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

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

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

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

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

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During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco's operating results. Reconciliations of these non-GAAP financial measures can be found in our quarterly supplemental financial information on the Kimco Investor Relations website. Also, in the event our call was to incur technical difficulties, we'll try to resolve as quickly as possible and if the need arises, we'll post additional information to our IR website. With that, I'll turn the call over to Conor.

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

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

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

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

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

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

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

Aerial view of a busy urban area with a large shopping center in the center.
Aerial view of a busy urban area with a large shopping center in the center.

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

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

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

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

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

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

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

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

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

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

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