Kimco Realty Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 24 speakers on the call.

Operator

Good day, and welcome to the Kimco Realty Second Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to David Buzhniki, Senior Vice President and Investor Relations Strategy. Please go ahead.

Speaker 1

Good morning, and thank you for joining Kimco's quarterly earnings call. The Kimco management team participating on the call today include Conor Flynn, Kimco's CEO Ross Cooper, President and Chief Investment Officer Glenn Cohen, our CFO Dave Jamieson, Kimco's Chief Operating Officer as well as other members of our executive team that are also available to answer questions during the call. As a reminder, statements made during the course of this call may be deemed forward looking, and it is important to note that the company's actual results could differ materially from those projected in such forward looking statements due to a variety of risks, uncertainties and other factors. Please refer to the company's SEC filings that address such 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.

Speaker 1

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 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.

Speaker 2

And with

Speaker 1

that, I'll turn the call over to Conor. Thanks, Dave, and good morning.

Speaker 3

I will begin with an overview of the Kimco Consumer, provide an update on the favorable supply and demand environment for our business and then share some highlights on our strong operating results, all of which will underscore the resiliency of our high quality grocery anchored and mixed use portfolio. Ross will cover the current transaction environment and Glenn will provide additional financial metrics, report on our balance sheet position and provide our updated outlook. We continue to navigate an economy that gives off mixed signals. A recent Bloomberg report noted that the American consumer savings have declined with the excess savings cushions that have been built up during the pandemic and used to offset rising prices that are no longer available. On the other hand, the labor market remains strong, reflecting both job growth and wage growth in the areas of our portfolio situated.

Speaker 3

This has led the consumer to remain resilient as they've tempered spending but not retrenched. As JPMorgan recently reported, the consumer is now rotating towards Staples and seeking value at Walmart, Costco and off price retailers who are gaining market share. As such, we've benefited from the needs oriented nature of our portfolio as over 83% of our annual base rents come from grocery anchored open air shopping centers. It is also why traffic at our properties has increased both sequentially and year over year. This has translated positively to our operating fundamentals as our leasing team is firing on all cylinders.

Speaker 3

Demand for our well located product remains strong as tenants seek to retain existing space or add new locations. Our retention levels are near all time highs with heavy competition for any vacancies, generating increasing rents, better credit and higher valuations. Nationally, store openings are outpacing closings and the lack of quality retail is having a positive impact in tenant bankruptcy auctions as leases are being acquired by healthy tenants striving to meet their expansion goals. In terms of new retail supply, the outlook remains in our favor. It has been well documented that shopping center development, which currently stands at approximately 0.2% of existing inventory remains exceedingly low.

Speaker 3

The shopping center sector has been sub 1% since 2010 and has provided the retail sector a meaningful tailwind to drive record low vacancies across the country. More importantly, we don't see this dynamic changing anytime soon. As we have previously noted, rents would need to increase upwards of 35% to make new development investment worthwhile. This assertion was recently validated by a notable REIT equity research firm, which calculated that the range of rent increases required to stimulate accretive development in the top 50 markets needed to be between 35% to 55%. All of this highlights the strength and unique position of our portfolio.

Speaker 3

As I noted, with our focus on grocery anchored necessity based off price retail, we are able to generate solid results in all kinds of economic weather. This includes uncertainty of national elections and potential policy shifts, predictions of hard or soft landings and the like. Our company, which features a resilient well located portfolio and strong demographic trade areas, solid balance sheet and best in class team stands out. To further illustrate this point, now let me touch on a few operating highlights. During the Q2, we signed 144 new leases, totaling 669,000 square feet of pro rata GLA with rent spreads of 26.3%, our 11th consecutive quarter of double digit new leasing spreads.

Speaker 3

Renewals and options continued their positive trend with 338 renewals and options completed at a spread of 9%. Overall deal volume totaled 2,300,000 square feet with combined rent spreads of 11.7%. Leasing velocity and retention drove pro rata occupancy higher by 20 basis points sequentially to 96.2%. Pro rata anchored occupancy increased 30 basis points from last quarter to 98.1% and was up 40 basis points year over year. Small shop occupancy increased 20 basis points sequentially to 91.7%, matching our all time high set in Q4 of 2023 and representing an increase of 70 basis points year over year.

Speaker 3

Of note, we continue to derive meaningful outperformance from the RPT portfolio, which further validates our acquisition thesis. We executed 9 new leases in Q2 with comp rent spreads of 146%, driven by a grocery anchor replacing a furniture store and a strong fitness operator replacing a weaker fitness credit. We also executed 24 renewals and options during Q2 at a 17% average spread. Year to date, we have executed 19 new leases at former RPT sites with spreads of 87% and 46 renewals and options with spreads of 14%. The former RPT portfolio also produced same site NOI of 4.5% for the quarter and 3.7% year to date, meaningfully outperforming our underwriting.

