Properties & Leasing

Where opportunity lies for Kimco in the Southern U.S. region

Posted by: Paul Puma Paul Puma
on March 12, 2014

A few weeks ago we shared on our blog some of Kimco’s key financial results from the fourth quarter. Most notably, our occupancy rates, rental rates, and same-property NOI grew significantly for the quarter and the year. We also reiterated the importance of continuing to follow our growth strategy that we first discussed during Investor Day 2013. We refer to our strategy as TSR+, which stands for transforming our portfolio by trading up to larger, higher quality properties; simplifying our business model by exiting Mexican and South American investments and reducing joint ventures; redeveloping targeted sites to create new value; and pursuing opportunistic retail investments.

Kimco’s Southern region is a great example of this growth strategy. I’ve led our efforts in this region for the past nine years. Our Southern portfolio now consists of 137 properties encompassing approximately 21.7 million square feet. It’s 93.9 percent occupied.

To the point of transforming our portfolio, we have been very active in the acquisition and disposition fields in our Southern region. Since Investor Day 2010, we have sold 36 sites in non-strategic markets and acquired 27 sites in key markets, including Atlanta, Charlotte, Raleigh-Durham, and target areas in Florida.

We have nine redevelopment projects currently underway in the region, with 17 more in the pipeline. For instance, one site under redevelopment is Pompano Beach in Pompano, Fla. We opportunistically terminated our Kmart lease early to redevelop the building for Whole Foods and The Sports Authority. Construction is now underway. We’ve also demolished the vacant restaurant outparcel and built a new building for “People Dedicated to Quality” (PDQ). The fast-casual restaurant opened in October as part of its aggressive South Florida expansion. Our efforts will generate an ROI of 11 percent and incremental NOI of $1.2 million.

ON TRACK: We brought PDQ into Pompano Beach Shopping Center as part of our redevelopment project that will continue with the build-out of Whole Foods and The Sports Authority this year

ON TRACK: We brought PDQ into Pompano Beach Shopping Center as part of our redevelopment project that will continue with the build-out of Whole Foods and The Sports Authority this year

One of our future projects is Westwood Plaza in Charleston, S.C., which we aim to complete by 2015. We’ll be relocating and right-sizing Office Depot, relocating TJX to the adjacent vacant box, and constructing a new 50,000-square-foot supermarket box adjacent to Barnes & Noble. We’ll also be renovating the storefronts to be compatible with the new supermarket façade, and adding a new parking field and lights. We expect to see an ROI of 11 percent and incremental NOI of $0.8 million.

Kimco Realty Westwood Plaza redevelopment

Much of our growth in the Southern region is certainly attributable to the favorable economic environment. Unemployment in many of Kimco’s major Southern markets is at or below the national average. One major success story is Orlando. Unemployment was nearly 12 percent in Orlando at the height of the recession. It’s now down to 5.5 percent, ahead of Florida’s 6.2 percent and the U.S.’s 6.7 percent.

We’re seeing robust recovery across all market segments, with Florida standing out in particular. Half of the GLA of our Southern portfolio is in Florida. We have seen very positive trends in housing, construction, tourism, entertainment, and leisure throughout the last three years, and reports are showing continued growth in these areas.

New housing starts are expected to rise 27 percent over the next two years, according to the University of Central Florida’s Florida and Metro Forecast 2013-2016. The report also finds retail sales will grow on average 3.7 percent in this same time period. Tourism, Florida’s #1 industry, is coming off a record year, increasing 3.5 percent in 2013, according to the state’s tourism bureau, Visit Florida.

We’re seeing these trends lead to increased expansion across the retail sector, especially in the home accessories, soft goods, and grocery categories. Traditional grocers — such as Publix, Harris Teeter, and Kroger — have been growing their store counts aggressively. We’re also seeing this trend in the specialty arena from retailers such as Whole Foods, Fresh Market, Earth Fare, and Trader Joe’s.

Another sub-market that’s showing significant growth is the South Carolina and North Carolina area, especially around Charlotte. Once known only for its robust banking industry, Charlotte is now diversifying. Chiquita, for instance, moved its headquarters to Charlotte in 2011. MetLife opened a major new office in Charlotte last year, bringing some 2,600 jobs to the area.

Moving into South Carolina, manufacturing is a solid industry. Michelin, headquartered in Greenville, is South Carolina’s largest manufacturing employer. The company opened a new $750 million manufacturing facility in South Carolina’s Anderson County in December. And BMW expects to employ 1,000 new workers by year-end at its manufacturing plant in Spartanburg, S.C., as it completes its $900 million expansion.

Continuing through Kimco’s Southern region, opportunities are also strong in the Puerto Rico market. We have seven shopping centers in Puerto Rico which produce 3 percent of Kimco’s annualized base rent (ABR), making it a very efficient portfolio. National retailers continue to show interest in Puerto Rico, with new entrants over the past four years including Petsmart, Petco, Anna’s Linens, and Shoe Carnival.

We have a solid runway in our small shop space in our Southern region and nationwide. Our small shop space in the U.S. is 85.2 percent occupied. We have a goal of hitting 90 percent by 2016. We have strategies in place, such as our Clicks to Bricks Program, and small shop regional operator portfolio reviews, to increase leasing activity with small retailers and franchisees. At some centers, we’ve also combined small boxes to create space to bring in high-quality mid-sized and larger tenants to strengthen occupancy.

Finally, an issue some investors have been following is Puerto Rico’s new tax laws, including the additional tax on gross income for some corporations (known as “Patente Nacional”) and a 7 percent business-to-business sales tax on services. We’re not concerned about these changes. The Patente tax doesn’t apply to the types of tenants in our portfolio. (It applies to financial institutions, insurance companies, gas stations, commission agents, advertising agencies, contractors, and new car dealers and distributors.) The sales tax does not apply to every service that we would provide a tenant. At the maximum, this sales tax might raise our CAM (common area maintenance) fees by 25-30 cents a foot.

To summarize, we have an intense focus on our growth strategy in our Southern region and throughout our portfolio. We have a disciplined acquisitions process that will enable us to continue to upgrade our portfolio and focus on our key territories. We’re remaining securely fastened to our core competency of retail real estate. We’ll continue to reinvest in our shopping centers and take advantage of upside potential. We have a clear picture of what Kimco will look like over the next three to four years, and that picture is bright.

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