Q2 2022 Kimco Realty Corp Earnings Call
Greetings and welcome to the Kimco Realty Corporation second quarter 2022 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
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Being recorded it is now my pleasure to introduce your host Mr. David Bush Nikki Senior Vice President of Investor Relations and strategy. Thank you Mr. Bush and they get you may begin your presentation at this time.
Morning, and thank you for joining kimco quarterly earnings call at Kimco management team participating on the call today include Conor Flynn Kimco C E O.
Ross Cooper, President and Chief investment Officer.
Glenn Cohen our CFO .
Dave Jamieson Kimco as Chief operating officer.
As well as other members of our executive team are also available to answer questions during the call.
As a reminder, statements made during the course of this call maybe deemed forward looking and it's important to note that the company's actual results could differ materially from those projected in such forward looking statements due to a variety of risks uncertainties and other factors.
Please refer to the company's SEC filings that address such factors.
During this presentation management may make reference to certain non-GAAP financial measures that we believe help investors better understand kimco operating results.
Reconciliations of these non-GAAP financial measures can be found in the Investor relations area of our website.
Also in the event our call were joined her technical difficulties, we'll try to resolve as quickly as possible and if the need arises we will post additional information to our Investor Relations website.
I'll turn the call over to Conor.
Good morning, and thanks for joining us.
I will lead off today's call with an update on our strategic initiatives and a review of our Q2 leasing highlights Ross will cover the transaction market and our recent activity and Glenn will follow with our financial metrics and our updated guidance. We had another solid quarter. Thanks to the efforts of our outstanding team the high quality nature of our portfolio and our disciplined.
The initiatives, we put in place more than five years ago to upgrade the quality of our portfolio streamline our organization and enhance our platform continue to drive exceptional results.
Our investment in leasing and property management human capital ESG community outreach technology data analytics and entitlement have generated solid positive returns and created value for all of our stakeholders. We remain focused on executing our plan and putting up numbers that helped to further differentiate kimco and RF.
Rich.
It is with cautious optimism that we highlight our considerable accomplishment this past quarter, while remaining cognizant of the macro issues impacting our country, our economy, our retailers and our consumers.
While our strong second quarter numbers are reflective our leasing team continues to report that demand for space across our portfolio remains robust and should continue to grow for the right space in the right location.
<unk> power remains strong even in this period of economic uncertainty one of the key drivers is our focus on last mile locations, which are seeing positive traffic patterns at 101, 3% relative to the same period last year.
Kimco consumer lives in the first string suburb of the top major metro markets, where employment and spending power remained strong while we can't ignore the impact of inflation. The consumer remains resilient for now and more importantly, our portfolio focused on essential goods and services puts us in a sound position to better withstand the ever changing environment.
On the leasing front pro rata occupancy finished up 40 basis points, reaching 95, 1% due to positive net absorption year over year Pro rata occupancy is up 120 basis points anchor occupancy is up 30 basis points quarter over quarter to 97, 6% and up seven.
Basis points year over year.
Small shop occupancy is up 80 basis points quarter over quarter to 892% and up 370 basis points year over year that is our largest year over year increase in small shop occupancy and over 10 years during the quarter, we signed 150, new leases totaling 711000 square.
Our new lease spread was 16, 6% with notable positive drivers coming from medical off price beauty and Salon services.
We completed the quarter with 348 renewals and options totaling one 6 million square feet.
The second quarter renewals and options spread was five 6% with options ending at six 4% and renewals at 5%.
Total second quarter deal volume was 498 deals totaling $2 3 million square feet with a combined leasing spread of seven 1%.
We executed two new gross released this quarter, which helped us crossed the milestone of 80% of annual base rent coming from grocery anchored properties ahead of schedule.
And we continue on the path to hit our goal of 85% by 2025.
The benefits of our portfolio transformation to a dominant grocery anchored portfolio and the top metro markets are numerous most notably perhaps the robust small shop leasing activity driven by the Halo effect of our strong grocery anchors, which helps drive cross shopping and more leasing demand and pricing power.
An important takeaway this quarter is that our portfolio retention rates continued to shine.
Our portfolio GLA retention rate during the second quarter was 93% with anchors and small shops.
Both 10% above their respective five year average retention rate.
The high retention rate is why are we only had 91 total vacates for 223000 square feet this quarter, making it the lowest GLA vacated during the quarter over the past 10 years.
Whether we're maintaining pricing power as 96% of all renewals and options. We are at a positive rent spread we believe these high retention rates are directly related to our efforts to optimize our last mile locations for our retailers and further highlight the value proposition of our portfolio.
We also believe that if we continue to make the last mile store more valuable over the long term our retention rates will continue to improve occupancy will rise and tenant churn and Capex will decrease all of which will result in a higher long term growth rate for the portfolio.
In closing our strategy remains straightforward focused on leasing work to expedite our tenant openings entitle our assets for future density opportunities maintain a strong balance sheet liquidity position and be patient identifying investment opportunities and which kimco is uniquely positioned to add value. We believe these initiatives.
The sector outperformance and reinforced the kimco differentiator that drive total shareholder return.
Uh huh.
Good morning, and I hope everyone is having an enjoyable summer as we always say in this business. The only constant is change in the second quarter has showcased the unpredictability of the macro economy and how quickly things can pivot.
