Kimco Realty Corporation (NYSE:KIM) Q1 2024 Earnings Call Transcript

Kimco Realty Corporation (NYSE:KIM) Q1 2024 Earnings Call Transcript May 2, 2024

Kimco Realty Corporation misses on earnings expectations. Reported EPS is $-0.03 EPS, expectations were $0.38. KIM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Kimco Realty First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would like now to turn the conference over to David Bujnicki, Senior Vice President of Investor Relations. Please go ahead.

David Bujnicki: 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 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 our quarterly supplemental financial information on the Kimco Investor Relations website. Also, in the event our call was to incur technical difficulties, 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.

Conor Flynn: Good morning, and thanks for joining us. I will lead off today with an update on the RPT integration, a summary of our significant first quarter leasing accomplishments, and a brief review of our strategic directions and goals. Ross will follow with an update on the transaction market, and Glenn will close with a summary of our financial results, major metrics and the specifics behind our increase to guidance. After a seamless close on our acquisition of RPT on the first business day of the year, the integration is now complete. Most important is that in almost all aspects as it relates to RPT, we are ahead of our underwriting expectations in terms of timing, performance and the select monetization of their assets.

The new portfolio is performing well, producing over 3% same-site NOI for the quarter and revealing exciting growth opportunities that were either not previously underwritten or had overly conservative assumptions. This includes greater ancillary income, better than expected credit loss, and the lease-up of shop space. We are very excited about the prospects for the new combination going forward and many thanks to our talented team, including our newest associates on this smooth integration. From a cost synergies perspective, at this early point in the year, we’re ahead of expectations and anticipate reaching the high end of the stated range of $34 million in 2024. The better than expected results are attributable to our execution of planned dispositions ahead of schedule, as well as the implementation of lessons learned from Weingarten, including accurate underwriting of hiring needs and a more rapid approach to decommissioning office space and eliminating duplicative services.

Kimco’s operating platform is delivering efficiencies due to the clustering of additional assets in our core trade areas, as well as the strategic investments we’ve made over the past five years in technology, talent and other areas. Turning to our first quarter leasing results, the portfolio generated same-site NOI growth of 3.9%. The increase includes 2.8% growth from higher minimum rents and a combination of lower landlord expenses, lower credit loss, and higher net recoveries. Pro rata occupancy came in at 96%, which represents a decrease of 20 basis points from last quarter, but also an improvement of 20 basis points from a year ago. The change from last quarter was primarily due to the RPT merger and the vacating of four Rite Aid locations.

Pro rata occupancy was also up 20 basis points to 97.8% and flat from a year ago. Small shop occupancy was down 20 basis points from last quarter to 91.5% as a result of the RPT merger, while still up 80 basis points from a year ago. Excluding the impact of RPT, small shop occupancy actually would have increased 20 basis points sequentially and represents future upside. During the first quarter, we leased over 4 million square feet, including 143 new leases signed with positive leasing spreads of 35.5%. We continued our strong trend with over 400 renewals and options completed at an overall positive spread of 7.8%. Overall combined spreads were 10.2% on 583 deals. Our lease to economic occupancy spread now stands at 330 basis points, representing a 20 basis point compression from last quarter as leases commenced and represents $63.4 million of annual base rent, with about $18 million expected to come online during the remainder of 2024.

Our strong quarterly results give us confidence to raise our full year guidance for both FFO and same-site NOI, which Glenn will provide further color on. Recognizing the importance of growing in a high inflation environment, we remain focused on trimming non-critical expenses. Further we have strategically positioned our open-air grocery and mixed use portfolio in first ring suburbs of select vibrant major metropolitan areas. These high barrier to entry markets continue to represent the sweet spot of the retail landscape as new supply remains constrained and demand from our best-in-class tenants remains strong. Ross?

Ross Cooper: Thank you, and good morning. It was a busy quarter of execution for Kimco and we’re pleased with our current positioning and what we’ve accomplished year-to-date. Just three short months ago, on the fourth quarter earnings call, I mentioned the optimism in the transactions environment coming off of a dip in the treasury rate and expectations for the Fed rate cuts in 2024. The optimism was short-lived as inflation has remained sticky, dampening the prospect of interest rate cuts and transaction activity. Notwithstanding the macro challenges, we were able to successfully complete the RPT sales consistent with our underwriting expectations as Conor shared. We sold 10 former RPT centers in the first quarter with the level of sales and cap rates in line with the previously provided guidance ranges, as well as a similar cap rate on the overall RPT company acquisition that was completed this January.

