaker 8

Sure. So when you're in a consortium that owns a sizable amount Of the stock. I think it's in best interest for our shareholders to really see it through to make sure that an organized execution Really creates the most value for our shareholders longer term. And so that's why we considered the options on the table and I felt compelled to go along with the consortium to see this through. It's been a wonderful investment for our shareholders.

Speaker 8

We've made a tremendous amount of money on the initial investment and feel like there's obviously this final act that we want See through and we do believe that the management of Albertsons is doing everything possible to maximize value. And so we feel like it was important to see that through and And the lockup period with the consortium to give the Albertsons management every opportunity to execute on their strategic alternatives review.

Speaker 6

Our next question comes from

Operator

the line of Craig Mailman with Citi. You may proceed with your question.

Speaker 10

Hey, guys. I fully acknowledge that the balance sheet is in a strong position with liquidity, but there was a news story out this week about a $400,000,000 portfolio you guys are buying, you're active In the quarter, and I'm just kind of curious on 2 things. 1, as you guys are underwriting on where the equity value is today, kind of What are the return hurdles you're looking for to be acquisitive here? And number 2, just what's the plan on Potentially financing, ramping acquisition activity.

Speaker 4

Yes, Craig, I'm happy to address that. So, as I've mentioned in the past, We do look at a variety of metrics when we're evaluating a potential investment. Cost of capital is something that's top of mind for everybody in the organization. We look at it every single day. So when we think about a cap rate in this environment, it really is a spot check On day 1, our focus is on creating value and enhancing growth for the company and doing it in an accretive way.

Speaker 4

So in terms of an acquisition, if it starts at a relatively low cap rate, we need to ensure that there's a tremendous amount of near term growth that's achievable. And we need to find other avenues to enhance the returns on our investments, which is where sort of our structured investments program comes in, We were able to put out capital at very attractive returns day 1. And so when you blend the return on our 3 sort of pillars Of our investment strategy between buying out our partners accretively, acquiring selectively core acquisitions and then layering on our structured investments, we get to a point where we feel very confident in the returns that we're able to achieve and the growth that we're going to get in the short, medium and long term. In terms of the funding, that's where we really feel that we're in a unique and really strong position. As Glenn mentioned, we have over $200,000,000 of Cash flow after dividend and leasing CapEx.

Speaker 4

We have cash on the balance sheet. We have a moderate amount of dispositions that we recycle into new acquisition activity and then of course ultimately we'll have our Albertsons monetization, which we'll be able to put to work there. So We do believe that we have a fair amount of ways to fund these deals in an accretive manner.

Speaker 6

Our next question comes from

Operator

the line of Samir Khanal with Evercore ISI. You may proceed with your question.

Speaker 4

Hey, good morning, everyone. Hey, Glenn, just wanted to dig a little bit deeper in the guidance here. When you take the first half FFO, you're getting close to $0.79 which implies $1.58 for the year. Your guide is about 54 to 57. Just want to make sure, is there something in the second half we should be aware of?

Speaker 4

I guess Steve and I were trying to figure this out this morning and maybe some color you can provide.

Speaker 7

No. I mean, I think if you look at the second quarter, $0.40 There's about a penny of I'll call things that are more or less like one time. There's some LTAs in there. There was a little bit of a settlement on And we did have about $4,000,000 of benefit from credit loss related items, reversals Straight line reserves as well as credit loss income. We're not anticipating that level of credit loss Going forward in the second half of the year, and as I mentioned, we do have a range of $1,000,000 to $6,000,000 of credit less that's still in the numbers.

Speaker 7

That's kind of where we get to that upper end of the range, which would imply roughly a $0.39 quarter for the 3rd and 4th quarters. So we have those components baked into it. And again, we are cautiously optimistic as Conor said, but We are watching pretty closely what's happening in the economy. We're watching interest rates and we think that the guidance that we put out, I'm happy that we've increased it to the level that we have, but we want to keep it at the level that we feel is achievable.

Operator

Our next question comes from the line of Juan Sumbria with BMO Capital Markets. You may proceed with your question.

Speaker 3

Hi, good morning. Just wanted to touch on the opportunism that you maybe see and or are positioned for given your The balance sheet strength and liquidity, I mean, is there possible opportunities that maybe you're seeing now? Or is there Maybe some potential distress that you see coming up that you think will eventually open up opportunities because it sounds like maybe there's something bigger in the works and just

Speaker 4

Sure. I would say we have not seen the distress as of yet, but we're absolutely prepared for it. Now we'll continue to be We are extremely disciplined with the investments that we make. Based upon our liquidity position, our balance sheet, We think that we're in a wonderful position to be opportunistic once that presents itself. We saw that in the early stages of the pandemic and then we had a very quick recovery.