To that point the mantra, we continue to follow emphasizes the importance of maintaining a nimble and opportunistic strategy and a balance sheet that supports both organic and external growth at any point in the cycle.
The quality of our portfolio balance sheet and liquidity position puts us in a prime spot to be opportunistic.
Okay.
On previous earnings calls, we identified a pipeline of activity in all three elements of our transaction strategy, which are the buying out of JV partners, providing mezzanine and preferred equity financing via our structured investments program as well as the outright third party acquisition of high quality shopping centers.
That offer further opportunities for value creation.
In the second quarter, we closed on several transactions in support of this strategy.
Okay.
In terms of partnership buyouts, we acquired an additional 3.6% interest in our longest standing institutional joint venture the Kia partnership, thereby increasing our ownership percentage of that fund to 52, 1%.
The net payment for this was approximately $55 million.
The assets consist of a geographically diverse portfolio of high quality long term hold properties for kimco.
On the structured investment side during the quarter, we closed three mezzanine loans for approximately $50 million, providing double digit returns.
The assets included a Safeway anchored regional center in Fairfax, Virginia, a mixed use pedestrian friendly power center in a high income Super ZIP part of Dallas and a unique irreplaceable center along the one O five freeway in Los Angeles, and a dense infill location with a culturally immersive experience.
Anchored by a supermarket pharmacy or mercado and others.
All of these investments have a right of first offer or right of first refusal in the event of a sale putting us in a prime position to potentially own these assets in the future.
Subsequent to quarter end, we acquired two premier grocery anchored centers from Cedar Realty as part of their portfolio transaction with G. R. A N K P. R centers.
The properties, which we view as the two best assets in the Cedar portfolio are located in Massapequa, New York and Philadelphia.
Both assets have tremendous upside potential that we look forward to unlocking.
Separately, we also made a $22 million participating loan on three grocery anchored centers in Pennsylvania as part of our structured investment program.
This is a prime example of our ability to utilize our various investment components to opportunistically deploy capital with a unique deal structure.
Also post quarter end, we were able to negotiate a $21 $2 million buyout of a fee title position on a former wine garden site in Rockville, Maryland, where we previously had a leasehold position with only 37 years remaining.
The transaction enables us to collapse, the leasehold and create substantial net asset value on the property by converting our ownership to a fee position.
On the disposition front, we sold approximately 100 million at kimco share of noncore assets, where the value had been maximized.
This included several joint venture assets, which we elected to sell to a third party rather than meet the pricing.
We will continue this strategy, where appropriate with all of our joint venture partners and make a disciplined decision whether to sell the asset or negotiate a buyout of our partner's interests.
While the market has quickly become a bit choppy on the transaction side with the bid ask between buyers and sellers starting to widen and the lenders becoming more conservative as interest rates and inflation rises we continue to see a healthy demand for core grocery anchored product that provides everyday goods and services.
<unk> remains relatively sticky for our property type, especially when compared to other asset classes that were either previously priced to perfection or contain greater risk in today's environment.
We believe with our multiple verticals, we can be opportunistic when dislocation or softening occurs with that I will gladly pass it off to Glenn to provide the financials for the quarter.
Thanks, Russ and good morning, we are pleased to report another strong quarter highlighted by brisk leasing volume higher occupancy positive same site NOI growth and a healthy increase in leasing spreads.
These operational achievements led to double digit <unk> per share growth NAREIT <unk> was $246 4 million or <unk> 40 per diluted share for the second quarter 2022.
This compares favorably to second quarter 2021, NAREIT <unk>, followed by $148 8 million or <unk> 34 per diluted share, which included a $3 $2 million charge or <unk> per diluted share in connection with the weingarten merger.
<unk> per diluted share grew by 17, 6% compared to a year ago and 14, 3%. If you exclude the merger related costs.
The strong increase in <unk> was primarily driven by higher consolidated NOI $97 1 million, including $87 3 million from the Weingarten acquisition $4 7 million from other property acquisitions, and $6 6 million from core portfolio growth.
<unk> contribution from our joint ventures was $9 $3 million higher than the same quarter last year comprised of $8 2 million from the newly acquired Weingarten Jv's and improved credit loss from our other joint ventures. This growth was offset by higher interest expense of $9 7 million in G&A of $3 two.
Primarily due to the 150 property Weingarten acquisition.
Our operating portfolio delivered positive same site NOI growth of three 4%, which included a 30 basis point benefit from our redevelopment projects.
This is a strong result, as we were comping against a 16, 7% level last year.
And additionally, encouraging sign from the same site NOI growth was the contribution from the minimum rent component of 470 basis points and lower abatements of 70 basis points.
This was offset by the change in credit was due to the significant level of credit loss reversals recorded in the prior year quarter.
Certainly our same site NOI for the next two quarters will also be challenging given our prior year comps of 12, 1% for the third quarter and 12, 9% for the fourth quarter, which resulted from large reversals in credit loss in 2021. Furthermore, our outlook for the remainder of 2012.
Two does.
Additional reversals of bad debt or collections from cash basis and in some prior periods.
Notwithstanding we expect same site NOI growth to be positive for the full year in terms of our ADR from cash basis tenants. It is now down to pre pandemic level of four 3% and which we collected over 76% that was due during the second quarter 2022, turning to the balance sheet.
