Acquisitions

Kimco’s vital signs looking good in Q2 2012 earnings results

Posted by: Dave Bujnicki Dave Bujnicki
on August 8, 2012

Words like “solid,” “steady,” “strong.” That’s how some analysts described Kimco’s second quarter 2012 earnings results. We couldn’t agree more.

Last quarter, we said the best word to describe our performance was “momentum.” Well, our momentum certainly has continued. If anything, it’s gotten even stronger.

For those who missed Kimco’s second quarter earnings last week, here are the key takeaways:

  • Our same-site net operating income (NOI) grew for the ninth consecutive quarter.
  • Our funds from operations (FFO), a key measure of REIT performance, increased 9.7 percent, to 34 cents per diluted share.
  • Our occupancy rates continue to rise, with a particularly strong increase in our small-shop space, a positive sign of the improving health of this retail segment. Leasing spreads, too, are being pushed higher, as demand for high-quality space exceeds the available supply.
  • Our portfolio recycling program — selling non-retail and non-strategic properties, and trading up to superior properties in top-tier markets — continues with good progress.
  • Our balance sheet metrics continue to improve. We have plenty of liquidity, and we’ve raised more than enough capital this year to redeem all of our near-term debt maturities at lower rates.

From a macro perspective, the neighborhood and community shopping center sector continues its solid upward trend. With virtually no new construction activity, continued population increases, growing GDP, and rising demand for high-quality retail space (more than 76,000 stores are expected to open in the U.S. over the next two years), we’re confident about the short- and intermediate-term prospects for our business.

Now for the details.

Shopping Center Operating Results

Our key vital signs — same-site NOI, occupancy, and leasing spreads — are all looking good. Here’s the breakdown:

Same-site NOI: Kimco’s combined (U.S., Canada, Latin America) same-site NOI was up 2.6 percent before the impact of currency, and 1.7 percent on a reported basis, as a result of the strengthening U.S. dollar. In the U.S., same-site NOI was up 2.1 percent, the ninth consecutive quarter it has increased.

Occupancy: Our occupancy levels are the best we’ve seen since the end of 2008. Gross occupancy in Kimco’s combined portfolio was 93.5 percent, and in the U.S. it was 93.4 percent, both up 40 basis points from last quarter. The improvements are driven, in part, by higher net absorption and our trade-up to higher-quality, better-occupied properties. Drill down a bit further, and you’ll see that our anchor space enjoys 96.3 percent occupancy. And here’s more encouraging news: Kimco’s small-shop occupancy was up 100 basis points from the first quarter, to 83.3 percent. We hope that signals good things ahead for the mom-and-pop segment, which we’re trying to help with Kimco’s FastTRACK Franchise and KEYS programs. A lot of the growth there will depend on the economy.

Leasing Spreads: When a vacant space gets filled or a lease gets renewed, it’s always a good thing if we can increase the rent. That’s the leasing spread — the difference between the old rent and the new. Our leasing spread in the U.S. was 4.5 percent. Broken down, rent on new leases was up 5.4 percent, and on renewals, 4.2 percent. We’ve been running positive for six consecutive quarters on this metric. Supply and demand is definitely working in our favor.

In addition to these positive trends in Kimco’s key operating metrics, I wanted to briefly mention the progress being made by our non-U.S. operations. Latin America’s NOI contribution, in local currency, is 15 percent ahead of last year, and we’re halfway to our goal of leasing up 800,000 square feet for the year. Canada, a strong and steady performer, had same-site NOI growth of 3.8 percent in local currency in the first half, and occupancy was 96.5 percent.

Investment Activity

We continued to make good progress on our portfolio recycling program, selling non-retail and non-strategic properties, and trading up to higher-quality shopping centers in top-tier markets that offer greater growth potential.

First, let’s take a look at what we sold. During the second quarter, Kimco divested 10 non-strategic properties, encompassing nearly 887,000 square feet, and one outparcel, for a total of $77.6 million. Demand for B properties in secondary markets is improving.  Right now, we are in negotiations to sell 12 such properties for approximately $120 million.

On the acquisitions side, Kimco bought five shopping centers and two outparcels for $97.3 million. With more than 430,000 square feet of space, these high-quality properties are 94.8 percent occupied and command an average rent of $16.97 per square foot.

We also purchased interests in two other properties — 70 percent of a grocery-anchored, 680,000-square-foot power center in Towson, Md., and 90 percent of a grocery-anchored, 140,000-square-foot center in Edmonton, Alberta, for a combined total of $169.4 million, including $26.4 million of mortgage debt.

To put Kimco’s recycling program in perspective, since September 2010, we have sold more assets than we have bought, 63 versus 42. But we have acquired larger properties, and as a result, had a net addition to our gross leasable area (GLA) of about 125,000 square feet.

Not only has our GLA increased, but we’ve improved our portfolio occupancy, rent, and demographics. The properties we bought are 93.8 percent occupied, while the ones sold are only 80.9 percent occupied. The average rent for the acquired properties is $13.60 a square foot, versus $9.35 for the properties sold. And while the total population around the purchased and acquired properties is roughly the same, average household income around the acquired properties is almost 30 percent higher. That’s what we mean by quality trade-up.

Dividend and Capital Structure

In terms of our balance sheet, the biggest highlight came after the close of the quarter:  Kimco’s $225 million perpetual preferred stock offering on July 17. This one stood out because we were able to get the deal done at 5.5 percent, the lowest coupon ever issued by a REIT for a perpetual preferred stock, and what is believed to be the lowest coupon ever for this type of security.

Demand for investment-grade paper has never been higher, as investors chase both yield and safety. You can read more about the current state of the capital markets in the most recent blog post by our CFO, Glenn Cohen.

In this borrower-friendly environment, Kimco has been able to raise $1.5 billion this year from the unsecured bank, mortgage, and perpetual preferred equity markets — more than enough to prefund all of our near-term debt maturities. And because the new issues are at a lower rate, we’ll save $11 million annually, and further reduce our fixed-charge costs.

What does that mean for our balance sheet? Our fixed-charge-coverage ratio is now at a healthy 2.6 times, and our consolidated net-debt-to-EBITDA-as-adjusted ratio is at 5.6 times, down from 6.0 times for the same period last year, and 8.3 times more than two years ago.

And with more than $2 billion of liquidity — including $380 million of cash on hand and more than $1.7 billion in our revolving credit facility — we’re ready to take advantage of any opportunity that comes along, including looking at retailer-owned distressed assets.

As for our common and preferred dividends, we plan to declare them on or about August 15, so that we can comply with Maryland law regarding the proposed redemption of our 7.75 percent Class G preferred stock.

Guidance Update

Last quarter, our guidance for 2012 FFO as adjusted was $1.22 to $1.26 per diluted share. This quarter, we tightened that range to $1.24 to $1.26. For the year, we expect to increase our combined occupancy 50 to 100 basis points, and to grow our combined same-site NOI by 1.5 percent to 3.5 percent.

For more details on our earnings, I invite you to listen to a replay of Kimco’s second-quarter investor conference call (available until Sept. 28), or download the conference call transcript.

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