Kimco Realty Corp (KIM) 2002 Q3 法說會逐字稿

Good day everyone and welcome to Kimco Realty's third-quarter earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Scott Onufrey at Kimco Realty. Please go ahead, sir.

Thank you Debbie. Thank you all for joining us for Kimco's third-quarter earnings conference call. Before we begin, I'd like to read into the records the safe harbor statement. The statements made during the course of this conference call state the company's and management's hopes, intentions, beliefs, expectations, or projections of the future, which are forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained from time to time in the company's SEC filings.

This morning, you'll here from Mike Pappagallo, our CFO; Milton Cooper, our Chairman and CEO; and Dave Henry, our Chief Investment Officer; Mike Flynn, our President and several other key executives are also available for your questions at the conclusion of our prepared remarks. I'll now turn the call over to Mike Pappagallo.

Thank you Scott and good morning. The company's third quarter operating results met the investment community's expectations, delivering FFO of 75 cents per share. And while this per-share result is flat against both last year's third quarter as well as the first two quarters of this fiscal year, it does not reveal the impact and success of our business strategy. As one analyses the third quarter of 2002 versus 2001, two items stand out. First, this year's third quarter includes the most significant impact from the year long Kmart bankruptcy issue, as the effect of the 13 stores rejected at the end of June hit this quarter's numbers broadside, on top of the lost income from the rejected stores earlier in the year. The total loss net operating income for the quarter amounted to $9.3 million as compared to last year. Second, last year's third quarter contained a substantial level of earnings from the Montgomery Ward disposition program. Comparing both periods, income from this program, which is now winding down with $8.7 million less after taxes. Yet, despite the combined $18 million of lower earnings from these two items, overall FFO dollars actually grew by 4.5 million. This was accomplished because we received significant contributions from all corners of the business solidly seen in the core portfolio, growth in our various investment partnerships and alliances, execution in our merchant building business and creativity in finding investment and profit opportunities in structured financing and reseller services. A look at the pieces reveals the following. First, while the net operating income of our wholly owned shopping center portfolio declined by $5.8 million or 6.7%, $9.3 million [inaudible] to the Kmart situation as I just indicated. We were able to generate $3.5 million of incremental annualized to offset some of this decline, with about a third of the total each coming from acquisition activity, internal growths, and lease termination income. More importantly, future periods will experience increased flow from about 900,000 square feet of leases pending on former Kmart locations and eliminations of the negative carry from dispositions of other locations. Second, we experienced increased contributions from our real-estate partnerships. The combined effect of higher earnings from the Kimco income breed and the contributions real-estate -- GE real-estate venture and co-investment with RioCan in Canada increased FFO by an aggregate $5.1 million from the comparable period. In addition, management fee income grew by $1.4 million. Next, Kimco developers delivered on its plans by selling its Cedar Hill and Wakefield developments as well as the continued sales of out-parcels at the large San Antonio project and resulted in the $3 million aggregate after-tax gain, 2.7 million higher than last year. We have also continued to seek in profit from structured financings and other opportunistic investments, be it loans to retailers, participation in inventory liquidation and other things. We enjoyed a $7.5 million increase after consideration of income taxes on these transactions. Of the total increase, about $5.7 million relates to interests and dividends on income producing investments, $1.2 million on securities gains and $600,000 from other transactional items. We feel the past quarter's results demonstrate our strategy as working and we continue to find opportunities both from our existing relationships as well as from new ones. Dave will speak to you shortly about some recent new business development. The balance sheet and capital structure did not change materially in the quarter with most our investment activity funded on a temporary basis through our credit facilities. A portion of these outstanding balances will be paid down over the next few months from a combination of sales of development properties and most likely a bond offering. Set service and fixed charge coverages remained healthy at 3.9 and 3.3 times respectively. With respect to earnings estimates, we affirmed our comfort with the first call of first quarter FFO estimate of 78 cents. And in our first release yesterday we did provide guidance for 2003. On a FFO basis we expect a range of $3.13 to $3.23 per share and between $2.21 and $2.29 on a net income basis. Based on the positive performance and business momentum, the board of directors has approved an increase in our quarterly dividend rate by 2 cents to 54 cents per share. That quarterly dividend at this new rate was declared and will be payable on January 15th, 2003 to shareholders of record on January 2nd. This actually represents the 11th consecutive annual increase in dividends since our IPO in 1991. The FFO and net income guidance earnings ranges reflect a possibility of additional store closings from Kmart after the holiday season. While we do not have specific knowledge on any store closings, we have made an evaluation in our portfolio of possible scenarios and feel that the low end of the guidance range can address this scenario. Our Kmart exposure is now at a manageable level and we do not see a material impact to earnings beyond this range. And with that I will turn it over to Dave.