Our look through net debt to EBITDA, which includes our pro rata share of joint venture debt and NOI and our perpetual preferred issuances stands at six four times, which remains the best level achieved since we began disclosing this metric over a decade ago.
This level does not include any potential benefit from monetizing our albertsons investment, which has a current market value of over $1 billion.
As mentioned earlier, our liquidity position remains strong with $2 3 billion of immediate availability comprised of $300 million in cash and our $2 billion revolving credit facility as well as our Albertsons investment.
With respect to capital activity during the second quarter 2022, we judiciously utilize our ATM program to issue 450000 shares of common stock at a weighted average price per share of $25 30.
Raising $11 3 million.
In addition, we repurchased $36 1 million of our three and an eight notes due in June of 2023, and $11 million of our three and three eights notes due in October 2022.
We also repurchased $3 6 million of our outstanding preferred stock lastly, we repaid $30 million of consolidated mortgage debt during the quarter and have a $290 million bond as our only remaining consolidated debt maturities for 2022.
Also worth noting over 99% of our outstanding consolidated debt is at a fixed rate, having a weighted average maturity of nearly nine years.
Based on the strong results for the first half of 2022 and our expectations for the remainder of the year. We are again, increasing our 2020 to NAREIT <unk> per share guidance range to $1 54 to $1 57 from the previous range of $1 50 to $1 53.
The new range is based on the following assumptions positive same site NOI growth for the full year, a range of 1 million to $6 million of credit loss for the remainder of the year.
No additional charges associated with debt prepayment, where the redemption of our callable preferred issuances that are outstanding and no monetization of our Albertsons investment.
Separately, we wanted to call out something important with respect to interest expense to your 2023 malls as a reminder, the reduction in the fair market value adjustment associated with the Weingarten debt. We assumed will result in approximately 13 million more of interest expense over that in 2020.
Two.
To better illustrate this we expanded our disclosure on the consolidated debt detail page in our supplemental package.
Moving onto our dividend.
Based on our strong second quarter results and favorable outlook. Our board of directors has again raised the quarterly cash dividend for the third consecutive quarter to a new level of 22 per common share.
This represents an increase of 10% from the previous level of <unk> 20 per common share and 29, 4% over the 17 cents per common share paid a year ago. We continue to maintain a dividend distribution level, which is in line with estimated taxable income from recurring operations.
We expect to generate over $200 million of free cash flow after the payment of both dividends and leasing capex.
We truly appreciate and thank the entire kimco team for their outstanding efforts and drive to create shareholder value and now we are ready to take your questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You may process start to if you would like to remove your question from the queue for participants using speaker equipment. It may be.
Necessary to pick up your handset before pressing the star keys in the interest of time, please limit yourself to one question only and rejoin the queue. If you would like to ask a follow up. Thank you one moment, while we poll for questions. Our first question comes from the line of Craig Schmidt with Bank of America. You May proceed with your question.
Thank you.
I'm just wondering.
The maintain the maintenance of a strong new demand and pricing power is this strength from your grocery slash essential base shopping centers or is it just a reflection of a positive run rate on leasing completed and put to bed for 'twenty two.
Yeah, It's a great question, Greg I appreciate it.
Yeah, I mean, I think that the quality of our real estate in the grocery anchored essential shopping center last mile.
Is that a customer is really at the forefront yeah. That's your foundation and once you build upon.
And then in terms of the demand side with the retail base. Despite obviously the headwinds that we're all discussing in the current environment. There is still a need long term.
<unk> in your real estate portfolio in the best centers possible I think what Youre seeing is a lot of retailers are observing that opportunity now and wanting to take advantage of it and certified through the current headwinds here and so I think we continue to see that the strong demand you know not only out of Q2, but as we progress through the balance of the year and then it's also.
With obviously the lack of any new supply in terms of retail construction I believe year over year. This last quarter, it's down about 56% or just over 3 million square feet of new retail construction was completed so when you have that you have this COVID-19 inventory and the high quality real estate all sort of comes together puts us in a really good position.
Our next question comes from the line of Adam Kramer with Morgan Stanley You May proceed with your question.
Hey, guys. Thanks, Thanks for the question and appreciate all kind of a commentary.
Specialty kind of V. I think Congress some of your earlier comments.
I think you kind of.
Outlined clearly.
Clearly right there theres some theres some crack showing in the background I think you're maybe a little bit more open than others about kind of.
You know recognizing that in your comments and so I think I, particularly hope I'm not putting words in your mouth, but I think you kind of called out cautious optimism.
Regarding kind of the quarter and how you see things going forward and wondering maybe what some of those puts and takes are.
That kind of caused you to use that.
That phrasing of cautious optimism.
Sure happy to expand on that so I think where we are today as youre seeing our products really resonate with the consumer you know, they're prioritizing value and convenience.
It's really resonating with sort of the new age of retail with how people are shopping in the convenience and value proposition that we can provide to our customer I think where we are having cautious optimism is obviously theres a lot of stress on the consumer right now at the inflationary environment that we're dealing with.
We look at the <unk>.
<unk> consumer, which again is more affluent than the traditional sort of U S.
Average shopper, they are holding up quite well.