Speaker 4

So to the extent that there is some dislocation that presents itself from some of the challenges in the macroeconomic conditions today, We'll be ready to move on that very quickly and aggressively, but we're going to stay very disciplined when we do it.

Speaker 3

I think we've seen

Speaker 8

a little bit more opportunity too, would you say Ross, Structured investments versus the core acquisitions as we're being patient looking for those cracks and we're seeing a lot of opportunity I think in the structured investment side with A little bit of higher return, they want.

Speaker 4

Yes. And one of the nice things about the structured investments is, as you could see or we put out in the release, there were 3 Structured investments that we closed on in the 3rd quarter were the 4th one that closed just subsequent to quarter end. And while it's not a tremendous amount of capital outlay, I think combined, it was just about $72,000,000 for those 4 deals. It does provide a potential pipeline for a much larger transaction if that opportunity presents itself. So it's a relatively modest investment today with a very attractive return that

Speaker 6

Our next question comes from

Operator

the line of Alex Goldfarb with Piper Sandler, you may proceed with your question.

Speaker 11

Hey, good morning, good morning out there on the island. Just a question on the consumer. As you look across your tenants, are they seeing any drop off? So Basically, what I'm getting at is if you take the eightytwenty rule where 80% of the business is 20% of the people, are they seeing some of that Some of the sort of non core shoppers or restaurant owners or whatever sort of fall out and their business being more sustained by their core shoppers or your tenants not really seeing a change in their overall shopper base. I'm just still trying to Understand with fuel costs and rising interest rates and all that stuff, if there's been any change at all In the shopper dynamic or if it's really that some of the people have dialed back, but it's that core shopper that just remain adamant about continuing To go to your centers.

Speaker 8

Yes. It's a good question, Ghulfar, making me think a little bit here.

Speaker 10

So, I'm

Speaker 8

going to use a little bit of fact and then a little bit of anecdotal, My opinion and assumption. So traffic wise, when we compare our numbers to 2021 and where it is, it's up over 100%. You care about when you compare it back to 2019 levels, it's more or less in line with where it was then Pre pandemic, so you have the volume of activity there on-site, which is good. Then you look at sort of the dynamic or the composition of the customer and the consumer. I think what we have been seeing is still this desire to reengage in society and the communities, services, Restaurants, entertainment, obviously, the near term success that we've seen with theaters, people wanting to go out and spend some discretionary dollars to entertain themselves and Friends, has been a positive sign that we've seen extend through the summer.

Speaker 8

So I think that probably broadens Based beyond just your core recurring shopper, I do think you're seeing some value trading occurring obviously with price Inflation being what it is, some of those customers have continued to buy, but they may be focused more on value purchasing, which And the Great Recession is where off price really found its footing and acceleration, maybe they're making slightly different decisions at the grocery store, but they're still going to the grocery store. So you are seeing probably a bit of a change in how consumers think about where they want to spend their dollars, but the activity is As you've seen across the board, it's up. And I think the consumer continues to show some resiliency right now.

Speaker 3

Yes. Well, I'd say

Speaker 8

we're still benefiting too from the 3 major themes that the pandemic induced, and that's where the first one is suburbanization. I think we've seen obviously an uptick in population around our portfolio. 2nd being work from home. There's still a hybrid model out there, so the patterns are still robust to our portfolio as people are cooking more at home or going to the shopping center for lunch as they typically might have gone elsewhere or closer to the office. And then 3rd and probably the most important is still sort of the last mile distribution component.

Speaker 8

Target just came out with a remarkable stat this past month Saying that it's 40% cheaper for them to deliver goods that are ordered online from their store base versus from a distribution center. So I think that is again in the first inning of sort of adoption across the retail landscape. We're very, very focused on being 1st and last mile retail. We think that value proposition is really going to be a major differentiator for us going forward.

Speaker 6

Our next question comes from

Operator

the line of Michael Goldsmith with UBS. You may proceed with your question.

Speaker 3

Good morning. Thanks a lot for taking my question. Along the lines of the not just optimism, I guess, in times when the consumer has Hold back. How long has that taken before it impacts kind of the leasing discussions and then eventually your financials? Just trying to determine like if things get worse from here, when does this start to show up in your conversation and in your numbers?