Speaker 3

We also increased our cost savings synergies to be realized this year as well as additional future revenue opportunities stemming from increasing the RPT small shop portfolio, which currently sits at over 400 basis points below Kimco's. Additional growth in ancillary income will also be generated by our specialty leasing program. In closing, we are enthused by the performance of our team in our portfolio, resulting in increases to our and same site NOI outlook. The growth profile of our portfolio continues to trend up and our team continues to look across the investment spectrum for new growth opportunities, all while remaining vigilant on costs. Ross?

Speaker 4

Thank you, Conor, and good morning. I hope everyone is having a wonderful summer. On last quarter's call, we talked about the solid fundamentals of the Open Air retail format. We further discussed the volatility in the capital markets and how it has tempered the transaction environment. While those same themes continue to persist, we are positioned to take advantage of dislocations within the market to invest accretively given our favorable access to capital and multiple investment platforms.

Speaker 4

We continue to see unique opportunities on both the And in the Q2, we funded several new structured investments that all have unique attributes, but share a general theme of high quality real estate, accretive yields and a right to acquire if they are marketed for sale in the future. I'll touch on 3 of the more significant transactions. We provided $8,000,000 of mezzanine financing for an infill core Giant Foods grocery anchored regional center in the dense market of Alexandria, Virginia. Dollars 10,000,000 of mezzanine financing for the acquisition of a Sprouts grocery anchored center in Atlanta, Georgia, and we also funded a senior loan at The Rim in San Antonio for $146,000,000 at a 9% interest rate. We also converted our existing $50,000,000 preferred equity position in the Rim to mezzanine financing, giving us greater control of the capital stack on a trophy asset that is one of the most visited properties, not just in Texas, but all of the U.

Speaker 4

S. On the acquisition side, we are encouraged by the deal flow and the possibilities as pricing is moving closer to our hurdle rates. While neighborhood grocery anchored centers in our core markets remain aggressively priced in the 5% to 6% cap rate range, larger format assets in similar geographies with solid demographics and densification opportunities are trading at higher cap rates due to their operational dynamics and the larger check sizes. These unique attributes align well with the Kimco platform and is a differentiator that we believe allows for a better risk adjusted return for our shareholders. We remain confident in achieving our 2024 acquisitions range of $300,000,000 to $350,000,000 that is inclusive of structured investments.

Speaker 4

As it relates to dispositions, following the completion of the $248,000,000 of RPT asset sales in the Q1, we have substantially completed our 2024 plan. Any dispositions in the second half of the year will be very modest and at a much lower cap rate. Therefore, we have reduced our disposition guidance for this year to a new range of $300,000,000 to $350,000,000 which is net neutral with our 2024 acquisition target with a slightly lower blended weighted average cap rate. Now on to Glenn for an update on the financial aspects of

Speaker 5

the quarter. Thanks, Ross, and good morning. Our high quality operating portfolio generated strong second quarter results as we maintained a strong balance sheet and enhanced our liquidity position. Highlights for the Q2 include continued positive leasing activity producing increased occupancy, another quarter of double digit leasing spreads and solid same site NOI growth. Now for some details on our 2nd quarter results.

Speaker 5

FFO was $276,000,000 or $0.41 per diluted share as compared to last year's 2nd quarter results of $243,900,000 or $0.39 per diluted share, representing per share growth of 5.1%. We produced $387,900,000 of total pro rata NOI in the 2nd quarter, an increase of $45,800,000 over the same period in the prior year. This growth was driven by $38,300,000 of pro rata NOI from the RPT acquisition, dollars 12,800,000 from higher minimum rents and $1,600,000 from higher net recoveries from the balance of the consolidated portfolio. These consolidated These consolidated NOI increases were impacted by lower percentage rent and other income of $3,500,000 which was mostly due to timing and higher credit loss of 1,400,000 dollars Our credit loss for the first half of the year was 86 basis points, the midpoint of our bad debt assumption. The net NOI increase was offset by greater pro rata interest expense of $14,000,000 due to the higher interest rate on the $500,000,000 bond issued in the 4th quarter last year related to the refinancing lower coupon debt, dollars 510,000,000 of additional debt in connection with the RPT acquisition Conor outlined.

Speaker 5

Same site NOI growth was positive 3% Conor outlined. Same site NOI growth was positive 3% for the 2nd quarter. The primary driver was higher minimum rents contributing positive 3.4 percent driven by quicker rent commencements from the sign not open pipeline, which compressed 10 basis points from last quarter to 3 20 basis points. At the end of June, the sign not open pipeline represents 4.20 6 leases and $63,000,000 of ABR, of which $30,000,000 is expected to commence in the second half of the year, generating $8,000,000 for the remainder of the year. For the 6 months of 2024, same site NOI growth was positive 3.4%.