And you know where our portfolio is positioned in that first drink some or all of the major metro markets.
<unk> is strong.
The wage increases that we're seeing are resilient.
And the shoppers are continuing to gravitate towards our product and so I think we're all wondering what the future is going to hold.
Everyone has a different crystal ball, we feel we're in a position to be an opportunist if cracks emerged where we can obviously pounce on opportunities, where we can create a lot of value but to date, what we've seen is a continued.
Traffic towards our centers continued demand for our limited vacancies that are remaining pricing power remains squarely in the landlord's camp and we are cautiously optimistic that that's going to continue as we see the pipeline continuing to expand with the right retailers without a credit worthy that a integrated e-commerce and are using their stores is.
While distribution points.
Our next question comes from the line of Greg Mcginniss with Scotiabank. You May proceed with your question.
Hey, good morning.
Ken I just wanted to talk quickly on the.
The decision.
To extend the lockup on the Albertsons shares just curious with the kind of drivers were there.
Sure. So when you're in a consortium that owns a sizable amount of our stock I think it's in best interest for our shareholders to really see it through to make sure that our organized execution really creates the most value for our shareholders longer term and so that's why we considered the options on the <unk>.
Table and felt compelled to go along with the consortium to see this through its been a wonderful investment for our shareholders. We've made a tremendous amount of money on the initial investment and feel like there's there's obviously this final act that we want to see through and we do believe that the management of Albertsons is doing everything possible to Maxim.
<unk> value and so we feel like it was important to see that through and extend the lockup period with the consortium to give the Albertsons and management every opportunity to execute on their strategic alternatives review.
Our next question comes from the line of Craig Mailman with Citi. You May proceed with your question.
Hey, guys.
Right.
Fully balanced with the balance sheet and strong position with good liquidity, but.
There was a new story out this week about $400 million portfolio. You guys are buying were active in the quarter and I'm just kind of curious on two things one.
And you guys are underwriting or the equity value is today and kind of what are the return hurdles you're looking for them to.
To be acquisitive here and number two just whats the plan on potentially financing.
Anthony and acquisition activity.
Yes, Craig I'm happy to address that so as I mentioned in the past, we do look at a variety of metrics. When we're evaluating a potential investment cost of capital is something that's top of mind for everybody in the organization. We look at it every single day. So when we when we think about a cap rate in this environment. It really is.
As a spot check on day, one our focus is on creating value and enhancing growth for the company and doing it in an accretive way so in terms of an acquisition.
Starts out at a relatively low cap rate, we need to ensure that there is a tremendous amount of near term growth that's achievable and we need to find other avenues to enhance the returns on our investments, which is where sort of our structured investments program comes in when we're able to put out capital at very attractive returns day, one and so when you blend the road.
Churn on our three sort of pillars of our investment strategy between buying out our partner's accretively acquiring selectively core acquisitions, and then layering on our structured investments we get to a point, where we feel very confident in the returns that we're able to achieve the growth that we're going to get in the short medium and long term in terms of.
The funding that's why we really feel that we're in a unique and really strong position as Glenn mentioned, we have over $200 million of free cash flow after dividend and leasing capex cash on the balance sheet, we have a.
Moderate amount of disposition that we recycle into new acquisition activity and then of course ultimately we will have our albertsons monetization, which will be able to put to work. There. So we do believe that we have a fair amount of ways to fund these deals and in an accretive manner.
Our next question comes from the line of Samir Khanal with Evercore ISI you May proceed with your question.
Hey, good morning, everyone.
And then just wanted to dig a little bit deeper into guidance here.
When you take the first half so youre getting close to 79, which implies about 58 for the year.
That is.
About 54% to 57 I just want to make sure is there something in the second half we should be aware of.
I guess, Steve and I were trying to figure this out this morning and.
Maybe some color some color you can provide.
I mean, I think if you look at the second quarter <unk> 40.
There's about a penny of I'll call things that are more or less like one time, you're on this LTA is in there it was a little bit of a settlement on one of our joint ventures, and we did have about $4 million of benefit from credit loss related items reversals of straight line reserves as well as credit loss income.
Anticipating that level of credit loss income going forward in the second half of the year.
Mentioned, we do have a range of a 1 million to $6 million of credit loss, that's still in the numbers. So.
That's kind of where we get to that upper end of the range, which would imply roughly a 39 quarter for the third and fourth quarters.
So we have those components baked into it and again, we are cautiously optimistic as Conor said, but you know we're all watching pretty closely what's happening in the economy will watching interest rates.
We think that the guidance that we put out.
Happy that we've increased it to the level that we have but we want to keep it at the level.
That we feel is achievable.
Our next question comes from the line of <unk> <unk> with BMO capital markets. You May proceed with your question.
Hi, Good morning, I, just wanted to touch on the opportunism you may be see our <unk> our position for given your balance sheet strength and liquidity I mean is there.
Sizeable opportunities that maybe you're seeing now or is there.
Maybe some some potential distress that you'll see coming up that you think will eventually open up opportunities because it sounds like.
Maybe there's something bigger in the works and just trying to get a sense of.
How about near term.
The potential opportunities that might be.
Sure I would say, we have not seen the distress as of yet, but we are absolutely prepared for it and we will continue to be extremely disciplined with the investments that we make.