Good morning. I am pleased to say that our third quarter was very productive and successful in terms of acquisition in new business activities. In Canada, our partnership with RioCan, Canada's largest REIT acquired 11 additional properties since our last conference call. The portfolio now contains 27 existing properties and 3 development projects, aggregating approximately 6.9 million square feet with a total cost of approximately $910 million, Canadian. The Canadian portfolio continues to perform very well with occupancy currently at 97% and financial results in excess of our original underwriting projection. Our partner, RioCan, continues to do an excellent job forcing and underwriting acquisition opportunities. In the US, we've acquired 4 additional properties for our GE Capital joint venture during the quarter. These properties contain 631,000 square feet and were purchased at a total cost of approximately $53 million. Three other properties totaling $50 million are under contract and targeted to be closed in the fourth quarter. With the Kimco income REIT (inaudible) our partnership with New York Commons and several other investors, we've acquired two new properties comprising 839,000 square feet at a cost of approximately $67 million. We have also contracted to purchase a large retail property in Seattle for $88.5 million, which is scheduled to be closed in the first quarter of 2003. As previously announced on October 21st, we have also successfully closed on Westlake Village, a 561,000 square feet property in Daly City, California. This is a re-developmental property that we acquired in a down REIT partnership structure, and we are particularly excited about the long-term prospects of the property. We are also very pleased to be working with William Chang, the owner of the property for the past 30 years. Moving south of the borders, in Mexico, we are happy to confirm that we have completed the acquisition of two new high-quality shopping centers from HEB, a large and successful regional grocer currently operating in Texas and Mexico. The two properties are located in Monterey and Sawtillo and comprise approximately 280,000 square feet, with an additional 114,000 square feet extension plan for the Monterey property. The properties will be managed and leased by [inaudible], a large retail leasing and development company headquartered in Monterey. We anticipate the GE Capital will participate with us on a 50-50 basis after completing their separate approval and due diligence process. Together with GE we are continuing to explore additional acquisition and development opportunities in Mexico. Overall, we believe that a strong tenant demand for quality retail properties in Mexico will continue to grow due to the shortage of retail sites, and related infrastructure, strong population growth, rising real wages and purchasing power, and increasing competition among domestic and international retail centers. With respect to other new business, our joint venture with Lazard is scheduled to complete its purchase of Conover property trust on November 22nd. Kimco will provide services to the venture including leasing, property management, redevelopment, and construction supervision, and the joint venture anticipates selling of portion of the assets during 2003. We are also beginning to build our portfolio for third equity investments with four additional transactions closing during the quarter and one other transaction closed in early October. These deals aggregate approximately $17 million for the investments in the properties located in various markets. Kimco, as part of a joint venture, has also recently agreed to provide a $100 million secured revolving DIP loans to Ames, secured by all of its real estate. Kimco will retain a substantial portion of the loan, which has participating loan features based on the success of selling and re-tenanting the Ames properties. Now I'd like to introduce Milton Cooper for his comments and thoughts.

Thanks Dave. I think everyone knows my own views on the real prospects of deflation and the lack of growth in cash flows from real estate properties. We've felt this way for some time and this feeling was the impetus for us starting our strategy of generating income and profits from activities that are recession resistance and are not dependant on cash flows increasing from real estate ownership. And that strategy is working. Despite the Kmart "perfect storm" and the loss of income from 31 locations, we reported the highest net income and FFO in the history of the company for this 9-months period. The thesis of this strategy is that money would be made from talent and it's obvious that without the talent there cannot be any execution of the strategy. So our thanks go to our large group of talented Kimco people who are making this happen. As long as I am talking about talent, I want to thank our leasing team, who managed during a period of numerous store closings to actually increase our occupancy during the quarter. Our occupancy increased this quarter in our core, in our Kimco Income REIT, and our retail lease portfolio. By the way, the press release referred during the quarter having executed 126 new leases. The total for all of our portfolios is 195, when you think about it, it's more than 15-a-week. And I just feel very confident that in time we will be back to our occupancy levels prior to the "perfect storm."