Speaker 5

These results demonstrate the continued strength of our well located portfolio. Turning to the balance sheet. We ended the Q2 2024 with consolidated net debt to EBITDA of 5.5 times. On a look through basis including pro rata JV debt and perpetual preferred stock outstanding, net debt to EBITDA was 5.8 times. These metrics would have been 1 tick better if we included the full quarter of income from the $146,000,000 structured investment in the RIM Shopping Center made in late June.

Speaker 5

Subsequent to quarter end, we increased the size of our $200,000,000 term loan by an additional $300,000,000 The term loan has a final maturity date in 2029 and we swapped the $300,000,000 to a fixed rate of 4.78 percent including our credit spread for the full term. We use the proceeds to repay $220,000,000 outstanding on our $2,000,000,000 revolving credit facility, which had a borrowing coupon of 6.19 percent. The balance of the funds was invested in an interest bearing account earning in the mid-5s pending use for investment. Separately, we achieved the high end of our sustainability goals by surpassing our required Scope 1 and Scope 2 greenhouse gas emission reduction targets. As a result, the borrowing spread on our $2,000,000,000 revolving credit facility and our $310,000,000 term loan is reduced under the green pricing feature.

Speaker 5

The reduction is 4 basis points from the stated credit spread for both facilities and we get a 1 basis point reduction in our facility fee on our revolving credit facility. Now for an update on our outlook. Based on our strong first half results and our expectations for the balance of the year, we are again raising our FFO per diluted share range from $1.56 to $1.60 to a new range of $1.60 to 1.6 $2 Our increased FFO per share guidance range incorporates the following updates to our full year assumptions. Same site NOI growth of 2.75 percent to 3.25% from the previous level of 2.25% to 3% and is inclusive of the RPT assets and a credit loss assumption of 75 basis points to 100 basis points. Full year cost savings synergies from the RPT acquisition improving to $35,000,000 to $36,000,000 Interest income expected to be between 13,000,000 dollars to $15,000,000 and lower disposition guidance of $300,000,000 to $350,000,000 Our other full year guidance assumptions remain intact.

Speaker 5

I want to thank all our associates whose efforts significantly contributed to our outstanding results. We are well positioned to deliver growth. And with that, we're ready to take your questions.

Operator

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

Speaker 6

Good morning. Thanks a lot for taking my question. My question is on the guidance and you took the FFO guidance higher to $1.60 to $1.62 and that was supported by both the higher same property NOI expectations as well as some same property NOI expectations as well as some other moving pieces. So can you just kind of walk through like how much of a contribution of the FFO guidance is driven by the same property NOI? And then what are the other pieces that are driving the forecast higher?

Speaker 7

Thanks. Sure, Michael. The primary driver really is the operating portfolio. Again, our rent commencements have been quicker than what we had originally forecasted. So that's a major driver and that also drives same site NOI growth because it's cash based.

Speaker 7

Expense control is another piece. So we've been really very focused on expense control both at the property level and the G and A level. Those are the primary drivers, but it's really coming from the operating portfolio.

Speaker 6

Yes, I

Speaker 8

would also say Michael that as we talked about, it's also the RPT. We had better execution than planned. So that's doing well for us as well from the guidance increase.

Speaker 6

Just as a related follow-up here, you've done same property NOI of 3, 4 for the first half of the year. The guidance assumes that decelerates in the back half. Can you kind of walk through Yes. I

Speaker 7

Yes, I mean, again, we've increased the guidance range of same site now twice during the year. Again, the portfolio is performing very well. We do have a tougher comp in the Q3 of last year based on some one time things that were in there that has a little bit of an impact. But overall, we feel very comfortable with the revised guidance range that we put out. Yes.

Speaker 7

And we also we look

Speaker 9

at same site as an annualized number. There's always as Glenn mentioned, there's noise quarter to quarter timing of expenses, recoveries, etcetera. Really is always intended to be an annualized number. So when you look at the annual outlook and we've increased the guidance, it's a good indication of the direction we feel we're going.

Speaker 6

Got it. Thank you very much. Good luck in the back half.

Speaker 7

Thank you.

Operator

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

Speaker 2

Good morning, everybody. Hey, Conor, you spoke about the RPT portfolio, the 400 basis point spread in shop occupancy. I guess just trying to understand kind of the ability to close this gap. I mean, what's the timing on this considering that I imagine some of that is probably hard to lease space, right? You need some capital spend on that for anchor repositioning.

Speaker 2

So help us walk through kind of how to think about that closure of the gap over the next several years? Thanks.