Based upon our liquidity position our balance sheet. You know, we think that we're in a wonderful position to be opportunistic once that presents itself you saw that in the early stages of the pandemic and then we had a very quick recovery. So to the extent that there was some dislocation that presents itself from some of the challenges in the macroeconomic conditions today.
Well, we'll be ready to move on that very quickly and aggressively but we're going to stay very disciplined when we do it.
I think we've seen a little bit more opportunity to what would you say Ross in the structured investments versus the core acquisitions as for being patient looking for those cracks and we're seeing a lot of opportunity I think in the structured investment side with a little bit of higher returns. They want yeah, and one of the nice things about the structure of investments is as you can see our we put out in the release.
There were three structured investments that we closed on in the third quarter with a fourth one that closed just subsequent to quarter end and while it's not a tremendous amount of capital outlay.
And combined it was just about $72 million for those four deals. It does provide a potential pipeline for a much larger transaction if that opportunity presents itself. So it's a relatively modest investment today with a very attractive return that could lead to a much bigger opportunity down the road.
Our next question comes from the line of Alex Goldfarb with Piper Sandler You May proceed with your question.
Okay.
Good morning, good morning out.
Out there on the island.
Just a question on the consumer.
As you look across your tenants.
Are they seeing any dropbox, so basically what I'm getting at is if you take the 80 20 rule, where 80% of the business is 20% of the people are they seeing some of that.
Some of the sort of noncore.
Shoppers or restaurants, diners or whatever sort of fallout in their business as being more sustained by their core shoppers or your tenants not really seeing a change in their overall shopper base I'm, just still trying to understand with fuel cost and rising interest rates and all that stuff if theres been any change at all in the.
<unk> dynamic or if it's really that some of the people have dialed back, but it's that core shopper that just remains adamant about continuing to to go to your centers.
Yeah. So good question Gulf are making me think of all of them in here.
Let me add a little bit of fact, and then a little bit of anecdotal.
My opinion and assumption so traffic wise, you know when we compare our numbers to 2021 and where it is it's up over 100% when you care back when you when you compare it back to 2019 levels, it's more or less in line with where it was that a pre pandemic. So you have the volume of activity there on site, which is good.
Then you look at sort of the dynamic or the composition of the customer and the consumer.
And then what we have been seen as is still desire to Reengage in society and the communities services restaurants Entertainment, obviously, the near term success that we've seen with theaters people wanting to go out and spend some discretionary dollars to entertain themselves and their friends.
It has been it has been a positive sign that we've seen extend through the summer. So I think that probably broaden your base beyond just your core recurring shopper.
I do think youre seeing some value trading occurring obviously with price inflation being what it is.
Some of those customers have.
To buy but they may be focus more on value purchasing which you know in the great recession as we're off price really found its footing and acceleration, maybe they're making slightly different decisions at the grocery store, but there's still going to the grocery store. So you are seeing probably a bit of a change in how consumers are thinking about where they want to spend their dollars.
But the activity is as you've seen across the board is and I think the consumer continues to show some resiliency right now.
I'd say, we're still benefiting too from the three major themes that the pandemic induced and that's where the first one is suburbanization I think we've seen obviously an uptick in population around our portfolio.
Being worked from home there is still a hybrid model out there. So the traffic patterns are still robust to our portfolio as people are.
Looking more at home or going to the shopping center for launches that typically might have gone elsewhere are closer to the office and then third and probably the most important is still sort of the the last mile distribution component target just came out with a remarkable stat. This this past month, saying that it's 40% cheaper for them to deliver goods that are ordered online from there.
Store base versus from a distribution center. So I think that is again in the first inning of sort of adoption across the retail landscape. We're very very focused on being first and last mile retail we think that that.
Value proposition is really going to be a major differentiator for us going forward.
Our next question comes from the line of Michael Goldsmith with UBS. You May proceed with your question.
Good morning, Thanks, a lot for taking my question along the lines.
The optimism I guess in times when the consumer has pulled back.
How long has that taken before it impacts kind of the leasing discussions and then eventually your financials just trying to determine.
If things get worse from here.
When does it start to show up.
In your conversations and in your numbers.
Yeah, I mean, I think every market cycle is different so it and you know it may show itself in different ways I can say, what we're seeing right now is not the slope of appetite for new deals because as I mentioned earlier in the conversation if retailers are looking at the long play when they make these long term commitments signed.
Fixed primary terms with options going forward and they all have evolving retail strategies.
Many of them O'connor said about the last mile distribution fulfillment that there's greater margin value and being closer to the customer and shipping and distributing from store.
So now it's a great opportunity to secure that real estate that's necessary to meet your.
Your evolving fulfillment strategy within each individual company.
So in order to do so you have to continue doing deals.
That said you may.
There may be certain areas that you start to see some.
Some pullback maybe on the higher end side, but in terms of the value oriented essential.
Early consumer and daily retailer that supports that customer we continue to see the demand side hold up.
Trying to absorb that higher quality real estate, that's still out there as a result of the pandemic I would just add.
Some of this cautious optimism is because of where the real estate is today, we spent a lot of years transforming the portfolio. So having it in these top markets embedded in the communities. It's been a it's just a real game changer and you see it with you know.