Speaker 8

Yes. I mean, I think every market cycle is different. So, it may show itself in different ways. I could say what we're Right now is not the slope or appetite for new deals because as I mentioned earlier in the conversation, retailers are looking at the long play. They may be long term commitments, signed fixed primary terms with options going forward, and they all have evolving retail strategies, Complimenting what Connor said about the last mile distribution fulfillment that there is greater margin value in being closest to the customer and shipping and distributing from store.

Speaker 8

So now is a great opportunity to secure that real estate that's necessary to meet your evolving fulfillment strategy within each individual company. So in order to do so, you have to continue doing deals. That said, you may There may be certain areas that you start to see some pullback Maybe on the higher end side, but in terms of the value oriented essential daily consumer and daily retailer that supports that customer, We continue to see the demand side hold up trying to absorb that higher quality real estate that's still out there as a result of the

Speaker 7

I would just add, if you think some of this cautious optimism is because of where the real estate is today. We spent a lot of years transforming the portfolio. So having it in these top markets embedded in the communities has been a it's just a real game changer. And you see it with Whether it be the curbside pickup and the way many of the retailers are using their store today as really a fulfillment point. So that is a real we think that that's a real benefit.

Speaker 7

And then if you look at the tenant mix that we have, it is essential based, Whether it be grocers, off price, home improvement, and then just everyday goods and services, whether it be Dunkin' Donuts, Starbucks, Bagel Guys, That stuff continues to be doing very, very well. So it gives us some comfort level and We sit in our office in a shopping center and watch the traffic every day to kind of gauge it a little bit.

Operator

Our next question comes from the line of Haendel St. Juste with Mizuho, you may proceed with your question.

Speaker 3

Hey, there. Good morning. So a different question on expenses, I guess.

Speaker 4

Can you

Speaker 3

discuss the mix of lease structures between fixed CAM net lease growth? As expenses rise on contracts for various things and because taxes and other items. Is there potential for some pressure on NOI, although top line revenue likely remains strong? Thanks. Yes.

Speaker 8

So, Glenn, our margins have been improving quarter over quarter As you've gotten more of those retailers open, when you look at our lease economic spread, it compressed 20 basis points from 310 to 290. So you're seeing more And contributing to the recovery element of your operating expenses, so margin improvement is actually Continuing to expand in a favorable way as we're moving out of the pandemic. As it relates to to net leases, those are typically your 2 most dominant forms. For us, our fixed camp program is now a multiyear program. We look at a 5 plus year capital plan, so we have an insight to where we're going to be spending dollars over The near to midterm and that's all factored into the pricing as well as an inflation factor appreciating the markets do change.

Speaker 8

And then it's also important to note that within the component of Amt, there are some recurring services that are contracted out for multiyear contracts. So it's not directly impacted by Near term inflationary pressures. So you once you mix it all together, we still are in a very good position to Absorb, yes, the pressures of the near term. Yes. The only thing I would add is the benefits of scale we have.

Speaker 8

When we look at our portfolio and we bid out services and we bid out some of these items that go into our expenses. We obviously get a bulk discount just because of the size of the amount of services and goods that we're purchasing. And so with the amount of technology that we've embedded in the portfolio as well, I feel like Our expenses are we typically try and make sure that we have the lowest triple net costs in the trade area because of that efficiency of scale. So we are very mindful of that and use our scale to our advantage to keep our costs under control. And I will just because you did mention specifically real estate tax, That is excluded from your fixed income number.

Speaker 7

Right. Now having said that, I will add though, if inflation was to run at 10% or 12% a year, Year after year, it would definitely have some impact. But I mean, we've built in, as Dave mentioned, an inflation factor into our fixed can program. So We think we just built it, then it can absorb

Speaker 3

it.

Speaker 6

Our next question comes from the

Operator

line of Floris Van Dykem with Compass Point, you may proceed with your question.

Speaker 3

Good morning, guys. I had a question on your return expectations and how they've changed since the beginning of the year. And obviously, what kind of impact the direct market typically is slower to react in terms of cap rates, but What kind of impacts are you seeing in your underwriting of as you look at acquisitions? Are you underwriting higher Cap rates or are your growth expectations rising as a result of higher inflation?