Speaker 10

Yes, happy to Sameer. Look, we look at that vacancy as real upside. So when you look at the S and O pipeline or the signed not open pipeline of the former RPT portfolio, That's what's really getting compressed. So we were driving that the first two quarters and that's why you saw over 4% same site NOI in that portfolio for the 2nd quarter. Now as those anchors start to come online, that's when you're going to start to see the pickup in small shop leasing, because typically you want to have an operating anchor that's easier to fill around where you can mark to market those rents around the former vacancy, whereas previously if we have

Speaker 9

a vacant anchor box, it's a lot harder

Speaker 10

to lease the small shops around that vacancy. So we do anticipate because we've seen it in our own portfolio, the small shop leasing continuing to show the strength and the acceleration. And we are very focused on driving the small shop occupancy in that portfolio because again that's where we see upside. That's really sort of

Speaker 6

next

Operator

The next question comes from Dori Kestin with Wells Fargo. Please go ahead.

Speaker 11

Thanks. Good morning. The strips had a nice run earlier this week. Based on your discussions with private equity peers, how would you describe interest in the strip today versus say 6 months ago? And then how are you viewing your own NAV today versus where you're trading?

Speaker 10

Thanks, Dore. Yes, we've been pretty consistent this year that capital formations continue to accelerate for Open Air shopping centers. I think when you look at the recent transactions that have been announced, Cohen and Steers obviously coming in, in a joint venture to buy a grocery anchored shopping center. When you look at the amount of capital formations from the institutional investors, private equity, I mean, it's very clear the supply and demand that we've been talking about is starting to come into focus because it's showing up in the numbers and it's really producing significant growth. And I think the other big piece of it is the cap rates for the product are still relatively attractive when you look at other sectors.

Speaker 10

And I think that is really driving a lot of interest because of the lack of new supply on the horizon. I feel like that really opens people's eyes back up to the shopping center sector.

Speaker 12

Yes. And I would just add, I mean, we have a pretty strong purview given the joint venture partners that we have that are all pretty diverse and have different views on retail. And across the board, what we're seeing is a lot of private equity and other formation that have really gone from, I would say, retail curious to retail active. And that really is something that we think is going to push both cap rates activity and investment in the back half of the year and forward and beyond that.

Operator

And the next question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.

Speaker 6

Hi, thanks for the time. Just curious on the structured investments, if you can comment on the types of opportunities incrementally you're seeing in the market yield expectations. And you kind of mentioned as well maybe more opportunities for some bigger centers and how we should think about incremental deal flow second half and going into 2025?

Speaker 12

Absolutely. The structured investment is a unique product that every deal is a little bit different. I indicated 3 of the transaction that we closed on in the Q2. It was a combination of a recap of an existing owner, one was acquisition financing. Then of course the RIM was an exciting unique opportunity where we have the ability to further strengthen our position in a dominant asset as a tremendous amount of equity embedded in it and ultimately could become an acquisitions target.

Speaker 12

So whatever the outcome of that asset and investment is going to be a positive for Kimco. I think that on a go forward basis as we look at the 3rd and the 4th quarters, our expectation is that our investment activity will be more heavily weighted toward core acquisitions, as some of the structured investments have been completed. And again, they're sort of one off and unique in nature. But there's definitely a place for our capital within the STACK, whether it be repositioning, financing, new acquisitions as we've seen volumes starting to increase and a lot more optimism as the rate environment there's an expectation that the cuts might be coming and there just seems to be a bit more stability and optimism in the environment. So I think that the back half of the year is going to be positive for Kimco.

Operator

And the next question comes from Greg McGinniss with Scotiabank. Please go ahead.

Speaker 13

Hey, good morning. Ross, just to better understand on that acquisition guidance, the 7.5% blended cap for the year on midpoint $325,000,000 of investment seems to imply a 0% cap rate on the remaining $80,000,000 Is there a I mean, it sounds like you're talking about core assets, but we're missing something on the math there or is there a plan to buy land?

Speaker 12

It's not certainly not a land play. I think when you look at the guidance, it is a blended spread between our structured investments and our core activity. As you've seen clearly, the first half of the year has been heavily weighted towards structured investments. We do anticipate that in the second half of the year, there's going to be more activity on the core acquisition. So as we have a little bit more color and clarity on the specifics of the deals that we're looking at now, we'll certainly update that guidance in that range.

Speaker 12

But with where we sit today and what we know is in the pipeline, we're comfortable with where we sit.

Speaker 13

Okay. And then on development side, CulturePlace seemed to have pretty limited investment this quarter. Is there a slowdown to development happening there? Any color would be appreciated.