Whether it be the curbside pick up and the way many of the retailers are using their store today as really a fulfillment point.
That that is a real we think that thats a real benefit and then if you look at the tenant mix that we have it is essential based.
Whether it be grocers off price home improvement.
And then just everyday goods and services, whether it be Dunkin' Donuts, Starbucks bagel, guys that that stuff continues to be doing very very well. So it gives us some comfort level and we sit in our office in a shopping center watched traffic every day to kind of gauge it a little bit.
Our next question comes from the line of Handel St. Juste with Mizuho you May proceed with your question.
Hey, there good morning.
So a different question are unexpected I guess.
Can you discuss the mix of lease structures between fixed Cam net lease growth.
As expenses rise on contracts with various things, but because of taxes and other items.
Is there a potential for some pressure on NOI, although top line revenue likely remains strong. Thanks.
Yeah. So.
What are our margins.
Had been improving quarter over quarter as you've gotten more of those retailers open when you look at our lease economics sporadic compressed 20 basis points from $3 10 to 290, so youre seeing more contribution in contributing to that recovery element of your operating expenses. So margin improvement is actually.
To expand into.
A favorable way as we're moving out of the pandemic as it relates to fixed Cam said to net leases are typically your two most dominant forms.
For us our fixed Cam program is a multiyear program.
We look at a five plus year capital plans. So we have insight to where we're going to be spending dollars over the over the.
The near to mid term and Thats, all factored into the pricing as well as an inflation factor appreciating the markets do change and it's also important to note that within the component of fixed Cam too. There are some recurring services that are contracted out for multiyear contracts. So it's not directly impacted by near term inflationary pressures.
Once you mix it all together, we still are in a very good position to.
Absorb the pressures of the near term, yes. The only thing I would add is the benefits of scale. We have you know when we look at our portfolio and we bid out recurring services when we bid out some of these items that go into our expenses, we obviously get a bulk discount just because of the size of the amount of services and goods that were purchasing.
And so with the amount of technology that was embedded in the portfolio as well I feel like our our expenses are we typically try and make sure that we have the lowest triple net costs in a trade area because of that efficiency of scale. So we are very mindful of that and use our scale to our advantage to keep our keep our costs under control and I.
Well it doesn't just because you did mention specifically real estate taxes that is excluded from.
From your fixed Cam number right now having said that I will add though if inflation was to run at 10 or 12% a year year after year it.
It would definitely have some impact, but I mean, we've built in as Dave mentioned, an inflation factor into our fixed Cam program. So we think we did built it can absorb it.
Our next question comes from the line of Floris Van <unk> with Compass point you May proceed with your question.
Good morning, guys I had a question on your return expectations and how they've changed since the beginning of the year.
And.
Obviously, what kind of impact.
The direct market typically is slower to react in terms of cap rates, but what kind of impact.
Are you seeing in your underwriting of as you look at acquisitions or are you underwriting higher cap rates or are your growth expectations are rising as a result of higher inflation.
Yeah, there's no doubt that as cost of capital increases our hurdle rates go up alongside it.
So we're very mindful of that we tried to stay extremely disciplined when we underwrite deals very.
Very healthy in terms of inflation expense expenses rising in our in our assumptions in our underwriting we take a I think a very conservative approach to lease up assumptions, making sure that we anticipate that these deals do take a fair amount of time from lease execution to opening and that costs have been rising.
So all of those factor into our hurdle rate, that's certainly higher today than it was even three months ago to your point on cap rates, moving maybe a little bit less quickly than the overall market.
That's certainly the case and it's very dependent upon.
The asset and the location we've continued to see up through this month transactions occurring at all time low cap rates not dissimilar than what we saw three four months ago.
On the other hand, if you have a commodity power center that you know four months ago, a borrower or a buyer was borrowing.
In the twos and they're now borrowing in the fives, there's no doubt that that's going to have a direct impact so the composition of the asset and who your target audience is whether it said all cash institutional buyer versus a lever in private buyer is going to be a very meaningful difference as to how much movement, we've seen in the cap rate.
Our next question comes from the line of Mike Mueller with JP Morgan You May proceed with your question.
Yes, Hi is.
Is the 55 million KIR step up investment inclusive of assumed debt or is it just the cash paid.
And what was the implied cap rate on that purchase because the back to the envelope seems like it was a fairly high cap rate.
Yeah that is a net number we factor in all of the cash liabilities that that's in the joint venture. So that was a $55 million payment net of all of those.
I would tell you that it was a direct negotiation with one of our partners based upon our collective views of the value of the assets and then factoring in sort of a.
A minority position of ownership there. So I would say that to your point was a higher cap rate than what we would see those asset sell in the open market today.
Our next question comes from the line of Anthony Powell with Barclays. You May proceed with your question.
Hi, good morning.
A lot of E. Commerce are only play you're just saying that they're seeing more material shift back to pre COVID-19 activity in terms of retail is that a positive or negative for you is it a positive given that stores more important or is that maybe a headwind. If you see incremental activity from retailers looking to use your centers as last mile distribution.
Hi.
At the end of the day, a retail omni channel you have to have both right I mean, I think the pandemic proved out that you can't deem pure play online is but you got a bit of a disadvantage as it relates to distribution of margin being pure play it may be just in brick and mortar theres, probably advantages of having some online presence. So I think it's a combination of both I think.
