Kimco Realty Corporation (NYSE:KIM) Q3 2023 Earnings Call Transcript

Kimco Realty Corporation (NYSE:KIM) Q3 2023 Earnings Call Transcript October 26, 2023

Kimco Realty Corporation misses on earnings expectations. Reported EPS is $0.19 EPS, expectations were $0.39.

Operator: Good day and welcome to the Kimco Realty Third Quarter 2023 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 now like to turn the conference over to David Bujnicki, Senior Vice President of Investor Relations and Strategy. 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.

Aerial view of a standard residential neighborhood with multiple rows of relatively new houses representing the company’s real estate investments.

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. And with that, I’ll turn the call over to Conor.

Conor Flynn: Thanks, Dave, and thanks everyone for joining us this morning. I’m going to lead off today with an overview of the macro environment, summarize our operating performance for the quarter, and provide an update and some color on our strategy for navigating through these uncertain economic times. Ross will cover the transaction markets and Glenn will close with our financial metrics and updated guidance. Despite the headwinds of high interest rates, some high profile tenant bankruptcies, shaky debt and equity markets, and the on-again, off-again predictions of an impending recession, underlying shopping center sector fundamentals remain robust. More importantly, our portfolio continues to produce strong operating results, as we have been able to nearly overcome, from an FFO perspective, over $0.06 of non-cash accounting related headwinds relative to last year.

In an environment marked by virtually no new supply, strong demand from new, recurring, traditional, and non-traditional anchor and small shop tenants, along with the resilient consumer, we continue to produce strong operating results. Indeed, our third quarter results were stronger than anticipated, enabling us to raise our outlook for same site NOI, while raising the bottom end of our FFO guidance for the remainder of the year. A few more third quarter highlights. We signed 457 leases totaling 2.1 million square feet during the third quarter. Our small shop occupancy reached an all-time high of 91.1% as demand for our portfolio continues. Our strong positive leasing spread was 34.9% for new leases and 8.8% for renewal and options reflects the pricing power of our high quality portfolio.

Of note, our combined spread of 13.4% is the highest in six years. As anticipated, our anchor occupancy dipped 50 basis points, quarter-over-quarter to 97.2% due to the recapture of the remaining Bed Bath & Beyond boxes. We released seen Bed Bath boxes this quarter at a positive spread of 54%. Our remaining 12 Bed Bath boxes are all in negotiation and continue to benefit from the favorable supply and demand dynamic for well-located retail. Our overall occupancy is off only 30 basis points to 95.5%, notwithstanding the headwinds described. We are encouraged by the continued push by tenants to secure the right real estate with the right landlord. This continued strong demand is perhaps best evidenced by our signed, but not open spread, which actually widened out this quarter to 320 basis points, representing about $52.2 million of rent that is not yet cash flowing.

It is these operating dynamics in our own portfolio that continue to build our team’s enthusiasm for the pending RPT transaction. While we remain excited about our portfolio, the headwinds I noted earlier cannot be ignored. As a result of the dramatic rise in the 10-year treasury due to persistent inflation in all likelihood, we will remain in a higher-per-longer interest rate environment for the foreseeable future. To mitigate balance sheet uncertainty and maintain a stance of de-risking our exposure to market forces, we do not [Technical Difficulty] continue to prioritize generating free cash flow. We are laser focused on expediting store openings and rent commencing dates, while reducing expenses that are not income producing. Free cash flow growth will allow us to be self-funding and help produce strong organic internal NOI growth as we move ahead.

In summary, we continue to build a company, team, and portfolio that is resilient and able to drive growth in challenging times. We believe we are well positioned to execute and take advantage of the additional opportunities that will inevitably arise as we continue to work to optimize shareholder value. Ross?

Ross Cooper: Thank you, Conor, and good morning all. It was a busy quarter for Kimco on all fronts, including the transaction side of the business. While the macro backdrop continues to be volatile, the dislocation that has begun to emerge clearly benefits well-capitalized owners and operators. Those with the scale and liquidity to not only weather challenging times, but take advantage of them. With rates continuing to rise and financing more difficult to obtain, creativity and utilizing unique advantages is how to win in this environment. To that point in August, we capitalized on an opportunity to acquire a dominant grocery anchored lifestyle center in one of our top markets. Stonebridge at Potomac Town Center is a 500,000 square foot trophy asset in Washington DC Metro with all the attributes we look for in a property, starting with the best-in-class grocer, in this case Wegmans, with exceptional sales.

