Kimco Realty Corporation (NYSE:KIM) Q4 2022 Earnings Call Transcript

Kimco Realty Corporation (NYSE:KIM) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Greetings, and welcome to the Kimco Realty Corporation’s Fourth 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. David Bujnicki, Senior Vice President of Investor Relations and Strategy. Thank you. Mr. Bujnicki, you may begin.

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

Conor Flynn: Thanks, Dave. Good morning, everyone, and thanks for joining us. Today, I will provide a quick recap of our major accomplishments for 2022 and share some of the progress we have made on our longer-term strategic goals. Ross will follow with an update on the transaction market and Glenn will report on our earnings results for Q4 and our guidance for 2023. At Kimco, we believe a winning strategy is one that can be successful in any economic environment. It needs to be opportunistic, have multiple growth drivers, and be resilient during downturns. A winning strategy also needs to be easy to understand and be supported by a best-in-class team to implement and execute on it. The Kimco strategic plan meets all these criteria and that is why we are so proud of our 2022 results and excited about our longer-term prospects.

If the ultimate measure of evaluating a strategic plan is results then it is abundantly clear that we are on the right track. 2022 was a banner year and the fourth quarter was again outstanding from a leasing perspective as our team achieved some recent and all-time highs across many of our key metrics. This includes strong overall occupancy that finished up 40 basis points pro rata to 95.7%. This represents a recovery of nearly 90% of the COVID inventory we experienced and only 70 basis points below our all-time high. Year-over-year, overall occupancy was up 130 basis points, which is one of the highest year-over-year gains we’ve experienced. Contributing to our strong results was a 20 basis point sequential and a 90 basis point year-over-year rise in anchor occupancy to 98%.

Small shop occupancy increased 80 basis points sequentially to 90% and was up 230 basis points year-over-year. In 2022, we leased over 11.5 million square feet, which is the highest level on record. Specifically, we ended the quarter with 152 new leases totaling 795,000 square feet, exceeding the five-year average new lease GLA for the fourth quarter. Our new lease spread was very strong, 30.4% and includes new grocery leases with Whole Foods and Albertsons. We closed the quarter with 340 renewals and options totaling 1.7 million square feet exceeding the five-year average for renewals and options GLA for fourth quarter. The spread on renewals and options was 4.6% during the quarter with options ending at 8.5% and renewals at 2.7%. Total fourth quarter 2022 leasing volume was 492 deals, totaling 2.5 million square feet at a combined spread of 8.7%.

We experienced only 99 vacates, totaling just 305,000 square feet in the fourth quarter, which is 37% lower than the prior five-year historical average for the fourth quarter. Our mixed-use entitlement initiatives reached new highs in 2022 as we continue to unlock the highest and best use of our real estate. We set another Kimco record by entitling 2,805 apartment units in 2022, bringing our current total entitlements to 5,461 units. Combined with the 2,218 apartment units we have already built and 1,139 units that are under construction, this brings our overall total to 8,818 units and we are well on our way to our upsized target of 12,000 by the end of 2025. Our percent of ABR for mixed-use assets is now up to 13% and we continue to use a CapEx-light strategy to activate projects by either ground leasing or joint venturing with best-in-class apartment developers.

Turning to 2023 and beyond, we believe our platform advantage is just beginning to demonstrate its potential. Efficiencies of scale often take time in multiple cycles to play out, but thus far, it is clear from our performance throughout the pandemic and during 2022 that both our strategy and efforts are being validated. Our unmatched diversification, our access to capital, our internal and external growth profile, our large-scale M&A experience, our CapEx-light mixed-use redevelopment strategy and our opportunistic investment record are just some of the differentiators that characterize Kimco. That said, we can’t rest on our 2022 accomplishments. We know 2023 will require a full team effort to produce another year of sector-leading results.

We are also encouraged by the fundamental strength of our operating business, limited new supply, high retention levels and robust retailer demand for quality space such as ours makes for a healthy leasing environment. While we anticipate leasing velocity and retention rates to continue at elevated levels, we can’t ignore the macro environment and the potential for credit defaults to revert to the mean, that is why our 2023 priorities include additional focus on controlling expenses, upgrading the credit and merchandize mix of our tenant base, and attracting recurring customers. One of the keys for Kimco in 2023 will be to expedite tenant openings and compress the least economic occupancy spread of 260 basis points that represents approximately $43 million of annual base rent that is not yet contributing to cash flow.