In addition, we negotiated to retain a slice of the capital stack on eight of the sold assets in the form of mezzanine financing, which allows us to continue to earn a double-digit yield on a secure income stream. With these sales completed ahead of schedule, we have executed on the majority of our disposition targets for 2024. We can now focus our efforts on new investment activity throughout the balance of the year. Glenn will soon provide more details on this. Speaking of investment activity, we have also closed on a pair of structured investments, one during the first quarter and the second subsequent to quarter end. Both properties align with our strategy of investing in high quality real estate supported by strong tenancy and demographics with seasoned operators.

We also have a right of first offer or refusal embedded in our position. Total Kimco investment in the two properties was modest at $17 million, but the value of the two centers combined is upwards of $175 million, allowing us to get our foot in the door on a potential future acquisition opportunity. We expect there will be additional unique and attractive structured investment opportunities as our capital remains in high demand. On the core acquisition front, we have maintained our disciplined approach to investing at a spread to our cost of capital. Asset pricing remains strong as we have seen major market infill grocery and high quality convenience centers still trading at plus or minus 6% cap rates and in some cases even below that. While this is a testament to the fundamental strength of the open-air retail platform, it has not been easy to find accretive opportunities through the first four months of the year.

We remain confident in our ability to source and secure properties that align with our return thresholds and given our selective approach, it will likely push more of our acquisition activity towards the late second half of the year. Now off to Glenn for the financial results and updates to our outlook.

Glenn Cohen: Thanks, Ross, and good morning. 2024 is off to a strong and active start. As Conor mentioned, our first quarter results are highlighted by solid leasing activity, double-digit leasing spreads and robust same-site NOI growth. These positive operating metrics drove our strong FFO per share growth, excluding merger costs. All our metrics are inclusive of the $2.3 billion RPT acquisition, which we completed on the first business day of 2024. While we are providing insight on the RPT contribution for the first quarter, we do not plan to continue breaking out that performance as operations are fully integrated. Now, for some details on our first quarter results. FFO was $261.8 million or $0.39 per diluted share, which includes merger charges of $25.2 million or $0.04 per diluted share.

Our strategic and timely acquisition of RPT resulted in several significant contributors to our improved performance, primarily our higher pro rata NOI. Importantly, RPT is running ahead of all our underwriting expectations as Conor highlighted. Excluding the merger charges, FFO would have been $0.43 per diluted share for the first quarter as compared to $238.1 million or $0.39 per diluted share for the first quarter last year, representing a 10.3% per share increase. The primary driver of our improved performance was our higher pro rata NOI of $53.7 million, of which $38 million was generated by the RPT sites. Pro rata NOI also benefited from higher minimum rents coming from commencements from the sign not occupied pipeline and lower credit loss.

Credit loss for the first quarter 2024 was 62 basis points as compared to 92 basis points for the first quarter last year. In addition, included in the NOI increase is GAAP income of $1.1 million from the RPT acquisition related to straight-line and above and below market rent amortization. FFO also benefited from higher interest income of $7.4 million attributable to the higher cash balances during the quarter. We view this as a non-recurring item and do not expect this to continue for the remainder of the year as we have significantly utilized most of our cash in the first quarter towards the closing of the RPT acquisition and debt reduction. These increases were offset by greater pro rata interest expense of $14.6 million, resulting from the higher interest rate on the $646 million of bonds that were recently refinanced, lower fair market value amortization related to the form of Weingarten bonds, and higher rates on the floating rate debt in our joint ventures.