The market also has excellent demographics with over 115,000 annual household incomes and over 110,000 people in a three mile radius that also pulls from a trade area that stretches upwards of 40 miles, due to the tenancy and regional location. The property will allow us to layer in our platform to create additional value and cash flow growth, both from upgrading specific tenants and rental levels over time. Additionally, the asset includes over 50 acres of land, providing us with the optionality to densify with mixed use in the future. Historically, this is an asset that every institutional owner would be chasing and would likely have a premium cap rate attached to it due to all the positive attributes. However, with financing tight and for a large deal size, Kimco stood out with its ability to close all cash on the $172.5 million purchase price, which allowed us to negotiate a cap rate north of 7% for our newest Signature Series asset.

During the quarter, we also announced the merger with RPT Realty. This is another clear example of utilizing our platform to negotiate a highly favorable cap rate for a well-regarded portfolio of primarily grocery-anchored centers. Similar to the timing on the Weingarten transaction, we view this as another unique window during which the competition is limited and we can take advantage. As it relates to structured investments, there has been a noticeable uptick in discussions and potential opportunities in the past 30 days to 60 days. Admittedly, we expected these conversations to ramp up earlier in the year, but it seems to be happening at a more significant pace as of late. Conversations are taking place with operators facing debt maturities, groups looking for capital to transact on unique one-off opportunities, as well as institutional investors facing redemptions that are looking at recaps.

We’re being very selective in where we participate, so we expect this part of our business to grow as we move forward. All in all, we are excited about the activity during the quarter and our ability to utilize our position and sector-leading liquidity to remain active when others are sidelined. We will continue to be extremely judicious with our capital, but be ready to move opportunistically. And now off to Glenn for the financial highlights of the quarter.

Glenn Cohen: Thanks Ross and good morning. Our third quarter results continue to demonstrate the strength of our high quality operating portfolio, highlighted by robust leasing spreads and positive same-site NOI growth. Importantly, our strong liquidity position and leverage metrics position us to effectively handle the macroeconomic headwinds resulting from stubborn inflation and the higher interest rate environment. Now for some details on our third quarter results. FFO was $248.6 million, or $0.40 per diluted share, as compared to last year’s third quarter results of $254.5 million, or $0.41 per diluted share. Our third quarter results produced an increase in pro rata NOI of $3.3 million. The key components of the increase were higher consolidated minimum rent of $12.6 million offset by lower LTA income and straight-line rent of $4.7 million.

In addition, bad debt expense was higher by $2.8 million as the current period had a more normalized credit loss level, compared to last year, which benefited from $600,000 of credit loss income due to reversals of reserves. Overall, credit loss was at 71 basis points as a percent of revenues for the nine months at the favorable end of our 75 basis point to 125 basis point credit loss guidance assumption. Pro rata interest expense was also higher by $10 million comprised of $8 million from the consolidated portfolio and $2 million from our joint ventures. This was due to lower fair market value amortization resulting from the early repayment of Weingarten bonds in the third quarter of last year and higher interest rates on the floating rate debt in our joint ventures.

Also included in FFO for the third quarter 2023 are $3.8 million of costs incurred in connection with the announced RPT merger and a net benefit of $4.8 million associated with the final liquidation of the Weingarten pension plan. Moving to the operating portfolio, leasing activity remained brisk throughout the quarter as Conor mentioned. Same-site NOI growth was positive 2.6% for the third quarter. And if we excluded the impact of prior period collections it would have increased to 3.1%. The primary drivers of the same-site NOI growth are higher minimum rents contributing 290 basis points and other rental revenues adding 40 basis points. These increases were offset by a more normalized level of credit loss impacting same-site NOI growth by 90 basis points.

Overall, these results demonstrated the continued strength of our well-located portfolio and brings our year-to-date same-site NOI growth to 2%. Turning to the balance sheet, we ended the third quarter with consolidated net debt to EBITDA of 5.5 times. On a look through basis, including prorata JV debt and perpetual preferred stock outstanding, net debt to EBITDA was 5.9 times, the same as last quarter and 0.4 times better than a year ago. Our liquidity position remains very strong at over $2.4 billion at quarter end. This was comprised of more than $400 million in cash and full availability of our $2 billion revolving credit facility. In addition, we have our remaining Albertsons shares which have a value of over $320 million. Subsequent to quarter end, we issued a new $500 million long 10-year unsecured bond which is scheduled to mature in 2034 at a fixed coupon of 6.4%.