Speaker 9

Yes. No, we right now, we board the foundation for the parking, the subterranean parking and then the ground floor retail, its construction is underway. Just as a reminder for us, it's a preferred equity structure, so our capital

Speaker 6

investment is limited. As a matter

Speaker 9

of fact, I'll just add that our

Speaker 10

So you won't see any increase going forward. Correct.

Operator

And the next question comes from Craig Mailman with Citi. Please go ahead.

Speaker 6

Hey, guys. Just to go back to maybe the RIMs a bit, you guys are about $200,000,000 of the capital stack now. Could you give us a sense of maybe what the LTV of that overall property is? I mean, given the 9% rate seems like and versus what others are getting for high quality kind of strip and open air that seemed kind of a high coupon. I mean is this I know you alluded to you guys always look for loan to own, but is this something in the near term you guys could get an equity stake in?

Speaker 6

How should we kind of think about this particular investment?

Speaker 12

Sure. Happy to. Yes, I mean, the rim is really an exceptional asset, performs really well. Our partnerborrower has executed on the business plan exceptionally well. Leasing is strong.

Speaker 12

We're right around 100 percent occupied there. Our expectation in terms of recent valuations is that there is at least 50 $1,000,000 of equity in that deal. So when you're looking at it from our position being just under $200,000,000 from an LTV standpoint, we're right at that 80%, which is really where the structured investment program is intended to sort of cap out. So we feel very comfortable with where we sit. As I mentioned, it's still a little bit unclear as to ultimately where that shakes out, but whether we get repaid and keep a position in the deal or ultimately own it, I think that either outcome would be a fantastic one for Kimco.

Speaker 12

You are correct that the coupon is clearly high. It is intended to be relatively short term, while I think the borrowers consider what the next step is there, whether it be a refinance, a sale or otherwise. So, there are some moving pieces there, but we're in a really

Speaker 6

strong position.

Operator

And the next question comes from Alexandra Goldfarb with Piper Sandler. Please go ahead.

Speaker 14

Good morning. And I'm still Alexander Goldfarb. Alexandra, I don't know, I guess I'm a new age fluid person. So question for you. On the small shop, because that's where a lot of the juice is coming from.

Speaker 14

Not sure if you've quantified, but maybe you could. The impact to FFO or NOI margin as the small shop leases up becomes occupied paying rents, You mentioned 400 basis point lower small shop occupancy in the RPT versus Kimco. And obviously in the release you highlighted the record leased rate in the Kimco portfolio, 91.7%. Can you just give some framework around what the earnings benefit as the small shop takes effect maybe every 100 bps of small shop occupancy versus the larger boxes because I got to believe that the earnings impact is superior just given the better economics?

Speaker 9

Yes. Great question, Alex. Doing the math quickly, so you have about 25,000,000 square feet of small shop space. If you take 100 basis points of that, it's about 250,000 dollars Average rents for our small shops are around $32 a foot. So multiply the 2, you get around $8,000,000 of ABR coming from that, and that excludes obviously any recovery benefit you would get from that as well.

Speaker 9

So take that, quantify into the FFO gain, there's obviously significant upside. And when you look at so how we've been trending, obviously, on the small shock activity for Kimco and what we anticipate, what we could potentially do on the RPT side, we see real benefits going forward. On the snow pipeline, that $63,000,000 on the non anchor side, Small

Speaker 10

Small shops also typically take less time and less capital to come online. So really it's a focus. Clearly we understand the upside and we continue to ride the momentum.

Operator

And the next question comes from Flores Van Dijkkem with Compass Point. Please go ahead.

Speaker 15

Hey, guys. Following up on the small shop concept, obviously, it's a huge earnings driver and upside potential. I know you guys are around 49% of ABR from shop space today. Where do you think once the portfolio stabilizes that percentage of ABR from shop space goes to or can go to?

Speaker 10

It's a good question, Floris. I mean, I think we are laser focused on driving that small shop occupancy. Obviously, we're in uncharted territories because if you think about the drag that the RPT portfolio had on Kimco's small shop occupancy, we're setting records this quarter. So we have the ability to continue to push. We don't see any hurdles in front of us that should sort of derail the momentum that we're seeing, and trying to generate as much growth from the small shop side is really the focus.

Speaker 10

The occupancy on the anchors is over 98%. There's still a lot of demand there as I mentioned earlier. A lot of leases that are in bankruptcy auctions are being acquired because they can't find good quality retail space. So they're acquiring it out of the bankruptcy process. But I think when you look at the small shop occupancy side, there's really we're not sure how high we can push it, but we're going to push it as hard as we can to all time highs.

Operator

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

Speaker 16

Great. Good morning. Connor, just based on your opening remarks around the economy, mixed signals, the consumer, what are the marching orders to the leasing team at this point? Is it changing your leasing strategy or staying aggressive? Thank you.