Now lets talked about Kmart. First, the 31 closed locations. At this time, we have a combination of completed leases, sales, contracts, (inaudible), negotiations, and other dispositions for 27 of the 31. We are down to 4 properties that we have nothing hot for at this point. But we are comfortable with out previous guidance that we will have all 31 disposed off by the end of the second quarter of 2003. Now let's check again about our remaining Kmart, and revisit some of the information I gave you in our last conference call.

Now, of our 44 remaining locations, 38 are owned by Kimco and 6 are owned by an entity in which we have less than 50% interest. Of these 44 locations, the existing average Kmart rent is 524, the average rent on the rejected stores was 1006, almost twice the Kmart stores that are opened. Kmart has issued a press release to the effect of a plan to emerge from bankruptcy by the second quarter of 2003, and there is no certainty as to which stores may be closed prior to them. In a chapter 11 proceeding, a retailer closes in the first round of closings its worst performing stores, and usually the least marketable. In any additional round of closings, the stores to be closed would represent better-performing stores and in our case much lower rents. And Mike Pappagallo in his guidance had taken it to account the possibilities of additional closings that would result in a loss of income in 2003, until they are leased. Now in any event, our Kmart exposure has been dramatically reduced. As of January 1st, 2002 Kmart accounted for 11.4% of our consolidated base revenues, as of September 30th, 2002, that number was reduced to 5.1% of our consolidated base revenues, and you can expect further percentage reductions as we grow our portfolio and have additional transactions that take place on Kmart locations. The balance of our portfolio is diversified, tenant-wise, our largest tenants other than Kmart are Home Depot, Kohl's, and TJX, which represent above 3% of our base revenues, no other tenant represents more than 2% of the revenues. We [inaudible] diversified geographically with properties located in 41 states, Canada, and Mexico, and it's a portfolio that is actively managed and one that will see increases in occupancies. By the way, last week we added a sensational redevelopment property in San Francisco, and we are excited about that. And our portfolio, despite my views on a weak economy has room to grow. I also think we have a good recession resistant service business. We provide a service to those retailers that are expansion-minded, through a development subsidiary, and are managed by seasoned professionals and highly motivated team. We provide services to retailers in financial difficulties that desire to monetize their real estate holdings. A terrific team is handling the designation rights for 54 Kmart leases and that same team is now working under disposition of all the Ames Real Estate of leases and [inaudible]. We have a third service business, we manage and co-invest the pension trust, institutions, and others who desire to invest in shopping centers. This is a good business that will grow. The management contracts in view of our investments are long-term contracts and these businesses and our core, are managed by a great team. I love our business model and excited about the team we have and I wish I could feel as good about the economy as I do about our strategy in our future and with that we welcome your questions. Debby we will be happy to take questions at this time.

Thank you. The question and answer session will begin at this time. If you are using a speakerphone just (audio gap).

The question and answer session will begin at this time. If you're using a [audio gap] just lift the handset before pressing any number. Should you have a question please press "1" followed by "4" on your pushbutton telephone. If you would like to withdraw your question, press "1" followed by "3". Questions will be taken in the order they are received. Please standby for your first question. Once again, if there are any questions please press "1" followed by "4" on your pushbutton telephone at this time. First question comes from Jeff Donnelly, please state your affiliation followed by your question.

Good morning gentlemen, Wachovia Securities. A few questions. Actually, first off is on the Kimco Developer's pipeline. I was looking at your project list for the third quarter as compared to what it was at the second quarter. And it looks like the GLA of above the 5 million odd square feet, about 1 million square feet that has been pushed back 6-12 months on its delivery. I recognize you folks build the suit, but does this have something to say perhaps about, you know, your development return expectations or more broadly about, you know, big box anchor demand of the market.

Jerry are you on the line right now?

Yes, I am on the line right now. This is Jerry Freedman. Really, the problem is that we developed, as you say build a suit, and it's really not pushing back a significant number of square feet. Most of -- the reason why we pushed back the estimated completion, (inaudible) that is a completion of the entire project where there might be a couple of out-parcels or a small tenant building that will not be done until that date. Most of the anchors are already there, signed and being developed. So it's really just the timing to be -- when if you drove by the center you would a see it completed and no construction. That's why it got pushed back as far as the date.

Okay.

Again and just to further Jerry's point, in one example is Panama City where all the -- its a small project, but all the major tenants are leased in an occupancy, but we have a small tenant building, which is built but the tenants aren't going to lease them until its fully constructed and the rents will start a little later on. So we've kind of pushed out the date through that end gain. That's why we added some notes as well on that page that perhaps will help you folks to understand that these have a lot of twists and turns in terms of what's an actual final date.