Speaker 4

Yes. There's no doubt that as cost of capital increases, our hurdle rates go up alongside it. So we're very mindful of that. We try to stay extremely disciplined when we underwrite deals, very healthy in terms of inflation expense expenses Rising in our assumptions and our underwriting, we take, I think, a very conservative approach to lease up assumptions, making sure that we anticipate These deals do take a fair amount of time from lease execution to opening and that costs have been rising. So all of those factor into a hurdle rate that's Certainly higher today than it was even 3 months ago.

Speaker 4

To your point on cap rates moving maybe a little bit less quickly than the overall market, That's certainly the case and it's very dependent upon the asset and the location. We've continued to see up through this month Transactions occurring at all time low cap rates, not any dissimilar than what we saw 3, 4 months ago. On the other hand, if you have a commodity power center that 4 months ago, a borrower or a buyer was borrowing In the 2s and they're now borrowing in the 5s, there's no doubt that that's going to have a direct impact. So the composition of the asset And who your target audience is, whether it's an all cash institutional buyer versus a levered private buyer is to be a very meaningful difference as to how much movement we've seen in the cap rate.

Speaker 6

Our next question comes from

Operator

the line of Mike Mueller with JP

Speaker 5

Inclusive of assumed debt or is it just the cash paid? And what was the implied cap rate on that purchase because the back of the envelope seems like it was a fairly high cap rate?

Speaker 4

Yes, that is a net number. We factor in all of the cash, liabilities, debt that's in the joint venture. So that was a $55,000,000 payment net of all of I would tell you that it was a direct negotiation with one of our partners based upon our collective views of the Value of the assets and then factoring in sort of a minority position of ownership there. So I would say that it To your point, was a higher cap rate than what we would see those assets sell in the open market today.

Speaker 6

Our next question comes from

Operator

the line of Anthony Powell with Barclays. You may proceed with your question.

Speaker 12

Hi, good morning. A lot of the e commerce only players are saying that they're seeing a more material shift back to pre COVID activity in terms of retail. Is that a positive or a negative for you? Is it a positive given that stores are more important? Or is that maybe a headwind if you see less incremental activity from retailers looking to

Speaker 8

At the end of the day, retail, it's omni channel. You have to have both, Right. I mean, I think the pandemic proved out that you can't being pure play online is puts you at a bit of As it relates to distribution of margin being pure play and maybe just in brick and mortar, there's probably advantages of having some online presence. So I think It's a combination of both. I think you're going to see e com sales ebb and flow a little bit as you do see brick sales, but when you look holistically about the retail strategies, it's really infused as one together.

Speaker 8

So I think net net, as Long as the Total Pie continues to grow their utility and the brick and mortar product and how they use that for distribution. And really, the other part is to focus on customer acquisition costs. I think when you look at the pure play e commerce players, they have really been struggling to try and get control over their customer acquisition costs as Sort of the major players continue to boost the costs involved with that advertising online continues to be extremely expensive, Well, I think the integration of the brick and mortar stores really allows them to have a pretty nice return in terms of customer acquisition costs and their margins are a lot healthier. So I think it's a net benefit for us as most pure e commerce players as you've seen are opening physical stores.

Speaker 7

I mean, the lines are clearly blurring. Some of the e commerce that you're talking about, the product itself is being picked up in the store. I mean that's where we've seen this big benefit of being where the real estate is sitting today better than these markets. It's just It is a fulfillment point as well.

Speaker 6

Our next question comes from

Operator

the line of Derek Johnston with Deutsche Bank, you may proceed with your question.

Speaker 11

Hey, everybody. Good morning. On development, So Kim's held back on some pretty hard sought in hand entitlements. So I guess, how are you thinking about development now? Clearly, given the potential economic slowdown and rising costs, but also in the face of rapidly rising rents for multifamily, retail rents for multifamily, retail desire for newness.

Speaker 11

How do you balance new development starts and Maybe the potential timing with your balance sheet to flip towards more offense given these rents and demand? Thanks.

Speaker 8

I think you actually have the answer in your question through all the questions you just mentioned. So if we break it down, 1, I think we're in a wonderful position right now. We don't have long term capital commitments with big development projects as compared

Speaker 4

to where we were in

Speaker 8

the last 5 years. Milton is continuing to move under construction down in Arlington market as Phase 2 of our Pentagon project. It's GMAX contracts, so we feel good about the pricing there. As it relates to new activity, as you can see in the supplemental, we have thousands of entitlement units That are at our option to activate. And so what we're doing right now is we're looking at the balance sheet, we're looking at our capital plan, we're looking at the use of funds and the opportunities ahead of us and then ahead of us and then we're looking at the entitlements that we have in place and how best to activate them.