Speaker 10

Thanks, Jeff. It's pretty consistent. I think when you've got the advantage that we have in terms of advantages of scale, we try and be proactive and work with our partners, our retailers to try and make sure that we are the first call and looking out 2, 3, 5 years even for their growth strategy. So the benefit of Kimco's portfolio is a lot of our retailers are regional and some of them have yet to even consider some of our target areas where we have phenomenal portfolio. So when you look at some of the retailers that have done quite well recently like Sprouts Farmers Market, for example, they have yet to even really penetrate some of our markets and the same goes for some other grocers.

Speaker 10

We did 5 grocery anchored leases this quarter, 5. And we feel like that demand is still accelerating. And when we look at our portfolio, a lot of our strategy is to utilize the platform and the team to go and unlock more value by adding groceries to it. So there's a lot of momentum there. Clearly, the focus is on executing.

Speaker 10

We've got a lot of tools at our disposal. We just designed a brand new interactive site plan that we're really excited about that actually links to all of our data. So it's really sort of a unique tool that allows our field team to be able to utilize it in the field with the retailers to be able to generate more leasing opportunities. So a lot of things clicking on all cylinders right now and obviously you can tell we're super excited to continue the momentum.

Operator

And the next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Speaker 17

Hey, just two quick ones. One on the RPT, just looking at the slide in the deck, which is really helpful. I think we talked about the 4 20 basis points small shop occupancy. But can you hit on just the Mary Brickell Village redevelopment, just the timing? I know it's farther out, but how

Speaker 10

is that sort of progressing?

Speaker 17

How are you sort of thinking about executing on that would be question 1? And then the question 2 is just on the breadcrumbs on same store NOI. It seems like you're going to continue to gain occupancy from here. The portfolio is pretty full. What sort of similar bad debt assumptions is this year as last year, is there any reason in what you can't do another sort of 3% sort of long term going forward?

Speaker 17

What are the puts and takes there? Thanks.

Speaker 9

Yes. On the Mary Brickell side, you're right. I mean, there is a tremendous amount of opportunity there. Right now, near term, the reinvention of the merchandising plan and

Speaker 6

the re leasing opportunities are significant. You're seeing

Speaker 9

rents go from the reinvention of the merchandising plan and the re leasing opportunities are significant. You're seeing rents go from the 40s up into the triple digits. And so our focus right now is near term opportunities to remerchandise, reposition a healthy portions of that asset, and that will be the focus in the near term. As it relates to your other question?

Speaker 7

Yes, yes. As it relates to look at the same site, again, we are very comfortable with the guidance range that we have. So you're 3 quarters to 3.25%. Looking out longer range, obviously, our intent is to continue to drive same site growth as much as we can. But again, it's an annual number.

Speaker 7

Quarter by quarter makes it a little tricky quarter by quarter every 90 days. But the team is incredibly focused on generating leases quickly and getting those tenants open as fast as we can. We've dedicated a lot of resource to helping our tenants get those stores open and getting the rent commencement as quick as possible. So that's the driving force today.

Speaker 10

The only other thing I would add on Mary Brickell Village is you've probably seen a lot of the news headlines of all the development going up around Mary Brickell and the demand there from the retailers continues to accelerate, market rents continue to accelerate, and Mary Brickell Village was obviously part of the RPT portfolio and that price per square foot for the whole portfolio was $165 a foot, which included Mary Brickell Village.

Operator

Next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Speaker 18

Hi, good morning. Maybe just a little bit more on the leasing side, it feels like the environment has been pretty good for a while. So what are some of the key steps you guys use to gauge leasing interest and activity, if you like the size of the pipeline, number of lease proposals, etcetera? And how are they trending? And has there been any change to who the active tenants are?

Speaker 9

Yes. I mean, first on the start with retention. Obviously, our retention rates right now are about 90%, which are exceeding our historic highs over the last several years. So the demand for existing tenants to remain in place and want to renew and continue to operate their business with us has been really, really encouraging. On the new lease side, the acceleration of both the anchor and the small shop activity, again, as And then in terms of how you're looking forward And then in terms of how you're looking forward in terms of new retailers that are looking to expand into the portfolio, you're seeing a lot of ethnic grocers being very proactive in this sector right now, which is great.

Speaker 9

And they're looking not only 1 to 2 years, but really 3 plus years out now and planning for well into the future because as we mentioned earlier, there is no new development supply on the horizon in any meaningful way to create new inventory. So it's all about 2nd generation space. All of these retailers need to hit their mark and hit their own growth strategy. So they want to be as proactive with us as we are with them. And you're seeing that too in terms of obviously deal terms and the flexibility of the space in which they target.

