Kimco Realty Corp (KIM) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Kimco Corporation fourth-quarter earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. It's now my pleasure to introduce our host, Mr. Scott Onufrey. Sir, the floor is yours.

Thank you. Thank you all for joining us for Kimco's fourth-quarter earnings conference call. First, I'd like to read into the record 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's 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. During this presentation, management may make reference to certain non-GAAP financial measures we believe help investors better understand Kimco's operating results. Examples include but are not limited to funds from operations and net operating income. Reconciliations for these non-GAAP financial measures are available on our web site.

Presenting this morning are Mike Pappagallo, our CFO; Dave Henry, our Chief Investment Officer; and Milton Cooper, our Chairman and CEO. Mike Flynn, our President, and several other key executives are also available for your questions at the conclusion of our prepared remarks.

I will now turn the call over to Mike Pappagallo.

Thanks, Scott. Good morning, all. I'm very pleased to report to completion of a very solid year in terms of growth in earnings and cash flow and what I feel is successful (technical difficulty) shift back to a complete focus on the overall (technical difficulty) operating strategy after dealing extensively with the Kmart situation. No one said analyzing Kimco's numbers was easy, and this quarterly report certainly did point (ph).

In previous conference calls, you may have heard me carry on about how certain aspects of GAAP accounting and financial statement presentations do more to confuse than enlighten. But rather than waxing philosophical on GAAP or FFO recognition shortcomings or to explain the illogical geography of the numbers that we're held to present to satisfy the regulators, instead, I want to focus my comments on the primary drivers of earnings performance.

First of all, allow me to clarify the overall reported numbers. Funds from operation were 85 cents per share for the fourth-quarter versus an adjusted 68 cents for 2002's fourth quarter. By adjusted, I mean we revised last year's numbers to include impairment charges and gains from buying back mortgage debt at a discount. It all relates to clarification by NAREIT back in October on the FFO definition. And we made similar adjustments to the third quarter numbers, but changes were barely noticeable. The net effect was to reduce last year's quarterly FFO per share by 10 cents down to the 68 cent level.

In the current year quarter, we had another discounted mortgage payoff of a former Kmart location. Separately, we recorded a write-down of the book value on that very same asset that collateralized the mortgage, as well as one other form of Kmart asset. Both of the assets subject to this write-down will be sold this quarter. In fact, one has already been sold.

The net effect of these items was a charge this year of $600,000. If we remove these gains and write-down items out of both quarterly periods, the rate of FFO per-share growth was about 10 percent, which is more representative of the improvement over the prior year's fourth quarter. None of the adjustments in either year had any impact on reported net income.

In sizing up the quarter, I would say the major drivers were first, the impact of higher income of the parent shopping center portfolio, both on continuing improvement in occupancy as well as the impact of the mid-Atlantic purchase; and second, the greater number of properties under management with resulting increases in operating flows and management (ph).

The parent REIT's shopping center portfolio continues to improvement in occupancy and operational (technical difficulty) throughout 2003 (ph). Year-end occupancy stood at 90.7 percent, an improvement of 120 basis points from the prior quarter. The inclusion of the mid-Atlantic portfolio contributed 50 basis points of the increase. So even without those new additions to the occupancy, we still exceeded our 90 percent goal for year end. Net operating income growth reflected this trend, growing by 13.3 million or 16.5 percent over the comparable quarter, and 36.5 million or 11.5 percent for the full year.

In total, we acquired 87 properties worth $1.5 billion (ph), sold 21 properties for $258 million and transferred 9 properties into the management program. Of the growth in NOI for the quarter, approximately 12 million is due to the acquisitions net of transfers, while 1.3 million came from internal growth, which represents about a 2 percent same-site improvement. For the full year, internal growth is closer to 4 percent.

In addition to the parent U.S. assets, the Canadian shopping center portfolio provided an additional $1.9 million in FFO contribution versus the 2002 fourth quarter, reflecting continued excellent leasing and occupancy performance -- and no surprise, strengthening of the Canadian dollar versus the U.S. dollar over the past year.