Speaker 8

We go through our decision tree, we self develop, do we joint venture, do we Ground lease and at what time is that appropriate to do so. So we are looking at near term opportunities, what makes sense and then also what we have Sort of in the midterm and how we want to pull it forward. So that's our job. We continue to assess it on a quarterly basis. And if we feel like there's an opportunity to pull some of those out of the entitlement shelf and activate them, we will.

Speaker 8

We're very focused on continuing on Growth FFO path that we've been on. And I think when you look at the opportunity set that we have with the entitlements, we're going to be mindful of not activating too many all at once. When we do activate them, we're going to see what's the best way to continue to enhance the FFO growth profile of the organization.

Speaker 6

Our next question comes from

Operator

the line of Ki Bin Kim with Truist. You may proceed with your question.

Speaker 11

Thanks, Good morning. So when you look at the top of the demand funnel for your customers, I'll just kind of put it in perspective. When if you have a good quality space, how many tenants are looking at that type of space today versus a couple of quarters ago? And I'm curious if deals are taking longer to close, I guess, overall just trying to gauge how quickly open to buy plans might be changing amongst your customer base?

Speaker 8

Yes. I mean, with again, high quality real estate inventory that does not come available all that often, We have seen that we continue to have multiple bidders at the table, which obviously helps the negotiation and strategy. And I also think you've seen, as we mentioned multiple times already today, is that people are evolving their real estate strategy and how they want to utilize it. So whereas Several quarters ago, Target announced that they're going for full size formats again, which was something pretty unique. They're really focused on the small format concept years in penetrating urban market.

Speaker 8

So people or retailers are constantly evolving and changing their needs and wants, which is creating demand for our real estate. As it relates to the timing and activation of deals and the negotiating process, I think both sides are actually very focused on to get the deals done as quickly as possible. We have a number of conforming leases. We're working directly with a lot of our retailers of how best to expedite That discussion and that negotiation because both have targets to open, right? They have growth their own growth targets and the way to achieve those is to get their stores open as quick Possible.

Speaker 8

We have our own growth targets and we want to get them open as quickly as possible. So there's a mutual benefit actually now where we both felt pressures and we both had Point of friction within the process of say construction, that's pretty unique and so it's brought us together to find better solutions, which I think Net net as we go forward is just better for the industry and better for ourselves, as we work closer in partnership with our retailers.

Operator

Our next question comes from the line of Tayo Okusanya with Credit Suisse. You may proceed with your question.

Speaker 13

Yes, good morning. So I'm trying to get a better handle on the guidance raise. You beat by $0.02 raised midpoint of guidance by $0.04 And I'm just trying to understand what that incremental piece is. Are you expecting better same store NOI growth? Is it better occupancy?

Speaker 13

Reversal of credit provisions? Just trying to get a better sense of what does that additional increase in guidance alludes to?

Speaker 7

Yes. Again, when we look at the balance of the year, we think that we have a reasonable run rate in this $0.39 level built into the guidance level, a certain amount of Potential credit loss that we think we can absorb while we're doing it. But we do expect that same site NOI will remain Positive for the year. Again, as I mentioned, there are pretty tough comps in the 3rd and 4th quarters. But for the full year, we do expect that.

Speaker 7

Occupancy has increased certainly over last year and there's more minimum rent that's coming online. So that's all built into it as well. And then there are some investments that Ross has mentioned that were not really part of the initial plan We're using the cash that's on the balance sheet and the return on that is quite favorable relative to The interest earned sitting in our investment bank accounts.

Speaker 13

Got you. Great.

Speaker 6

Our next question comes from

Operator

the line of Linda Tsai with Jefferies. You may proceed with your question.

Speaker 14

Yes. Hi, good morning. Just given the changes in the landscape with the Albertsons lock extended a little further out, are you thinking any differently about the use of its proceeds?

Speaker 2

We really haven't Linda. I think we were in a

Speaker 8

unique position where Come September, which is not far off, we'll be in a position to look at the landscape of opportunities. We have a number of items that we feel like are unique to So Kimco that we can invest in through our different, as Ross mentioned, our different unique investment opportunities. We have some bonds coming due that we could potentially pay off. The preferreds are going to be callable as well. There might be unique investment opportunities that present themselves come some September as well.

Speaker 8

As I mentioned in my remarks, I think the key for us is being patient and focusing on unique opportunities where Kimco And really enhance shareholder value and create a lot of value in the near term. And that's where I think we're uniquely positioned to take advantage of any opportunity that presents itself.