Speaker 9

Prototypes were something coveted in the past and now they've become much more flexible of how they utilize the space, can either expand or contract to fit into the opportunity that's presented in front of them. And so it's really developed really strong partnerships with all of our retailers and resulted in all of us having to get creative to help achieve both collective goals.

Operator

And the next question comes from Linda Tsao with Jefferies. Please go ahead.

Speaker 19

Hi. A 2 part question. You mentioned S and O getting open faster. Is there any way to quantify how much more quickly this is happening? And do you think you have the ability to move it even faster?

Speaker 9

Sure. In the 1st part of this year, we anticipated our snow contribution at $25,000,000 to $30,000,000 We're now at the upper end of that range, so $30 plus 1,000,000 for the year, with, as Glenn mentioned in his prepared remarks, about $8,000,000 coming online for the second half of this year. And then when you look ahead in terms of what's going to be contributed as it relates to that 63,000,000 dollars between $24,000,000 $25,000,000 about $30,000,000 plus will start to come online in 'twenty four and then another $20,000,000 plus will come online in 2025. So that's almost 85%, 90% of that snow pipeline starting to flow over the next 12 months. How we're doing this is just exhaustive work.

Speaker 9

It's simply put that the tenant coordination, the construction team, leasing team, property management are all exhausting all of their efforts to help solve problems in the field challenges and develop opportunities to open them sooner. That's the only way you can get it.

Speaker 19

And then just to follow-up on the transaction environment. How much have cap rates compressed since the beginning of the year? And then what's the level of compression you might expect over the next 12 months?

Speaker 6

Yes, I think in

Speaker 12

the first half of the year, it's been fairly consistent As we talked about, transaction volumes have been lower this year compared to 2023, but the deals that are getting done continue to be at That being said, there That being said, there as I mentioned, is a fair amount of optimism that the back half of the year and into 2025 with the amount of capital that's been on the sidelines that's ready to invest and with the expectation that the rate environment is stable, if not moving lower. The anticipation is that there's going to be more capital, which inherently should push cap rates down gradually over time.

Operator

And the next question comes from Wes Golladay with Baird. Please go ahead.

Speaker 20

Hey, good morning, everyone. It looks like just under 30% of the anchor leases expiring through 2025 have no option. It looks like they're older leases about a 40 percent mark to market. How should we think about retention here? Would you look to force move outs, get more relevant tenants in?

Speaker 9

Yes, that's a great question. So right now, you're right, it's about 52 leases that are rolling with no options at 25. We've resolved or in the process of resolving about half of those already. So it's a combination of identifying new opportunities to backfill space at higher rents, retaining the existing tenants in place at a market rent. And what we do is we look at, in today's environment, the merchandising mix and what is best for the asset long term to drive shareholder value and to best support the needs of the shopping center itself.

Speaker 9

So it's a combination of all those activities. But again, we're already looking ahead into 25% and feel very good about the outlook.

Operator

And the next question comes from Paulina Rojak with Green Street Capital. Please go ahead.

Speaker 21

Good morning. As you described, the sector's background is clearly very solid. Based on your experience, what level of year over year rent growth should these solid fundamentals translate into if you think about the next 12 to 24 months? And also if you could comment on how is your negotiating power evolving with anchors? It seems to be to me that most of the rent growth is coming from the shop side of the business?

Speaker 21

Thank you.

Speaker 10

Yes, good question, Paulina. I think what you've seen is the trajectory of the same site NOI growth continues to improve. When you look at the components of that, as you know, a lot of it has to do with retention because we're so highly occupied. So as retention rates remain high and we're getting the incremental growth from new leasing, you're seeing 3% plus over the past three quarters that we've been able to produce. So when you look out, it's hard to extract exactly what the new glide path looks like.

Speaker 10

Historically, our sector has produced around a 2% same site NOI growth profile. Obviously, we're trending towards higher than that, but we like just executing on where we are today and continuing to look at the opportunities that going forward. Clearly, we've talked a lot today about the small shop opportunity we have. We think that will continue to manifest in our numbers. And then on the anchor side?

Speaker 9

Yes. On the anchor side, the conversation, we sort of break it into 3 broad categories. Obviously, on the terms, you mentioned growth. We're continuing to push rent escalations, both in the primary and the option period, ensuring that we retain as much control as we can into the future. When we look at the space, I mentioned this before, growth also comes from the accommodation of being more flexible with the space in which they're willing to occupy.

Speaker 9

So if you're able to show flexibility and modify that prototype to get them in place, you then also get the halo effect benefit from the balance of the center with tenant open and operating. And then finally, with timing too, as I mentioned, we're building a very robust pipeline into the future, and so we're working with our retail partners and our anchors to look well out in front, 12, 24, 36 months and beyond to help achieve both collective goals. So we're seeing the conversation evolve pretty dramatically in several broad categories.