Milton, I guess, you know, the occupancy that you would like to attain, you know, called prior to the perfect storm it is still about 4-5 million square feet away of leasing just a rough estimate. I was curious, if you could provide us with some more detail on your expectations or assumptions in your '03 guidance as it pertains to Kmart? I guess what your assumptions are for occupancy and rent on the current vacancies and may be some detailed assumptions on what are you thinking about for future perspective vacancies, or either number of stores lost or per square footage?

Well, you know, we can't speculate on what the number of -- what closings will be and I don't think anyone of the committee or anyone really has and I don't, even over this -- I am sure this decision hasn't been made. So it's really Jeff that would be speculation.

I don't mean any aggregate for Kmart, I mean for Kimco?

That again, we were just speculating and I don't know what your guess was as a number. In your guess Mike, how many locations did you guess?

I think, you know, our basic assumptions were between 12-15 locations, could potentially be closed and again Jeff, that was based more on, you know, just expectations about the center, the guess, you know, the relative performance with the Kmart versus others, but it was a guess. And as (inaudible) pointed out, the average rents in that portfolio ranged in the $5-6 range, although there were a couple of higher ones there. So, I think, in terms of our estimates, that was kind of build in for the low end of the range. As it relates to the existing vacancies that we are looking to release and that we have deals and transactions on. As we had suggested in earlier conference calls that the average rents will probably about 2/3 of the aggregate rent dollars that the [inaudible]

On the first round?

On the first round. It will not -- it will be greater on the second round. And again, Jeff, so that we understand, that projection is for 2003 on the theory that if there were store closings, we would, the loss of income, would probably be for a 6 or 8 months period during 2003. We really expect that all of them will be back in 2004.

That actually kind of dovetails, and this is my final question. As I was curious what your assumption was for downtime in 2003, and do you really -- do you think the -- this visibility that we have today in the industry on Kmart's condition has allowed you folks to perhaps accelerate your turnaround on these cases?

It has, what we've done, we been active on it, but even if you have. If we would have, and I am not saying we do. If we would to have signed deal with a tenant, anticipating who wanted the space, it came out less. We would still have a 6 to 8 months period of loss of income till they open. So the acceleration no matter how fast you are in your footwork, you are going to have anywhere from a 6-9 months period because of the tenant. You have the time for them to adjust the premises for their use and then there are certain periods they don't want to open. So that, no matter how fast you are, you are going to have that -- that period.

Thank you.

Next question comes from Mark Siseloff please state your affiliation followed by your question.

This is Mark Siseloff of Reif. Just a follow up to Jeff's question on your range of guidance here - Mike, the 12-15 locations that you've identified there as possible closures, you mean, you are assuming that rent goes away 100% in those locations - aren't necessarily picked up in a designation's right auctions.

That's correct. That's right.

So if -- at the high end of the range that assumes then that there are no store closings.

That's correct. That assumes that there is no loss of rent flow in 2003.

2003.

As the low end of the range assumes that at 12-15 store portfolio would lose rent for a significant amount of 2003, for the very reason that Milton has suggested. You could theoretically close the store after the holidays and then there would be a 6-9 month period, it would be going out of business sale, then a 6-9 months period of closure before a new rent flow came in.

The other aspect was marked in our re-development in Daly City. We may take down some buildings and have a temporary loss of income in 2003 while we are re-developing, and that's going to be a sensational project but we've taken into account that possibility.

Okay, appreciate it, thank you.

Done.

Next question comes from Ross Nussbaum. Please state your affiliation followed by your question.

All right, Solomon Smith Barney. Good morning everybody. Of the 27 Kmart stores you have activity on, can you break down for us specifically how many are going to be leases and how many are going to be sold or [inaudible] lease terminations.

As I said, well of the 27 let me break down, there are eight that are leases that are pending and then there are another eight that -- their most likely strategy is dispositioned, and in the balance I think we are actually have been leased at this point. [Also I think] [inaudible]. Let me just kind of go back to that, I apologize. If I take the original 31 let me do that Ross because -- we talked about four not being -- not having a lot of activity. Also there are 11 locations where leases have been signed or pending. The three that you see in the supplemental package plus eight more that are pending. There have been four locations where we have already, or are planning to ground lease locations, that we are planning to terminate and then the balance essentially will be what I call dispositioned. These are outright sales of the properties or settlements with mortgages, etc. So when you kind of pull all of those together that will be between 27 of the 31. So I think when you go back and you say what's going to be the affect, just looking at the occupancy line with the re-leasing of certain of those stores and the disposition of the others, all other things being equal the occupancy versus is 85.9. Today we probably go up to close to 89%.