While our size and diversification have significantly reduced our exposure to weaker credit tenants, we still need to be vigilant and proactive. We need to closely monitor our tenant watch list, anticipate changes and turn them into opportunities. Bed Bath & Beyond is a case in point. Subsequent to year-end, we sold a shopping center with 1 Bed Bath, reducing our exposure to 25 Bed Bath, one Cost Plus sublease and four buybuy Baby locations. At this point, we know that Bed Bath is planning to close six stores. Of those locations, we already have two leases executed, two ready for execution and two with active LOI negotiations with a combined potential spread of over 12%. We are also in active negotiations with retailers on the balance of the portfolio, representing 60 basis points of Kim’s share ABR, of which 10 basis points relates to buybuy Baby.

This level of activity proves we continue to see strong demand from a diverse set of retailers for the vast majority of these well-located boxes, which are primarily in desirable demographic areas where there is virtually no new supply. Leasing, leasing, leasing will continue to be our mantra in 2023 and together with a solid balance sheet, strong free cash flow and ample liquidity including further potential monetization of our Albertsons stake, we are poised to take advantage of any dislocation and ready to pounce as opportunities present themselves. We have made meaningful progress towards our stated 2025 goals, both on the operating and earnings front, along with further strengthening our balance sheet. Specifically, we have improved our debt maturity profile and increased our portfolio of unencumbered assets while minimizing exposure to floating rate debt.

At Kimco, we are never satisfied with the status quo and our entrepreneurial team is laser-focused on building upon our past achievements and advancing what we believe to be as our best-in-class platform and portfolio. You will see the continued evolution of our portfolio composition through a mix of our unique leasing strategies, including adding grocery anchors where feasible, entitlements, redevelopments and data analytics and tools that give our platform a unique advantage. With our focus on owning and operating the last mile open-air grocery-anchored shopping centers, along with a growing portfolio of mixed-use assets, Kimco has come a long way in a short period of time and we all collectively believe that the best is yet to come in our efforts to maximize long-term shareholder value.

Photo by Maria Ziegler on Unsplash

Ross?

Ross Cooper: Good morning. I hope everyone is having a great start to their year. I will quickly touch upon a few additional details on the fourth quarter and year-end before getting into the current environment and our external growth expectations for 2023. As previously mentioned, in the fourth quarter, we closed on the $375.8 million acquisition of eight open-air retail centers from a privately-held portfolio based in the high barrier to entry Long Island, New York market. With five of the centers grocery-anchored, this acquisition is well aligned with our long-term investment approach, utilizing a combination of cash, the assumption of below-market fixed rate debt and tax deferred down REIT units, we were able to structure an accretive transaction for this generational portfolio.

We are very excited about the potential to create incremental long-term value on these properties with our leasing and our operating platform. Also in the fourth quarter, we closed on another unique opportunity for our structured investment program. We had previously mentioned the $22 million participating loan on a three-property grocery-anchored portfolio in Pennsylvania. In just over four months, our borrower sold the assets for a sizable gain. As such, our loan was repaid and we received a $4 million participating interest. On an annualized basis, our investment yielded a 76% IRR. These two transactions serve to reinforce our already strong operating results. Subsequent to the fourth quarter, we kicked off the year by disposing of two slower growth commodity power centers located in Georgia, which included several watch list tenants, including Bed Bath & Beyond.

We recycled the capital from the sale of these two properties into a 1031exchange on two high-quality open-air grocery-anchored shopping centers in Southern California that were previously held in one of our institutional joint ventures in which Kimco owned a 15% interest. We were successful in securing and purchasing our partners 85% stake of these two last mile centers located in Huntington Beach and Tustin anchored by Avon’s Grocer and a soon-to-open 99 Ranch grocer. The demographic profile for the area includes a combined average three-mile population approaching 200,000 people, an average household income in excess of 120,000. In the coming years, we anticipate the growth profile on the two acquired assets will far outpace that of the sold properties in Georgia, a trade-off we continually seek as our portfolio enhancement efforts continue to generate outperformance.