Operator

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

Speaker 15

Hey, good morning. So I guess first question I have, maybe for you Ross, I guess I was surprised a bit in the reduction in the dispositions here. I know it's not a sizable amount, but and that you're not in a position needing to sell assets, but we've heard of scarcity premiums, increased buyer interest. So I guess can you add a bit more color on why you're pulling back here? You're not getting the demand or pricing you want?

Speaker 15

Are the assets perhaps better than you appreciated? Are you preferring to keep the cash flow? What are we not appreciating? Or what's changed since you first contemplated the sale of a greater portion of these former RPT assets? Thanks.

Speaker 12

Sure. It's just looking at the outlook of where we are right now, the 1st August. We, as I mentioned, completed the vast majority of the positions that we had planned. We were really excited with the execution on the RPT dispose. And when we look at the performance of the portfolio that we have right now, there really isn't a need to further dispose.

Speaker 12

We have the availability of our full credit facility, so liquidity is in the best shape that it's been in, so not a capital need per se. We do have several assets that are within our joint ventures that are currently in the market. We're not certain if a few of those or any of those may or may not transact. But if they do, they'll certainly be at significantly lower cap rates than where we've been, which is sort of what prompted the decision to drop the upper end of the cap rate range on the dispositions. So it really is just a combination of the entirety of our capital plan and our outlook and the performance of our portfolio.

Speaker 12

And we feel really good about where we are. And we'll revisit where things shake out when we go through the budgets for 2025, but at least through the end of 2024, that's where we feel most comfortable.

Operator

The next question comes from Mike Mueller with JPMorgan. Please go ahead.

Speaker 22

Yes, hi. Just a quick one on bad debt. So for the 86 basis points that you had in the first quarter or the first half of the year, you talked a little bit about the makeup of that, how concentrated or diverse was it, types of tenants, anything notable there?

Speaker 11

Yes. Thanks so much for the question. So you're right, the credit loss for the year to date is at 86 basis points. There's really nothing no current tenants that are having concern inside that number that would make us go outside of our projected credit loss guidance of 75 to 100 basis points. For the quarter, there's definitely an impact of timing in there.

Speaker 11

So we bill a majority of our TAM bills as well as some real estate tax bills during the Q2. And as such, any tenants that are cash basis, you have to put up 100% reserve right away. So it's definitely a timing impact. But overall, we're not seeing anything in the AR in terms of creep or any acceleration on year over year levels that are pretty stable and flat. So we're very comfortable with our 75 to 100 basis points that we have in guidance.

Operator

And the final question comes from Gorman with BTIG. Please go ahead.

Speaker 23

Ratio and

Speaker 8

Mike, you cut off. Can you just start again?

Speaker 23

Sure. Sorry if I missed it, but can you just talk for a minute about the occupancy cost ratio that you're seeing as you're out there doing the new leasing? And I guess specifically the reason I'm thinking about this is obviously from the traditional real estate supply demand perspective, there's a lot of strength there. I'm just wondering how much continued strength and rent growth the tenant environment can support here? And has there been any shift in the tenant thought process in terms of how much of their cost structure can go towards rent and towards real estate?

Speaker 9

Yes. Occupancy cost ratios vary sector to sector, retailer to retailer, because it's a combination of really how they run their business and the margins associated with the products they sell. But it's always a continued dialogue between what is the all in cost for our leases both on the base rent and the CAM associated with that rent. And it's a negotiating point. Obviously, when you have right now what we right now what we're seeing, we're still continuing to see very healthy strong rent growth from where we were historically and are encouraged by the direction.

Speaker 10

Yes, Mike, don't forget that now most of brick and mortar retail is used as a distribution and fulfillment point. So the occupancy cost of the old days of just the 4 walls has changed dramatically. And I think we're just honestly, I think we're just scratching the surface in terms of value proposition is of the store and the true occupancy cost because the margin gets enhanced if you can run the e commerce sale through the store and most retailers have that as their business model, which continue to show why they're putting a lot of capital towards expansion goals today.

Speaker 6

Yes, it's

Speaker 9

actually a great point because they're now looking at it like trade area and its totality and how much market share they're grabbing out of the entire trade area. So the way in which they're viewing the world is very different than just the days of old where it was just 4 wall EBITDA growth, but instead what it said, the larger catchment area that this store can sell.

Operator

This concludes our question and answer session. I would like to turn the conference back over to David Bushnicki for any closing remarks.

Speaker 8

Just like to thank everybody that participated on our call today. We hope enjoy the rest of your day as well as the rest of the summer. So thanks so much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Kimco Realty Q2 2024
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