Increased management and related fees also contributed to the stronger quarter. Fees increased by 1.5 million to 4.5 million. The FFO contribution from KIR, the GE (ph) venture, and various other managed joint ventures aggregated $15 million (ph). For the full year, the FFO contribution from these co-investment programs increased by 13 percent to $52.6 million.

Outside of shopping center ownership and management, this quarter's results again demonstrated a pattern in which certain operating businesses harvested profit while other units were reloading their portfolios. For example, merchant building profits on property sales were lower, generating $1.3 million net versus $4 million net in last year's fourth quarter. This reflects the timing of sales and the type of property sold. Programs (ph) continue to maintain a solid inventory, and we expect numerous sales in 2004.

Our Kimco Select unit collect the final installment of Service Merchandise bond investment, generating over 3 million in profit, which in turn offset last year's fourth-quarter interest in CDs (ph) earned from our Ames real estate liquidation assignment (ph). Likewise, the increasing portfolio of preferred equity deals generated about $1.5 million of additional income in the period, and our portion of the Kimsouth distribution (ph) program generated an additional $4 million. As I've mentioned before, the sources and timing of contributions from our operating units will vary quarter by quarter, but viewed in total, we continue to see increasing contributions to Kimco's overall profitability.

One other point on the operating statement -- I think in a rush to write research notes, it appears that the income tax benefit on our statements is being characterized as a positive to earnings. For those of you that examined the supplemental report, you will notice that there is a disclosure of income subject to income taxes. And that was actually a loss of $4 million. And that's -- the income taxes were a benefit to partially reduce the loss. Now recall that that number reflects all of our TRS activity, except for merchant building, which is reported net effect on its own line item. The reason for the loss in the other TRS activities is solely the result of the use of the equity method accounting on our stock investment is Frank's Nursery. On a GAAP net income basis, Frank's reported a loss that's in its latest quarterly public report, and we picked up our pro rata share. We also recorded additional charges for the expected losses due to there for (ph) Christmas season. And as a result, we have effectively reduced the stock investment carrying base on our books to zero. And with that charge, which appears in the other income and expense line item, comes the related tax benefit. So clearly, the tax benefit number, properly interpreted, was not a benefit to our fourth-quarter results.

Now liquidity and capital position remain strong. For those of you who monitor our balance sheet, you'll notice an uptick in debt levels at December 31 from the levels at the end of the last quarter. These changes were attributable solely to the financing of the mid-Atlantic transaction through a short-term borrowing facility, as well as the assumption of existing mortgage loans of certain notes in the mid-Atlantic properties. As we mentioned in the last conference call, this is an interim situation. And we expect to transfer a substantial number of mid-Atlantic properties to joint venture partners over the next few months, eliminating much of these additional debt levels.

Notwithstanding this interim situation, debt service and fixed charge ratio was 4.0 and 3.6 times, respectively, and debt-to-total-assets was just under 47 percent, and debt-to-market-cap of 30 percent.

Liquidity has also benefited from the targeted disposition of property. Approximately 75 million of proceeds was realized from the sale of property within the core portfolio, as well as the disposition of the Harford Mall from the mid-Atlantic portfolio, which brought in another $71 million. As I said earlier, the company completed $258 million of property dispositions throughout 2003, and add to that another $91 million worth of sales from the former (indiscernible) portfolio.

Looking ahead to 2004, as we indicated in our press release, we refined 2004 guidance slightly to a range of between $3.41 and $3.46 per share. Frankly, this was done more to incorporate the current First Call consensus of $3.46 per share into our guidance range in order to avoid the markets from thinking that we were signaling something in the earnings guidance that in fact we were not. The consensus number, if achieved, would represent a 7.1 percent growth from 2003 results. And that growth is pretty exciting to us, particularly when you consider our size relative to others, our commitment to a strong balance sheet with low debt thus passing off excessive use of short-term debt and finance long-term asset, and the difficulty today of finding accretive deals for the parent with that commitment to the capital structure. Sometimes doing what's smart business runs counter to juicing current income, such as financing versus selling a development property -- as we did in our Sankeep (ph) project with MedStar (ph), or committing significant dollars to major redevelopment opportunities at the expense of short-term rental flows, or investing in first analysis (indiscernible) the potential of our operating (indiscernible).