Our FFO for the first quarter also includes about $0.01 per share of other non-recurring income items with a one-time benefit of $2.4 million in below market rents from two tenants that vacated early and $2.5 million of other income. It was a very active quarter from a balance sheet perspective, primarily resulting from the RPT acquisition, much of which was already addressed on our last earnings call. Just to briefly summarize, we issued 53 million common shares and 953,000 OP units, and replaced RPT 7.25% convertible preferred stock with a liquidation value of $92.5 million with a new Kimco convertible preferred issuance with similar terms. We also repaid RPT’s $130 million revolving credit facility and their $514 million of private placement notes from cash on our balance sheet, amended and assumed $310 million of RPT term loans, which have staggered maturities from 2026 to 2028 at a blended weighted average rate of 4.77% and issued a new $200 million term loan with a final maturity in 2029 at a fixed rate of 4.57%.

As previously mentioned, we monetized our remaining shares in Albertsons earlier in the quarter, receiving nearly $300 million in proceeds, and recorded a $72 million tax provision on the gain. At the end of the first quarter, our liquidity position remained very strong with over $2 billion of immediate availability and no remaining debt maturities for the balance of the year. Our balance sheet further strengthened as the company’s leverage metrics improved once again. We ended the first quarter with a consolidated net debt to EBITDA ratio of 5.3x and on a look-through basis including pro rata share of joint venture debt and perpetual preferred stock outstanding of 5.6x. The look-through metric of 5.6x is the best level Kimco has ever achieved and an improvement from the 6.2x reported a year ago.

Turning to our outlook, based on our strong first quarter results, the successful integration of the RPT acquisition, and our expectations for the balance of the year, we are raising our FFO per diluted share range from $1.54 to $1.58 to a new range of $1.56 to $1.60 inclusive of $0.04 per share for RPT merger costs. Excluding the merger costs, this represents a 3.2% annual FFO per share growth at the mid-point of the increased guidance range over last year’s results. Our increased FFO per share guidance range incorporates the following updates to our full year assumptions. Higher same-site NOI growth of 2.25% to 3% from the previous level of 1.5% to 2.5% and is inclusive of the RPT assets and a credit loss assumption of 75 basis points to 100 basis points.

Interest income of $10 million to $12 million based on the interest income earned during the first quarter and RPT related non-cash GAAP accounting income comprised of straight-line rents and above and below fair market value rent amortization of $4 million to $5 million. Our other full year FFO guidance assumptions remain intact, including our disposition range of $350 million to $450 million inclusive of the $250 million completed during the first quarter, an investment range of $300 million to $350 million weighted toward the late second half of the year. I want to thank all our associates whose incredible effort efficiently completed the integration of the RPT transaction and contributed to our strong first quarter results. And with that, we are ready to take your questions.

Operator: We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Dori Kesten of Wells Fargo. Please go ahead.

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Q&A Session

Dori Kesten: Thanks. Good morning. You left your credit loss guide unchanged but had a relatively low Q1. Can you just remind us of your 10 exposures that have built up to the annual assumption?

Conor Flynn: Overall, we look at just the entire portfolio when we’re doing the assumptions and again, the 75 basis point to 100 basis point credit assumption is really back from what historic levels, in the first quarter is clearly lower at 62 basis points. But there are some potential bankruptcies potentially during the year that can impact it and we think it’s more prudent to just leave the current guidance assumption, even though we still have been able to increase the same-site NOI guidance pretty significantly.

Operator: The next question comes from Michael Goldsmith of UBS. Please go ahead.

Michael Goldsmith: Good morning. Thanks a lot for taking my question. On the integration of RPT, you said initial G&A synergies of $30 million to $34 million. You took it up to $34 million to $35 million. So in terms of realizing these synergies, what’s driving them, what’s driving the upside to your initial guidance, and where have there been positive surprises as you’ve started to put the plan into action? Thanks.

Conor Flynn: Sure. Thanks, Michael. Obviously, we’re off to a great start with the integration. Clearly, we have a great blueprint and the muscle memory from Weingarten certainly helps. I’ll have Will Teichman comment a little bit about the G&A synergies and what’s helped there. But on the revenue synergy side, we’re obviously seeing a lot of deal flow earlier than anticipated. Just for the quarter end deals were signed in the RPT portfolio at rents of $31 a foot, 36% new leasing spreads, 10.8% renewals, so for a combined 14.1%. So when you look at those numbers, it’s obviously enhancing to the Kimco portfolio. And the business plan was always set up where we would execute on a strategy where we could buy the portfolio at a — we believe an attractive cap rate at an 8.5% cap rate, and then selling off the lowest tranche at similar cap rates we felt like would allow us to really retain a very high quality, high growth profile portfolio that with our platform could be enhanced over time.