Okay, I am looking at page 8 of your supplemental, I am trying to get a hand on leasing activity in the core portfolio, and I just want to make sure I am reading this correctly, you leased about 2.5 million square feet year-to-date average rents of just under 7.50 a foot, that looks like its about a 20% spread over your vacates year-to-date, excluding Kmart, is that correct?

Your looking at the 751 versus the 628 correct?

Yeah, the 748 versus the 628, yeah.

Okay, I think, yes it's the way to look at it is, if you want to look at the leasing activity excluding Kmart, really just go to the last column, which shows that on average -- the average rent for square foot $7.51. The average vacate is $6.28, and recognize that, you know, on a couple of cases the new leases in particular as relates to Ames. The new leases on the Ames box, on former Ames locations as well as the Ames rent themselves, a relatively low rent dollars. So that certainly has an impact on -- both ends of the ledger so to speak for new leases as well as vacates.

Okay, that leads to my next question which is, with all of the Ames, Kmart, and Service merchandise base on the market, I would expect to see rent growth flow pretty dramatically and it looks like that's -- not the case. What are you expecting in '03?

It really will depend by area of the country and demand. We are handling the disposition of the Ames stores and we are really very surprised that the amount of interest for space in New England, a great deal is geographic. Though its - while my own view, quite candidly, was that rents because of not only the availability of the space but general deflation in all aspects of real estate, the Ames liquidation may prove us wrong - and where there is a demand and there are barriers to entry, - so again its location specific and area specific.

Okay, turning to the guidance for next year, can you talk a little bit about what your acquisition assumptions are either generally or by -- business group?

Okay, I think we look for an acquisition situation or acquisition assumptions, which are similar to this year and when you think about the acquisitions this year, if you think about the dollar amount that -- of real estate and other assets that we have actually underwritten and acquired, you know, the gross number is, you know, about 1.5 billion, and when I say that and that's what anticipate by the end of the year, and when I say that I am talking about the gross value of real estate has been acquired at Kimco in Canada through the GE ventures with the Kimco Income REIT, the Kmart designation rights that we acquired, the additional amounts we have put in the recently announced Ames transaction, the Westlake transaction, the growth value of the assets from the Conover joint venture. And granted, Ross, our actual investment, is significantly less, because as we've talked about our investment strategy, it's really to be not only an owner, but significantly a manager and to have less amount of risks. So when I think about the dollar amount of assets, that we look to circle next year to satisfy our plan, we're basically going to look at a similar and a hopefully a higher level than we have this year, but our dollar investments, Kimco's dollar investments, that's the tricky one to predict because depending on where it comes from be it KIR, GE, maybe some new relationships we will create more designation like transaction which you know are little, need for long term capital etc. that's the harder part to predict. But I would go on a gross level with a very similar investment scheme or structure that we have this year and, hope that we can find even more opportunities - I know Milton is confident that we can, as we look to 2003.

Okay and in terms of cap rates, you're expecting on average cap rates to be lower than they were this year?

Yes.

How much?

Well, I hate to guess, but I think they could drop by a 100 basis points. That could happen, as we enter the deflationary period.

And that is even with a rising interest rating environment or ..

You are assuming a rise in interest rating environment. I am not sure in the period of deflation you are going to have it. That's an assumption that, and no one can guess on interest rates, but its hard to have rising interest rates in tough economic times.

How do you -- how do you look at the acquisition game, knowing down the road cap rates will rise at some point. How do you pull the trigger on a similar number of acquisitions knowing that, those properties may not be worth as much 2, 3, 4 years down the road?

You must couple acquisitions and not operate on the assumption, that they will be all cash, if you measure, in (inaudible) it's leverage, so that the spread is very high on the equity returns and our buckets, really have substantial, our core investment etc. So we look at what yields we are getting and don't forget, when you are locking interest rates and locking in your spread, the effect of a lower cap rate doesn't effect the equity as much, Ross.

Yeah, I understand.