As we are all aware, interest rates have risen dramatically over the past year and further rate increases are not off the table. As such, we felt it was prudent to address our upcoming 2024 unsecured bond maturities which come due in the first quarter of next year. Tending the maturity, we have invested the proceeds in high-quality instruments to mitigate a large portion of the dilution. Now for our outlook for the remainder of 2023. As Conor noted earlier, we began the year facing a non-cash headwind of $0.06 per share totaling $36 million, compared to 2022, stemming from the anticipated lower fair market value amortization from the early repayment of the Weingarten bond and the normalization of credit loss. In addition, we reduced our 2023 lease termination income assumption by $10 million or $0.02 per diluted share in the first quarter.

As a result of the strong performance from the operating portfolio, we have clawed most of this back. Our ability to overcome these headwinds speaks to the stability and strength of our operating portfolio. Based on our year-to-date results and our expectations for the fourth quarter, we are again tightening our 2023 FFO per share guidance range to $1.56 to $1.57 from the previous range of $1.55 to $1.57. This includes improving our full-year credit loss assumption to a range of 75 basis points to 100 basis points from the previous range of 75 basis points to 125 basis points and increasing our same-site NOI assumption to 1.75% to 2.25% from the previous level of 1% to 2%. In addition, based on our full year expectations, our board has elected to increase the fourth quarter common dividend to $0.24 per share, representing an increase of 4.3%.

As a reminder, we received a $194 million special dividend from Albertsons earlier this year, which is considered ordinary income for tax purposes, but not included in FFO. We continue to evaluate the amount of special dividend needed to satisfy our redistribution requirements. The Board is expected to declare the amount of special dividend in November and we expect to pay it by year-end. Looking ahead, we plan to provide our 2024 outlook when we report our fourth quarter results. We anticipate it will be inclusive of the RPT merger being completed early in the year. And with that, we are ready to take your questions.

David Bujnicki: Before we begin Q&A, one additional item of note, today’s call will be focused on Kimco’s third quarter earnings results and outlook as a standalone company. Today’s discussion may also contain forward-looking statements about the company’s pending merger with RPT, which remains subject to customary closing conditions, including the approval of RPT shareholders. As such, our responses around this pending transaction are limited. The information that is already publicly available, including the transaction announcement, the S4 and the merger agreement, which can all be found in the investor relations section of our website. With that, now we can begin the Q&A.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Michael Goldsmith with UBS. Please go ahead.

Michael Goldsmith: Good morning. Thanks a lot for taking my question. You purchased an asset in the quarter, you sold assets in the quarter, you’re presumably in the market for selling some of the RPT assets for when you acquire the company. Can you kind of provide an update of the transaction market with a particular emphasis on how things have changed since the 10-year rate increased? Thanks.

Ross Cooper: Sure, happy to address that. So, yes, you’re right, we had a very active quarter, as I mentioned. We were very excited about the acquisition of Stonebridge Center. It’s going to be a long-term hold where we can create some significant value. The dispositions on the Kimco side were fairly limited. There’s one transaction which I would note that we sold out of one of our joint ventures, a grocery anchored shopping center in Southern California at a very low cap rate and the low-5s, which I think showcases still the strength of the market and that there is significant capital, particularly for core grocery centers. That being said, we’re being I think very cautious in this market in terms of the fourth quarter and our expectations.

There’s essentially nothing in the pipeline on the acquisition side between now and year-end and on the disposition they continue to be limited to a couple of select land parcels and a few smaller joint venture assets that we’re exploring. So I would tell you that the market is still active, although transaction volumes are down plus or minus 70% year-to-date. There is still is capital that is being put to work. Just recently there were transactions that very aggressive sub-6 cap rates in Southern California aside from the one I mentioned that we sold as well as in Miami. We’ve seen grocery anchored-centers as well as power centers in Chicago and other parts of the Midwest that are trading in the 6s and the 7s and in some cases low-8s. The financing is still available albeit at higher rates than what we’ve seen in the last 12-months or so which is obvious given where the rate environment has gone, but LTVs can still be obtained from private owners or investors in the 50% to 60% range.

So there’s still activity out there. We’re encouraged by what we see in the fundamentals of the business, as we’ve talked about. And we believe that we can selectively execute it at the appropriate time.

Operator: The next question comes from Juan Sanabria with BMO. Please go ahead.

Juan Sanabria: Hi. Thank you. Good morning. Just hoping to pack up on the back of Michael’s question with regards to targeted RPT dispositions, presumably that would be focused in the lower growth Midwest markets. Just how committed are you to trying to prune that part of the portfolio, if at all? And how should we think about cap rate spreads or differences between, kind of, typical primary gateway markets versus more secondary, maybe Midwest or rest Belt type markets?