Youre going to see.
E comm sales ebb and flow a little bit as you do see brick and mortar sales, but when you look holistically about the retail strategy, it's really infused as one together.
So I think net net as long as the total pie continues to grow there is utility in the brick and mortar product and how they use that for distribution.
The other part is it to focus on customer acquisition costs I.
I think when you look at the pure play E. Commerce players they have really been struggling to try and get control over their customer acquisition costs as sort of the major players are continue to boost the.
But the costs involved with that advertising online continues to be extremely expensive, where I think the integration of the brick and mortar stores really allows them to have a pretty nice return in terms of customer acquisition cost and their margins are a lot healthier, but I think it's a net benefit for us as most pure E. Commerce players as you've seen are opening physical stores.
Yeah.
Yes.
Lines are clearly blurring.
Some of the e-commerce that you're talking about.
<unk> itself is being picked up in the store.
I mean, that's where we've seen this big benefit of being in the real estate is sitting today better than these markets.
<unk> is a fulfillment point as well.
Our next question comes from the line of Derek Johnson with Deutsche Bank. You May proceed with your Washington.
Okay.
Hey, everybody good morning.
On development.
So kims held back on some pretty hard sword in hand entitlements. So I guess, how are you thinking about development now.
Clearly given the potential economic slowdown and rising costs, but also in the face of rapidly rising rents for multifamily.
It was higher for newness, how do you balance new development starts and maybe the potential timing with your balance sheet to flip towards more offense, given these rents and demand.
<unk>.
No I think you actually have any answering your question through all the parts that you just mentioned.
If we break it down.
One I think we're in a wonderful position right now we don't have long term capital commitments with big development projects.
As compared to where we were in the last five years. The mountain is continuing to.
To move under construction down at our Arlington market as phase two of our Pentagon project.
<unk> contracts and we feel good about the pricing there as it relates to new activity.
As you can see in the supplemental we have thousands of entitled units at our at our option to activate and so what we're doing right. Now is we're looking at the balance sheet. We're looking at our capital plan. We're looking at the use of funds and the opportunities ahead of us and we're looking at the entitlement that we have in place and how best to activate them. We go through our decision tree.
We self develop do we joint venture to a ground lease and at what time is it appropriate to do so so we are looking at near term opportunities what makes sense and then also what we have sort of in the midterm and how we want to pull it forward. So.
That's our job we continue to assess it on a quarterly basis and if we feel like there's an opportunity to pull some of those out of the entitlement shelf and activate them we will.
We're very focused on continuing on the growth up a full path that we've been on and I think when you look at the opportunity set that we have with the entitlements, we are going to be mindful of not activating too many all at once but when we do activate them, we're going to see what's the best way to continue to enhance <unk> growth pilot.
The profile of the organization.
Our next question comes from the line of keeping Kim with tourists. You May proceed with your question.
Thanks Al and good morning.
So when you look at the top of the demand funnel for your customers.
I'll just kind of put in perspective, when if you have a good quality space now how many tenants are looking at that type of space to date versus a couple of quarters ago and I'm curious if deals are taking longer to close I guess overall, just trying to gauge how quickly open to buy plans might be changing amongst your customer base.
Yeah I mean.
Again high quality real estate inventory that does not come available all that often we have seen that we continue to have multiple bidders at the table, which obviously helps the negotiation and strategy and I also think you've seen as we've mentioned multiple times already today is that people are evolving their their real estate strategy and how they want to utilize it so whereas.
Several quarters ago, you know target announced that Theyre going for full size formats, again, which was something pretty unique they're really focused on the small format concept for years in penetrating urban market. So people are retailers are constantly evolving and changing other needs and wants which is creating demand.
For our real estate as it relates to the timing of activation of deals in the negotiating process. I think both sides are actually very focused on trying to get the deals done as quickly as possible.
Number of conforming leases.
Working directly with a lot of our retailers of how best to expedite that discussion of that negotiation because both have targets to two open right. They have target they have their own growth targets and the way to achieve those is to get those stores open as quick as possible.
Have our own growth targets that we want to get them open as quickly as possible. So there is a mutual benefit actually now where we both felt pressures and we both had.
Points of friction within the process of say construction.
That's pretty unique and judge brought us together to find better solutions, which I think net net as we go forward is just better for the industry and better for ourselves.
As we work closer in partnership with our retailers.
Our next question comes from the line of Tayo Okusanya with Credit Suisse. You May proceed with your question.
Hi, yes, good morning, so I'm trying to get a better handle on the guidance raise you.
You beat by <unk> raised the midpoint of guidance by four cents and I'm just trying to understand what that incremental pieces are you expecting better same store NOI growth was the better occupancy regression of credit provisions just trying to get a better sense of what does that do.
No.
Increasing guidance alludes to.
Yeah again, when we look at the balance of the year, we think that we have a reasonable run rate in this 39 level.
Built into the guidance levels.
Certain amount of potential credit loss.
We think we can absorb while we're doing it but we do expect that.
Same site NOI.
<unk> positive for the year again as I mentioned, there are pretty tough comps in the third and fourth quarters, but for the full year. We do expect that occupancy has increased certainly over last year and there's more.
Minimum rent that's coming online so that's all built into it as well.