Ross I think your question is only pointed out, as we look to core investments, that has less of a stake, a lot of the acquisition is predicated on the 6-(inaudible) financing that can be a pain and then our management business along side it - when we have a constancy of flow - and managing and operating and lease and earning leasing fees and so on. I think what we are focused on, is as much of being a manager and a service provider, as we are a co-investor and to not be hit, I'll use the word I used in my other comments, hit broadside by just simple changes in cap rates on owning properties 100%.

Okay, thank you.

Next question comes from Stewart Asceroz. Please state your affiliation followed by your question.

Yeah Stewart Asceroz with Lehman Brothers. Just looking at the top line NOYN, could you comment on the average occupancy during the quarter, obviously you had the 90 basis point improvement, but what it was for the average?

I think it might be fair Stewart, to simply take a two point average from the last to last quarter to this quarter. You could recognize that occupancies are point in time and they tend to be a lagging indicator of what's happening or, you know, a leading indicator I am sorry. In that the 85.9 occupancy well has had more implication going forward and very -- and doesn't have much of a statement to make with respect to the current period. You know, these leases were signed ratably throughout the period, and as a result, I think, it's more a question of going forward. So if you wanted an average, I mean I think, the best thing to do is take a simple two point average from last quarter to this quarter. I don't track it on a daily basis.

Okay, then on the acquisitions, looking at Westlake you mentioned, that's in Seattle, it looks like you are looking at larger assets. Could you just comment on that? But that assumes with the Westlake transaction, and has some details on the Seattle?

I'll just comment on the structure. I'll let Milton or Dave talk about the real estate. But that, Stewart that was as David said, a down restructure whereby essentially there is no debt that property was acquired by issuing down REIT units to the Chang family interest, which is convertible into Kimco common stock. So that's the structure of the investment itself. The Seattle was targeted for KIR and that will close the first quarter and there is a commitment for a 75% mortgage loan.

And that is actually a great example of locking in spreads, because we had rate locked that particular commitment, about 5.5% interest rate for a closing early next year. And so - it's almost a historic opportunity today to lock in these, I mean these spreads.

And then Mike could you just comment on the lumpiness regarding the security gains that was honestly pretty light this quarter, as you look forward for Q4 and any guidance for '03?

Yeah I think, we've always talked a little bit about lumpiness and I know that it's, you know, an analyst's nightmare to guess how much it would be in a given quarter. As I look into the fourth quarter and even into 2003, Stewart, I've kind of muted the effect of the securities gains next year. I mean it is probably only figure this is going to be, you know, 3 to 4 to 5 cents at most, which is less than this year. And I think, the whole kind of combination of interest dividends and other investment income as well as the other income lines on the operating statement, which, you know, through 9 months was probably about, you know, $35 million. I think the best thing to do is look at those two lines, you know, as one and then just, kind of, use that aggregate number is pretty much the run rate -- you know, obviously annualizing that and using that as the run rate. There may be some movement between that line item and things up in the real estate caption depending on designation right deals, and participating loan structures, and in the liquidation scenario. So what we'll try and continue to report for you is more, the type of transaction and try and give it a reasonable cut of what's bucket -- what bucket it goes in and maybe you can project from there.

The yields and the preferred equity transactions that were originated in the quarter?

The cash -- the current cash return is generally at 12%. Certainly we look for the IRRs to be higher as there is a participation feature on the backend on the disposition of a property. But so far and the handful that we have closed so far this year, they've have been humming at 12, well, with no issues. I mean it's important to note that everyone of these also has, in effect a kicker for a Kimco lease. We own a piece of the deals going out. These aren't just a straight interest rate return.

The next question comes from Matt Auster. Please state your affiliation, followed by your question.

Good morning, Morgan Stanley. Just wanted to ask on the sequential decline in revenues, can you breakout what component of that was reimbursement, so we have a sense for what's fixed here?

I think the best thing to do is look at the real estate taxes and operating and maintenance lines. And I'm just trying to give you reasonable percentage in the aggregate.

Is that 85%?

Of the decline was from...

No I am saying this if you want a reimbursement number, I am saying take the real estate tax expense and the operating and maintenance expense dollars on the expense side of the ledger and the aggregate of those two, take about 85% of those numbers. That will give you the portion of the revenues that are attributable to reimbursement.

Okay, good.