We also expect partnership buyouts to yield additional opportunities for us as we move ahead. As far as the transaction outlook for 2023, we believe Kimco has an enviable position in a market marked by uncertainty and inefficiency. For 18 months through mid- to late ’22, liquidity in the sector was abundant and capital was relatively inexpensive. We saw Open Air necessity-based retail rise to the forefront of investors’ minds and appetites with other sectors such as industrial, multi-family and self-storage setting all-time low cap rates, and sectors such as office and enclosed malls experiencing operational challenges. Fast forward to today, the conviction in our focused asset class, open-air grocery-anchored last-mile necessity-based retail remains strong.

However, access to capital has certainly tightened with elevated borrowing costs. Institutions such as private REITs, opportunity funds and pensions have seen redemption requests and withdrawals. This has created additional uncertainty on pricing and a once extremely efficient market has become much less predictable. We view this as opportunity. Kimco has the strongest liquidity in the company’s history with over $2.1 billion from cash on hand and our line of credit and our unique access to additional low yield and capital in the form of Albertsons stock, which we expect to continue to monetize in 2023. We plan to take advantage of our position with a combination of select open-air grocery-anchored acquisitions, continued partnership buyouts where appropriate and mixing in opportune structured investments that present themselves in an environment with substantial dislocation.

Dispositions will be modest in 2023 as our portfolio has proven to be in very healthy shape with only a select level of pruning and sales of non-income-producing land parcels and holdings. We are excited about the new opportunities that 2023 will bring and while we anticipate that there will always be challenges, we believe we have positioned Kimco to take advantage of the uncertainty to create additional long-term value. I will now pass it off to Glenn to talk about the financial results and forecast for the year ahead.

Glenn Cohen: Thanks, Ross, and good morning. We finished 2022 with solid fourth quarter results highlighted by strong leasing activity, which produced an increase in occupancy, positive leasing spreads and same-site NOI growth. In addition, we further enhanced our liquidity position with the partial monetization of our Albertsons investment. Now for some details on our fourth quarter results. FFO was $234.9 million or $0.38 per diluted share. This compares to fourth quarter 2021 of $240.1 million or $0.39 per diluted share, which includes about $0.01 per diluted share related to the valuation adjustment of the Weingarten pension plan. Worth noting, this is the first quarter with the full impact of the Weingarten merger included in the year ago comparison.

The key reasons for the $0.01 per share decrease are higher consolidated NOI of $6.5 million, offset by higher pro rata interest expense of $5.6 million. Other items included higher G&A expense of $2.9 million from the increased personnel levels as part of the Weingarten merger and cost associated with the UPREIT conversion and a $3.2 million change in the Weingarten pension valuation I just mentioned. The growth in consolidated NOI is comprised of higher minimum rent of $12.1 million, higher lease termination income, percentage rent income and other rental property income totaling $2.5 million offset by higher credit loss of $10 million, with $3 million of credit loss in the fourth quarter 2022, as compared to $7 million of credit loss income in the comparable quarter.

Our operating portfolio continues to deliver positive results. Same-site NOI growth was 1.9% for the fourth quarter 2022, comping against 12.9% for the fourth quarter last year, bringing full year 2022 same-site NOI growth to 4.4%. During the fourth quarter, same-site NOI benefited from higher minimum rents and lower abatements of $13.7 million as well as higher percentage rent of $0.8 million compared to the same quarter last year. These increases were offset by higher credit loss of $9.5 million, primarily related to reversals of reserves in the prior year quarter and a normalized level of credit loss for the current period. The minimum rent component contributed 3.9% to the same-site NOI growth, while credit loss was negative 3%. Turning to the balance sheet.

During the fourth quarter, we monetized 11.5 million shares of our Albertsons stock, receiving proceeds of $301 million. This sale generated a capital gain for tax purposes of about $250 million. In order to maximize the amount of proceeds we were able to retain from the sale for future investment and debt reduction, we elected to pay the income tax on the capital gain of approximately $57 million allowing us to retain $244 million. Further, our shareholders are eligible for a pro rata credit of the federal income tax we paid. We’ve added an FAQ on our Investor Relations website that provides further detail on this. We ended 2022 with a very strong liquidity position comprised of $150 million in cash and full availability from our $2 billion revolving credit facility.