The 2004 forecast assumes about a 3 percent growth rate in the parent portfolio, absent the effect of (indiscernible). I have dialed down the aggregate acquisition volumes for the parent and all of the joint ventures from what was an aggregate 1 billion down to about $600 million, but the timing of the transfer of some of the existing mid-Atlantic assets will offset the effect of that (indiscernible). The selective disposition of marginal properties may also restrain short-term growth for the benefit of long-term portfolio health.

A reduced acquisition assumption is just my own concern -- that's (ph) where properties are trading relative to their quality, and that we are just not going to buy stupid in this marketplace. We also expect development sales profits to be roughly the same range as 2003, and expect to see a continued benefit from our liquidation of the former Conover (ph) assets, as well as a variety of smaller, more diverse investments and opportunities providing real estate in financial services to retailers.

So with that, I will turn it over to Dave Henry to give (technical difficulty) perspective of new business activity.

Good morning. I'm pleased to report that Kimco had another strong quarter in terms of acquisitions and new business activity. In the U.S., and as previously announced, we completed our merger with mid-Atlantic Realty Trust on October 1st, and we are now moving forward on our plan to place approximately 30 of the properties in various co-investment partnerships. In addition, in December we completed the sale of the Harford Mall, the sole enclosed mall in the mid-Atlantic portfolio. We've also recently placed several other non-core mid-Atlantic assets on the market.

In addition to the mid-Atlantic portfolio, Kimco acquired seven shopping centers in the U.S. during the quarter. In total, the acquisitions comprised 788,000 square feet and were acquired at a total cost of 106 million. These properties, together with the mid-Atlantic assets, were all acquired as part of various joint ventures or are targeted to be placed into existing joint ventures, such as our GE Real Estate venture or a new commingled fund we plan to establish.

With respect to our institutional joint ventures, three additional properties totaling $87.2 million were transferred to our joint venture with GE Real Estate since our last conference call. The venture, Kimco Retail Opportunity Portfolio, now contains 24 properties comprising 3.6 million square feet acquired at a cost of 446 million. The portfolio is performing very well with occupancy at 98 percent.

Although there were no property additions during the quarter at the KIR, our joint venture with New York Common, the operating performance continues to be excellent, with occupancy at 98 percent on the present portfolio of 70 properties and 15 million square feet.

In our Kimsouth joint venture with Lazare on the former Conover property trust portfolio, five additional properties were sold during the quarter, and one more property was sold subsequent to quarter end. To date, the venture has sold 15 properties totaling 1.8 million square feet at an aggregate price of $118 million. The venture anticipates selling at least 12 other properties in 2004.

Since our last conference call, our preferred equity program was also active with 22.7 million funded in connection with five transactions. In addition, two preferred equity transactions will repaid during the quarter, generating returns in excess of 20 percent. The program is beginning to gain momentum with our preferred equity portfolio now containing investments in 29 properties with a current investment of $85 million. The preferred equity program is oriented towards a wide variety of retail developers and property owners who wish to recapitalize their existing portfolios, as well as retail buyers looking for additional equity for acquisitions.

In each case, Kimco's investments meet two requirements -- first, Kimco receives a significant profit participation in the property, and second, the property is of high quality and the type that Kimco would purchase for its own portfolio, if available. Our vision is to build a business of participating equity investments in numerous retail properties throughout North America.