And then there are some investments that Russ has mentioned.
We're not really part of the initial plan that we are using the cash that's on the balance sheet and the return on that is quite favorable relative to the.
The interest the interest earned on sitting in our investment bank accounts.
Gotcha great.
Our next question comes from the line of Linda Tsai with Jefferies. You May proceed with your question.
Yes, hi, good morning.
Just given the changes in the landscape with the Albertsons lockup extended a little further out are you thinking any differently about the use of its proceeds.
You know, we really Havent Linda I think we were in a unique position where come September which is not far off will.
We will be in a position to look at the landscape of opportunities that we have a number of items that we feel like our our unique took him go that we can invest in through our different as Ross mentioned, our are different unique investment opportunities. We have some some bonds coming due that we could potentially pay off the preferreds are gonna be callable as well.
There might be unique investment opportunities that present themselves come some September as well so as I mentioned in my remarks, I think the key for us is being patient.
And focusing on unique opportunities, where kimco and really enhance shareholder.
Shareholder value and create a lot of value in the near term and that's where I think we're uniquely positioned to take advantage of any opportunity that presents itself.
Look the nice thing about the investment if you do the <unk>.
Dividend yield on our investment in Albertsons, almost anything that we do whether it be debt pay down or any of the other investments that kind of just mentioned it is going to be accretive.
So we have a lot of good good options available to us and hopefully a lot of opportunity.
Our next question comes from the line of Craig Mailman with Citi. You May proceed with your question.
Hey, it's Michael Bilerman I had two quick follow ups just one as we continue the conversation on Albertsons has anything changed I guess from kinko's position in terms of potential monetization options.
In the sense of obviously, it's a real estate company Albertsons does have some real estate and you could create a type of real estate transaction.
Like that so has that changed at all in your mindset as they go through strategic alternatives.
Or is the only option to sell stock and take cash and then I had just a quick follow up on J D.
So it really hasnt changed Michael I mean, we've done sale leasebacks with them before in the past we're in a position where obviously, we can do more of that as well we've been focused on the assets where they own their grocery store within an asset where are we on the surrounding retail. So we get a cap rate compression on sort of the entire asset by controlling the grocery anchor so we still have.
That part of the playbook available to us.
So we'll continue to wait and see how the strategic alternatives play out but that obviously is the game plan, we've used before and continue to have that as a as an opportunity.
So are you, saying that effectively investors should think about either an option of taking all the stock in <unk>.
Down portions of it over time or converting some of your stock holdings into real estate assets through sale leasebacks that we should start thinking about multiple options for this stake.
No I think Michael the way to think about it is the marketable securities that we own will be used to be monetized and then those proceeds will be redistributed in the best investment vehicle possible I mean, I think that's the easiest way to think about it the unique sale leaseback situations would be separate and apart from that.
Okay, and then just on pure in buying mistake direct which it looks like you got that at about 7%.
Cap rate or at least effective NOI yield into your results. How should we think about the desire for you to syndicate out that equity arguably at more of an NPV value and.
Effectively earn that spread right now are you more desire to to buy discounted pieces of paper from your JV partners or are you trying to.
Bring in others.
You are sitting here now in this asset let's call it a $2 billion JV at.
Seven cap.
You own 52% of it what's the go forward plan or you can try to.
Syndicated backed out or continue to buy them to own 100% of these assets.
Yeah, no. It's a good question I think when you when you look at the KIR venture specifically this is our longest standing joint venture was established in 19, 99%. So I think ultimately there was a point in time, where it made sense for the one smallest minority partner to exit we think that there are assets are tremendous within our.
Our portfolio, we would love to own more of it at the same time, we have a fantastic partner in the New York State Common retirement fund that has been alongside us since the beginning so we will continue to maintain a great relationship with them and if and when the opportunity presents itself that they have a desire to exit will be we'll be ready to have that.
<unk>, but specific to the care venture, we don't anticipate bringing in any new partners.
Our next question comes from the line of Handel St. Juste with Mizuho you May proceed with your question.
Hey, there Glenn I guess, maybe maybe for you I was hoping you could be a bit more specific or provide a range of what the.
The 2022 same store NOI guide now on a clean X.
Ex prior adjustment ex prior period adjustment basis, and also on a GAAP basis.
It used to be 3% for both I recall and then if you could also.
Clarify what was the prior period rents in the second quarter.
As it relates to the same site guidance for the full year as I mentioned, we expect it to be positive.
We are not providing a range you can see what's happened during.
The first half of the year. So we're sitting currently at six 1% for the six months three 4% for the second quarter, but again Theres still you know theres still some uncertainty in there and we had these very difficult comps that are in the third and fourth quarter. So I really don't want to provide a range at this point, but to give you comfort.
For the full year it will be positive.
As it relates to.
Prior period rents from cash basis tenants that was about $5 million.
That was collected and as I mentioned.
We collected about 76% of the rent from those same cash basis tenants during the second quarter. So that difference that wasn't collected which was reserved there's also about $5 million. So the net of that kind of that kind of wash out each other.
That is all the time, we have for today's question and answer session I would like to turn the floor back over to management for closing comments.
Thank you very much for joining us today are again, our supplemental is posted on our website enjoy the rest of your summer.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.
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