And so Will, I’d love for you to comment quickly on the G&A synergies as well.

Will Teichman: Sure. Thanks, Conor, and good morning, Michael. As Conor said, we concluded integration of portfolio operations systems and human capital. We did it within a matter of weeks, saving about two months off the timeline versus our prior transaction with Weingarten. And as Conor mentioned, the playbook that we established post Weingarten has really been key to that developing and integration governance model tools and processes that are repeatable for future transactions. On the expense side, as with any M&A transaction in our sector, human capital is always the most significant driver of G&A and so speeding up the pace of integration activities avoids carrying unnecessary expenses during the transition period. A few drivers of note that I would call out first, the quick execution of the 10 asset sales that Ross mentioned in his comments allows us to hold to a more conservative staffing plan, as we don’t need to staff positions necessary to operate these assets.

And secondly, a more rapid pace of integration allowed us to minimize the need for transitional employees over the first few months of the year. Overall, our underwriting assumptions for permanent associates were on target and we filled all of the incremental positions, solidifying our go-forward G&A expense levels to operate the portfolio. And finally, beyond staffing, one of the other noteworthy areas where we’ve exceeded underwriting is around professional services and subscriptions. Our IT and legal teams led an effort to quickly exit over 100 service agreements and as a result, we’re seeing faster accretion in this important area.

Conor Flynn: Thanks, Will. I’ll just comment that with the execution of the 10 dispositions, the grocery percentage of the RPT portfolio is up to 85.5%. It’s obviously enhancing to the Kimco portfolio as well. We even have activity on a few of the nine remaining sites that don’t have grocery anchors to potentially convert those to grocery anchors as well. So Will, do you want to comment a little bit on ancillary income as well?

Will Teichman: Sure. With respect to ancillary income, it’s one of the areas where as a company we’ve been working to build out a national specialty leasing team that’s exclusively dedicated to this important area. That’s not the case with all of our peers, and it wasn’t the case with RPT where they had only recently established a focus around ancillary revenues. We have a 10-year track record in this area, and as Conor referenced in his remarks, we started off the year with double-digit growth relative to first quarter of 2023 in terms of RPT’s performance in this area and it really comes through a variety of different strategies. We track probably over a dozen different ancillary revenue income streams and it’s a combination of strategies that we have employed across our portfolio to monetize common areas as well as tactics to monetize and lease-up on a temporary basis vacant in-line space and knowing that the vacancy is a little bit higher in the RPT portfolio provides some near-term upside for us in terms of temporary leasing.

Operator: The next question comes from Alexander Goldfarb of Piper Sandler. Please go ahead.

Alexander Goldfarb: Hey, good morning out there. So Conor, clearly RPT, it sounds like, whether very conservative or sandbagging, you guys were pretty cautious on how you underwrote. It sounds like there’s a lot of operational synergies on the cost side, but maybe you could just outline a bit more on the NOI side what the upside is. And it sounds like there’s — I don’t know if it’s 50 basis points or 100 basis points better on the yield, but just sort of a magnitude of the sort of NOI performance that you’re seeing out of it in addition to what you’re seeing on the cost savings and synergy side.

Conor Flynn: Sure. Happy to, Alex. And again, I gave you some stats there on the RPT portfolio, but we gave ourselves I think a nice runway to execute and we’ve obviously been ahead of that assumption. So for the first year we had — we thought there would be a ramp up in terms of leasing and they thought there might be again a transition period where we wouldn’t have similar Kimco velocity on the RPT portfolio. And that just hasn’t been the case. We’ve been able to transition very quickly. We’ve able to lease-up a lot of space relatively quickly and retain tenants at higher rents as well. So the original underwriting had a 6 to 12-month period of ramp to transition to Kimco and we’ve been able to exceed the leasing velocity on that.

And there’s some hidden gems as well that we didn’t originally anticipate uncovering. So a lot of those deals that we’re working on, like I mentioned on transitioning some of these assets to grocery-anchored assets, take time, but we’re ahead of anticipation on that as well.