Our merchant building business, KDI, was also busy during the quarter. Four new projects were started, bringing KDI's number of active projects to 28, comprising 6.8 million square feet of rentable space. During the quarter, KDI also sold portions of free ongoing development projects and a project in Phoenix, Arizona.

In our retailer services division, Kimco was retained in November to assist Penn Traffic in the sale of its Big Bear division. This division of Penn Traffic consists of 60 stores, and Kimco will receive fees in connection with the disposition of the real estate. During the quarter, retailer services also made several loans to retailers, secured primarily by owned and leased retail real estate.

Looking outside the U.S. during the quarter, we closed on our previously announced acquisition of a 145,000-square-foot grocery-anchored shopping center in Juarez, Mexico. And we also closed -- at long last -- our joint venture with GE Real Estate for retail properties in Mexico. The joint venture is a 50-50 partnership for the acquisition and development of retail properties in Mexico. As part of the joint venture closing, two previously acquired shopping centers, located in Saltillo and Monterrey, were transferred to the venture. Kimco and GE Real Estate will be work together to identify and underwrite retail opportunities in Mexico.

Overall, our pipeline of new business activity in Mexico is strong. And during the quarter, we approved three new grocery anchored development projects, two of which will be anchored by HEB, and one which will be anchored by Wal-Mart. The projects will be developed in Reynoso, San Luis, and Cancun.

In Canada, our RioCan joint venture continues to perform very well. The portfolio is 98 percent occupied, and currently contains 31 operating properties and three development properties comprising 7.2 million square feet. During the fourth quarter, the venture acquired an additional 98,000 square feet of rentable space adjacent to its shopping center in South Edmonton at a cost of approximately CAN$18.7 million. In addition, our RioCan venture is scheduled in April to close on a recently completed 200,000-square-foot grocery-anchored center in Toronto for approximately CAN$43.3 million. Also in Canada, we are scheduled to close in February on our second preferred equity transaction, an 87,000-square-foot shopping center in London, Ontario.

Now, I'd like to introduce Milton for his comments.

Thanks, Dave. I'd like to briefly review (ph) our strategy. Our business strategy is mandated by two commitments. The first commitment is to those shareholders, myself as well, who rely on a dividend as a source of current income. The second commitment is to all, including myself, who expect Kimco's shares to appreciate through entrepreneurial creation of value and profits.

If we were in the business of managing money, we would be marketing and managing two separate funds -- an income fund and a growth fund. But we're not in that business. And our view is that the best roadmap to meet these two commitments is to separate Kimco's assets and businesses into two baskets. The first basket is designed to meet the requirement that the dividend be sacrosanct. And this basket must contain investments and activities and a capital structure that can safely pay a growing dividend, even in very depressed and troubled times. We call it the defensive basket.

The second basket, which we call the opportunistic basket, is more entrepreneurial and filled with investments and businesses that are a bit more aggressive. It demands motivated, talented, and dedicated team players working in an entrepreneurial environment and culture. It has, by definition, a greater risk profile than the defensive basket. The second basket has to be monitored and diversified, so that risk is carefully measured and its activity structured and financed so our defensive basket is largely protected from any risks in the opportunistic basket.

Now, briefly -- the principal assets of each basket. The defensive basket has ownership interests enabling (ph) community centers, of which approximately 300 are unencumbered by mortgages. It has the Kimco Income REIT, which has interest in 70 properties. It has 50 percent interest in Canadian shopping centers. And it has a management business.

The principal businesses of the opportunistic basket are the development business, the preferred equity business, the Kimco retail opportunity fund with GE, retailer services in Kimco Select Investments.

Now to make this strategy work, it will all be in the execution. And by the way, I loved Mike Pappagallo's comment that said "sometimes doing what's smart business runs counter to juicing current income." We all know that safety means you must maintain loan debt. And we all know that loan debt inhibits short-term growth in earnings. And maintaining loan debt requires great discipline. When you have interest rates at historic lows, it's tempting to increase debt and invest money and it spreads it (ph) costs. Short-term, floating-rate debt is particularly seductive. Borrowing at floating-rate debts it's start with a one (ph), and investing a spread can increase earnings in the short-term, but not without substantial risks. We believe that short-term debt should be used only to finance assets that will become cash in the short-term.