But Charles just -- I know you may have had this question in prior quarters, the real estate taxes that show to blip year-over-year, that reflects portion, we'll have to use the Kmart word again -- but that just reflects the change in their approach when they did file chapter 11 previously, quite a few of their pre-standing locations -- they had paid the taxes directly. When they declared bankruptcy they move to, you know, all landlords have to pay the taxes. And then, assuming there is still occupancy and paying rent, they would reimburse which they have done. I think that was just a cash flow maneuver on their part. But what it's meant for us is that we're showing a few more dollars of real estate taxes gross on the expense side, and then gross on the revenue sides to the extent that Kmart is still in occupancy.

Okay. And then just one question on KDI, it seems like, you know, looking at your pipeline, it seems there is a lot of flexibility next year, particularly the large asset in San Antonio, which I understand you might be able to sell in phases or break up. I guess, could you just comment on what your estimates are implying as to the KDI piece of it and then just generally how are you thinking about this in terms of, you know, if Kmart store closings are greater than what you are expecting, you know, in particularly the down side of your range, would you not just sell some more stuff from KDI to offset the extra impact?

You know, the way I work it with Jerry and the KDI team is, we identify a variety of properties at the beginning of the year, based on completion dates and then we just move more forward. And so a sure amount -- we always have some flexibility in selling more out parcels, because we have undertaken a strategy of selling things in pieces and not trying to have a big bang on one quarter. But when push comes to shove, you know, basically looking at the gains on the sales, you know, net of the taxes. I mean if we have a target of anywhere from $12-15 million that's what we're going to shoot for. And I don't know if we're going to settle with gains on sales, just to offset Kmart. I will tell you what we will continue to do though and focus in earnest is, what is going to be the mechanism of the vehicle for us to maximize the values on the disposition. In other words, selling out right to third parties, or selling it to private partnerships, whereby we'll retain management, and may be, you know, a profit stake on the backend, which may allow us to continue, not only sell the property in the current period, but to maintain a management stake going forward. So we are hoping, to may be incrementally increase the profitability of KDI through and to finding the optimal disposition structure.

Just a further note on Kmart, that when a retailer closes, they close the worse store to begin with. In our estimate we were just pulling numbers out of the air -- we took those that might be closed, the balance if they ever closed, would be the best performing stores. Some of them are in percentage rent, some of them are with the low market rent. So as you get further down where they're really the best stores - the exposure is much less than that and I think that's kind of obvious and of course what you see in Ames, when the chain liquidates completely and all of their stores go, there's a demand for a great number of them.

On that note, could you just comment on a little bit more, you know, our perceptions has been that you know roughly half of your remaining Kmart -- in the events of a full liquidation, which we all can admit is maybe not a high probability scenario right away, but in the event of full liquidation we just have been assuming that half of your Kmart would be designatable. Is that a safe assumption in your estimation?

That's a very safe assumption. It's a very safe assumption.

You know, we [inaudible] it will be lot of high quality real estate, so....

Yes, that's a very conservative assumption.

Okay. Thanks.

Next question comes David Bronco. Please state affiliation followed by your question.

Yeah, RBC Capital Markets. Most of my questions have been answered at this point. A couple of questions relating to the core portfolio - you talked about 126 new leases. I was wondering more about renewals, where were rents on renewals relative to prior rents during the third quarter, in the core portfolio?

Oh, it is just slightly better, Mike, would you. Slightly, better?

I think, as a general statement, I don't have the statistics in front of me to offer you an exact dollar amount. But renewals generally, it has a minor up lift, they are not -- they are not terribly significant. What we windup seeing is, is generally between renewals and the normal bumps in a lease that we have a normal contractual bumps. You know, you usually run about 1.5-2% a year of growth coming from those two source and I use that very top down number, obviously we have got a lot of leases and lot assets in the portfolio, but that's, in the aggregate generally, been the trend with respect to kind of a constancy of those leases that renew and rollover as well as the contractual bumps. Lot of our bumps happens once every five years, based on CPI or other stated percentages.

Okay, and then a related question, I wondered if you had an estimate for what (inaudible) NOI would have been in the core absent the vacant Kmart space. I don't know if he has run that number?

Other than this -- additional other than this -- the Kmart space, it was above 1.5% recognized that other Kmart there was also rather, you know, it was somewhat sizeable impact from and Ames and some of the home based locations in another company that has declared bankruptcy, but quite frankly, I didn't want to get to, I know, it's the right word, just disingenuous with my numbers to say except for Kmart and except for Ames and expect for home based here is what have been the growth. So we just kind of focussed on Kmart, but I think what it does show is just putting Kmart aside even with the other damage, so to speak, from some of the other big box vacancies, we're still able to show some positive growth across the board. And again, I think the point we're trying to make is that, looking at the Kmart situation in isolation, feeling that that's a very manageable situation going forward. We think, we have a lot of good momentum in the core portfolio, push out higher levels of internal growth in the future even though rents as a general statement are still rather compressed in the economic environment.