Speaker 7

Yes. I mean, look, the nice thing about the investment, if you do the dividend yield on our investment in Albertsons, Almost anything that we do, whether it be debt pay down or any of the other investments that Conor just mentioned, it is going to be accretive. So we have a lot of good options available to us and hopefully a lot of opportunity.

Speaker 6

Our next question comes from

Operator

the line of Craig Mailman with Citi. You may proceed with your question.

Speaker 10

Hey, it's Michael Bilerman. I just had 2 quick follow ups. Just one as we continue the conversation on Albertsons. Has anything changed, I guess, from Kimco's position in terms of Potential monetization options, in the sense of obviously as a real estate company, Albertsons does have Some real estate and you could create a type of real estate transaction like that. So has that changed at all in your mindset as they go through strategic alternatives?

Speaker 10

Or is the only option to sell stock and take cash? And then I just had a quick follow-up on JVs.

Speaker 8

It really hasn't changed, Michael. I mean, we've done sale leasebacks with them before in the past. We're in a position where, obviously, we can do More of that as well. We've been focused on the assets where they own their grocery store within an asset where we own the surrounding retail. So we get a cap rate compression on sort of the entire asset by controlling the grocery anchor.

Speaker 8

So we still have that part of the playbook available to us. So we'll continue to wait and see how the strategic alternatives play out, but that obviously is a game plan we've used before and continue to have that as an opportunity.

Speaker 10

So, Conor, are you saying that effectively, investors should think about either an option of taking all the Stock and selling down portions of it over time or converting some of your stock holdings into real estate assets Through sale leasebacks that we should start thinking about multiple options for this stake? No.

Speaker 8

I think, Michael, the way to think about it is the marketable that we own will be used to be monetized and then those proceeds will be redistributed in the best investment vehicle possible. Mean, I think that's the easiest way to think about it. The unique sale leaseback situations would be separated and apart from that.

Speaker 10

Okay. And then just on here in buying the stake direct, which looks like you got that at about a 7% Cap rate or at least effective NOI yield into your results. How should we think about the desire for you to syndicate out That equity arguably at more of an NAV value and effectively earn that spread, Right. Are you more desired to buy discounted pieces of paper from your JV partners? Or are you trying to Bring in others, you're sitting here now in this asset, let's call it a $2,000,000,000 GAV at that 7% cap.

Speaker 10

You own 52% of it. What's the go forward plan? Are you going to try to syndicate it back out or continue to buy in to

Speaker 4

Yes. No, it's a good question. I think when you look at the Keyur Ventures specifically, this is our longest standing joint venture. It was in 1999. So I think ultimately there was a point in time where it made sense for the one smallest minority partner to exit.

Speaker 4

We think that the assets are tremendous within our portfolio. We would love to own more of it. At the same time, we have a fantastic partner In the New York State Common Retirement Fund, that has been alongside us since the beginning. So we'll continue to maintain a great relationship with them. And If and when the opportunity presents itself that they have a desire to exit, we'll be ready to have that conversation.

Speaker 4

But Specific to the Keyur Venture, we don't anticipate bringing in any new partners.

Operator

Our next question comes from the line of Haendel Justin Just with Mizuho, you may proceed with your question.

Speaker 3

Hey there. Glenn, I guess maybe for you. I I was hoping you could be a bit more specific or provide a range of what the 2022 same store NOI guide is now on a clean Ex prior adjustment ex prior period adjustment basis and also on a GAAP basis, it used to be 3% for both, I recall. And then if you could also clarify what were the prior period rents in the Q2?

Speaker 7

Thanks. As it relates to the same site guidance For the full year, as I mentioned, we expect it to be positive. We are not providing a range. You can see what's happened during The first half of the year, so we're sitting currently at 6.1% for the 6 months, 3.4% for the 2nd quarter. But again, there's still some uncertainty in there and we have these very difficult comps that are in the 3rd Q4.

Speaker 7

So I really don't want to provide a range at this point, but to give you comfort that for the full year, it will be positive. As it relates to Prior period rents from cash basis tenants, that was about $5,000,000 that was Collective. And as I mentioned, we collected about 76% of the rent from those same cash basis tenants during the Q2. So that difference that wasn't collected, which was reserved, is also about $5,000,000 So the net of that

Operator

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 us today. Again, our supplement is posted on our website. Enjoy the rest of your summer.

Speaker 6

This concludes today's conference.

Operator

You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of

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