Now one can never be absolutely sure about what is the right strategy. And nothing is perfect. But we like what we're doing. We have fun enjoying the business and the company that we love very much. And with that, we'd be happy to answer any questions you have.

(OPERATOR INSTRUCTIONS) Amy Delione (ph), Banc of America Securities.

I was wondering if you could give some color, Milton, on your view of the retail environment today? And then also, I might have missed it, but occupancy expectations for 2004?

Well, my view of the retail environment continues to be bleak, and I guess even a broken clock is right twice a day. Fundamentally, my view is that long-range retail depends on people working. And I don't see job growth. And I even -- I see that the job statistics do not take into account that higher-paying jobs are being lost and replaced by Wal-Mart and McDonald's. I think the retail environment will continue to be difficult.

And I think the second part was with respect to (inaudible) -- Mike, you want to --

Mike Flynn? I feel very confident that, again, we'll reach at least 92 percent by the end of 2004.

Okay, thanks. And Lee Schalop is on the line as well.

On that occupancy number -- the occupancy increases have been very impressive over the past twelve months. Could you talk about either specific tenants or categories of tenants that have been important drivers of the increase in occupancy?

Lee, because (ph) primarily a lot of depression in the occupancy as we all know is due to the Kmart and the Ames issues that transpired over 2001 and 2002 -- essentially, you were dealing with replacement of discounters. And in terms of those space considerations, generally the two primary types of tenants that went in to replace those big boxes were your standard 800-pound gorillas, like the Home Depots and the Kohl's and the Targets and the Wal-Marts. And then in other situations, they were able to be broken down into boxes with smaller footprints -- people such as Bed Bath and Beyond, Ross, Michael's, and those sort of tenants. And I think (indiscernible) for 50,000 feet up -- that's generally been the driver in the occupancy increases. It was all about replacing lost big box tenants.

Michael Bilerman (ph), Goldman Sachs.

I was wondering -- Dave, maybe you can comment on the operations and opportunities in Mexico, and maybe talk about your -- you had an existing relationship with G. Accion, and how that will work now that you have a new venture at GE?

Sure, I remain -- I think all of us at Kimco remain big proponents of the long-term future of Mexico and Mexico retail. Our venture with GE Capital made a lot of sense to us. And we agreed on it actually about 15 months ago. It's just taken a long time to finish the process of getting it done. But with GE having 50 real estate people on the ground in Mexico and having about a decade of experience with customers and retailers in Mexico, it made sense to team up with them. Our venture is a little different than our U.S. venture, in that the U.S. venture is an 80-20 venture, with GE putting in 80 percent of the equity. In Mexico, it will be 50-50. And the reason for that is we believe so much in the long-term prospects for properties and value appreciation, we wanted to put more of our own shareholders' capital invested in Mexico. So we negotiated with GE a 50-50 relationship. GE, quite frankly, wanted it more of an 80-20, and have inquired about that.

In terms of our relationship with G. Accion, which is one of a number of operating partner joint ventures we have, that any properties we do within the context of G. Accion will be offered to GE as part of the venture. So we anticipate for instance, the Juarez shopping center investment, where Kimco owns 90 percent now -- that will eventually go into the GE venture. And GE and Kimco will each own 45 percent, and G. Accion will own 10 percent. So in each case, we are going to have a local partner together with perhaps a capital partner like GE.

Okay. And then maybe you can comment on -- how much you're going to be investing in these new developments and what your forecasted yields are, and how you think about those on a risk-adjusted basis?