Great. Thanks.

Our next question comes from Ian Wiseman please state your affiliation followed by your question.

UBS Warburg. Good morning. Generally speaking, in another words, besides Kmart, 2002 is a very light year in terms of announced retailer bankruptcies, still if you could address to two points. One why do you think this has occurred in the light of the struggling economy and two, do you see this trend continuing in '03?

I would expect that, I am not sure why they weren't more, quite candidly. May be so much damage was done. I would expect that you see some more in 2003. With the economy weakening and particularly a lack of inflation which retailers need. I can't quantify, but I expect to see more.

Okay. Fine thank you.

Our next question comes from Lee Schalop, please state your affiliation followed by your question.

Thank you, Banc of America Securities. Could you just give us some color on your thoughts on the overall environment where big box retailers versus supermarkets, is that something you spend time to thinking about or is that something that you think people spend too much time thinking about?

No, I happen to think it's one of the major issues and with supermarkets - and it's a good thing you used the word supermarkets rather than groceries - because there are very few grocery stores - most of them are supermarkets selling much more than food. These supermarkets are intensely competitive at low margins, and are in a pincer movement where on the one side they have the Wal-Mart superstores, they have the drug stores that are expanding and carrying more food, they have the warehouse clubs. So, I just think it's a very tough, tough business and we think about it all the time and try to strategize the impact, but I think it's going to be a challenge for the supermarkets in my opinion.

Can you talk about ways, that you specifically changed your strategy, to address that?

What we've done is -- what we look at in our basic philosophy, you start with the real estate business and watch if there is an infill location, if it were in Queens or Brooklyn, I don't care what happens to that, you know, and it's the low market, you are going to find users and users when you're really have a fundamentally location, location real estate. Other than that, if you have a credit in a supermarket and then you have to analyze how you hedge that credit with debt or what you do and it's a fundamental judgment of credit evaluation and every -- do it -- we do it every single day, and that's part of our business. But you have to first look in a shopping center business, when the real estate is so fundamentally good, like our Daly City acquisition, that's one type. Everything else really depends on the evaluation of credit, interest rates, and what you're doing and you really have to be very skilled and specific.

Thanks very much.

If there are any further questions at this time, please press "1" followed by "4" on your pushbutton telephone.

Okay.

And one follow up question from Jeff Donnelly, please restate the affiliation followed by your question.

Wachovia Securities. Yeah guys, just one or two quick questions. Dave, can you tell what kind of un-leveraged deals you guys are investing at in Mexico?

On existing properties, we are targeting 13% to better on the development side, 15% on leveraged returns, based on pace of rents, which we fully hedge.

Okay, and then final one was on the structure of the Westlake acquisition, I was curious why you guys opted for, I guess, a forward equity sale.

We -- that was the only way we could buy the property. The family owned the real estate for 30 years and was depreciated down to practically nothing. And they -- we would have preferred really a cash transaction. We had no choice, it was tax motivated on the part of the seller.

Okay thanks guys.

The next question comes from Scott Oshay, please state your affiliation followed by your question.

With Deutsche Bank. Good morning. Just wanted to ask about the mortgages on some of the Kimco properties. Are you current there? You had mentioned having discussions with some of the holders in previous calls, any update there?

We are current at all mortgages with the exception of the nonrecourse Kmarts. And as you know on many conference calls we indicated we were hedging our Kmart exposure through nonrecourse debt and in each case prior to getting those loans we really called every lender that we are anxious to hedge our Kmart exposure and these mortgage loans were really the equivalent of sales because the mortgages were more than the amount we would have gotten after tax with the sale. So actually those reflect the only -- that's the only place that is not current.

Okay. What's the dollar amount of those mortgages?

On the 5 Kmarts the -- I think -- I believe that on the 7 Kmarts that are currently closed and lease is rejected about at $70 million the mortgage balance.

Okay. Thank you.

Debbie we have time for one more call if you have any others.

If there are any further questions please press "1" followed by "4" on your pushbutton telephone. I am showing no further questions in queue at this time.

Thank you very much Debby. Thank you all for joining us.

This concludes our conference call for today. Thank you all for participating and have a wonderful day. All participants may now disconnect.