Additionally, after year-end, we received a $194 million special dividend from our Albertsons investment, and continue to own 28.3 million shares currently valued at over $600 million. As of year-end 2022, our look through net debt to EBITDA, which includes our pro rata share of joint venture debt and preferred stock outstanding was 6.4x and represents an improvement of 0.2x from the 6.6x level at the end of 2021. Our weighted average debt maturity profile is 9.5 years and we have only $50 million of mortgage debt maturing in 2023. Now for our 2023 outlook. We remain confident about the growth prospects of our operating portfolio. But as we mentioned on our last call, we anticipate earnings headwinds due to higher levels of credit loss more consistent with pre-pandemic levels, as well as higher interest expense compared to last year.

Also, as I touched on, in 2022, we benefited from credit loss income of $7.4 million, which amounted to about $0.01 per share for the year. Our initial 2023 FFO per share guidance range is $1.53 to $1.57. The guidance range is based on the following assumptions: positive same-site NOI growth of 1% to 2%. Included in the same-property NOI guidance range is a credit loss assumption of 75 basis points to 125 basis points representing a credit loss ranging from $15 million to $22 million. No income attributable to the collection of prior period accounts receivable from cash basis tenants. Lease termination income between $14 million to $16 million with a substantial portion being received in the first quarter of 2023, an increase in pro rata interest expense of $20 million to $28 million, most of which is attributable to lower fair market value amortization to the Weingarten bonds paid off during 2022 and higher interest rates on the floating rate debt in our joint ventures.

Total acquisitions, including structured investments net of dispositions of $100 million, subject to timing. Monetization of approximately $300 million of Albertsons shares subject to timing. Also, the $194 million special dividend received in January will not be included in FFO. Annual G&A expense of $123 million to $129 million, with the first quarter higher due to the timing of annual equity grants. No redemption charges or prepayment charges associated with callable preferred stock outstanding or early repayment of debt obligations and no planned issuance of common equity. And with that, we are ready to take your questions.

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Q&A Session

Operator: Our first question comes from Michael Goldsmith from UBS. Please go ahead.

Mike Goldsmith: Good morning. Thanks for taking my question. Last quarter, you talked about reverting to an initial credit loss expectation of 75 to 100 basis points kind of in line with the historical levels. Your guidance is 75 to 125 basis points, so a little bit higher at the top end. So, what are you seeing in the market? What is the scenario reflected by the high end of the range? And do your concerns extend beyond the usual suspects that we’ve been talking about? Thanks

Glenn Cohen: Hi, Michael, it’s Glenn. Again, we took a hard look at just the overall portfolio and look at the €“ really the environment that we’re in today. And there is a little bit more risk. We’ve started to see some more bankruptcies than we have in the past years and we felt it prudent to just widen the range a little bit and that’s just baked into the guidance and it takes into account really the scenarios that we see both top and bottom.

Operator: Our next question comes from Samir Khanal from Evercore ISI. Please go ahead.

Samir Khanal: Good morning, everybody. I guess, Conor, can you provide a little bit color on the timing of the monetization of the $300 million of Albertsons shares, which you mentioned in the guidance. Just trying to think through the allocation of that capital proceeds and maybe along that just expand on the opportunities that you talked about, right in your opening remarks as well. Thank you.

Conor Flynn: Yeah, happy to. Thanks, Samir, for the question. Look, we think that the capital coming from the Albertsons investment is a big differentiator for Kimco. We’ve already received a special dividend as we talked about in our opening remarks. We do have the opportunity to monetize another portion of our Albertsons shares similar to what we did last year and the same type of range of value. The expiration of the lockout is end of May. So that really sort of showcases when we have full potential to take advantage of that and then we have a €“ Ross can talk a little bit about the menu of options we have to reinvest those proceeds. It’s a real opportunistic investment that is going to actually really reward our shareholders because when you think about it, you don’t have to issue any equity this year.

We have this investment that’s really coming back to us now to redeploy into our core business, which should generate significant earnings growth, not necessarily in this year, but obviously, in the out years, that’s where the long-term value creation is really going to shine.

Ross Cooper: Yes, and in terms of the opportunity set, I mean, we’ve talked about our different acquisition verticals. We’re having lots of conversations in all three components of that. But as I mentioned in the remarks, we do anticipate that there’ll be continued partnership buyouts. We were able to execute on the acquisition of two assets from a partnership at the beginning of the year. We’re focused on potential additional structured investments as we start to see some additional dislocation in the market. And then depending on where pricing is and if we see a thong of the market to a certain extent, we’ll be active on acquiring open-air, grocery-anchored shopping centers. So, we like the fact that we have all three opportunity sets that we can be nimble when they present themselves.

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