Ross Cooper: Sure, we are going to save the specifics of the RPT strategy for once we close the merger. That being said, I would tell you that there is still activity out there, as I mentioned. We’ve seen transactions in the Midwest, as well as in the Sun Belt and other parts of the country. So investors are still looking at all parts of the country and all formats of retail. There’s a significant amount of capital that is currently sidelined that is waiting for the appropriate opportunities and frankly for more supply to hit the market as it’s been a pretty stable and static amount of supply that’s been introduced. So we’ll be very selective. We’re going through the integration process, the pre-merger integration process right now. So we’re formulating our strategy, but we’re very encouraged by the direction of the RPT portfolio and what we’re seeing. And as we get to the merger and beyond it, we’ll be much more specific about the strategy and plan there.

Operator: The next question comes from Jeff Spector with Bank of America. Please go ahead.

Jeff Spector: Great. Good morning. I guess just to push on that a little bit, just given the year-to-date stock performance, the market is clearly not appreciating the opportunities or the market is too concerned over the risks on these opportunities and it sounds exciting you’re seeing more opportunities to come. I guess is there anything else you can share today to alleviate maybe some of these concerns that, you know, Kimco is executing the right strategy to be opportunistic.

Conor Flynn: Jeff I’m happy to take that one so I think when you see in our results and that the numbers speak for themselves clearly we are very focused on executing our strategy and having that result in strong operating results, strong FFO, we raised our dividend, we raised our guidance, we raised our same-site NOI guidance, the all-time high occupancy for small shops is reflected there, six-year high on leasing spreads. So we believe we’re executing and we’re showcasing it and letting the numbers speak for themselves. Clearly we’re in an opportune time, you know, with the dislocation in the financing market, we try and be, you know, opportunistic. And I think that’s what Kimco is known for. And so obviously it’s a show me story and we believe we’ve executed in the past and we know we’re only as good as our last deal and so we’re going to make sure that we continue to put up the numbers that speak for themselves.

And when you look — and I know we’ve been very vocal about the health of our industry, but when you look at the supply and demand side of the shopping center sector, with the demand, the store openings of what we track over 6,900 new store openings for this year, the supply of 0.5% of existing stock of new construction, which is the lowest amongst all commercial real estate categories, and the vacancy levels for the whole entire open air sector. Depending if you look at Cushman and Wakefield or CBRE, it’s the lowest sense of ever been tracking. So between 16-years at Cushman, 18 years at CBRE, this is the lowest vacancy rate the country has ever experienced. And so we’re in a good spot. We see that opportunity. We think that the RPT transaction is exactly that.

It’s a high quality portfolio with all the wind at its back. So we can crystallize the GNA synergies very quickly. And what gets us most excited, obviously, is the OpEx margin that we can believe we can execute on quickly and bring it up to a Kimco level and block and tackle and showcase what the platform can do.

Jeff Spector: Great. Thank you.

Operator: The next question comes from Craig Mailman with Citi. Please go ahead.

Craig Mailman: Hey, guys. Just maybe coming at things from another angle on RPT here. Just the 10-years up called 70 bps since you guys announced the transaction, you guys just did the debt deal at [6.4] (ph), you have to refinance the under $80 million. Could you just talk about, given where rates are, where they could go, what the optimal mix of cash versus new debt could look like to take that debt out, and maybe how the accretion math has moved since the deal was announced just given the higher financing costs.

Glenn Cohen: Yes, hi, Craig, it’s Glenn. Again, rates obviously have moved a little bit, but we do have a full mix and we have a fair amount of optionality. We have cash, obviously, that is on our balance sheet. We also have our Albertsons investment that we would expect to be able to monetize in the beginning part of the year. So between that, our access to capital, the revolver, we feel pretty comfortable with taking, you know, refinancing the debt at prices relatively close to where we targeted. Rates are up a little bit, but I think from a full standpoint, we still expect the transaction to be FFO-accretive in the first year. We have, again, the revolver is fully available. We’re sitting with the significant amount of cash on the balance sheet, and Albertsons I think those give us the flexibility to take down what we need to do.

Operator: The next question comes from Haendel St. Juste with Mizuho. Please go ahead.

Haendel St. Juste: Hey there. Good morning. I will not ask a question on RPT, I wanted to ask about leasing spreads. My question for you is on leasing spreads, the Bed Bath spread in particular, which were stronger I think than many of us expected. So maybe can you shed some more color here? Are you perhaps offering a bit more TIs? Are you cutting up boxes? And maybe some color on how the conversations are going to backfill the remaining boxes and expectations for spreads on those? Thanks.