Well, a couple of things. One is we believe that you have to bet a little bit on the future of Mexican rents, because all leases are tied to cost of living increases, and because real rent growth has been so dramatic in Mexico, we believe there's more potential to grow the revenue line in Mexico. That said, we are looking at unleveraged returns on existing properties in the area of 12 to 13 percent and development returns somewhere in the area of 15 to 16 on an unlevered basis. And at the right time, we hope to leverage these properties probably to a 50 percent loan-to-value basis. But the long-term debt bet in Mexico is that the top line revenues will increase, either through inflation or real rent growth, and possibly the cap rates will come down as capital comes into Mexico.

Great. If we can just turned to the MART assets -- I guess you have about 630 million left after selling off the mall. Maybe you can give us some granular detail in terms of that 630 million -- how much is going to be parceled out? And when -- how much will be kept on to Kimco's books? And then how much is going to be sold outright?

Well, we can give you some rough numbers -- and we're still refining them a little bit. We anticipate somewhere between 18 and 19 properties will go into our GE Capital venture in the U.S. -- somewhere around 650 million. Michael Pappagallo can correct me if I'm wrong -- somewhere in that nature. Another eight properties will go into a commingled fund we're setting up -- probably around at least another couple of hundred million in that. In addition, some non-core property and some smaller properties are going to be put on the market, maybe in the area of $50 to $60 million over this year.

I think if you look between now and -- pick a date, September 30th of this year -- I think what will remain of the mid-Atlantic portfolio from core parent portfolio, I'll estimate about $100 million worth of the original 700. The rest will be either bids (ph) will be in one of the various coinvestment programs or be sold outright.

And how quickly do you foresee at least the GE and the commingled fund happening? Obviously, the longer you hold this given that you have a floating-rate debt, the more accretive it is?

I'm looking from the standpoint of an outside date to be sometime mid second quarter. I'd say that we are very -- moving very aggressively, even though it's counter to your point. Your point is very valid, the longer they stay on the books, the longer we'll earn that very large spread. But we are moving very aggressively to be consistent with the operating (ph) strategies to get (technical difficulty) venture. We have circled the financing structures on both the insurance company, institutional commingled funded that Dave had talked about, as well as the debt for the GE venture. The underwriting from the partners' perspective is virtually complete. So now you're really in the process of the innumerable, small details and structural and legal closing issues and the mortgage process. That will take some time.

Those are the things that are right now in the way of us getting these into the ventures. And that's why I'm trying to be as accurate as possible and say, hey, let's say at least another 60 days, which will get us (indiscernible) in the second quarter.

David Fick, Legg Mason.

I was wondering if you could give us a little bit of detail on what is happening with the same-store numbers? You were looking at the fourth quarter having fallen off a little bit compared to the whole year. Is that just the nature of the mix of what was being leased?

Very much so, and also the fact that looking at the individuals, looking at the quarterly items versus the full-year items, the Kmart -- actually (ph), the re-leasing of some of the Kmart on an annual basis is much more dramatic. When we're looking at fourth quarter over the fourth quarter, David, some of the original vacated and rejected leases (ph) from the first round of (indiscernible) Kmart elimination, it actually already some new pieces in it. So we didn't get as dramatic an effect in the fourth quarter on year-over-year same-site growth as we did looking at (indiscernible).

So as we get into '04, and I've thrown out this 3 percent number, it's just kind of reflective of the overwhelming majority of Kmart's issues (indiscernible) new leases or out right sold. Now I'm looking at what I think is, based on our 2004 budget plan, is more kind of conventional growth, for lack of a better term.

Okay. Turning to rent spreads on a non-Kmart deals, we're not seeing much leverage there at all. You know, the spreads are less than 1 percent. And that's looking like it's fairly consistent. Your portfolio has fairly low rents on average. And I'm wondering how you look -- and maybe this is a question for either David or Milton -- but how you look forward in terms of your leverage in the tenant demand environment, and what's going to happen in terms of essentially market rental rates on average against your lease rollovers?

Well, David, I think -- I do see -- my own view that we're in really for a deflationary period. And you see -- which explains why interest rates are where they are, in part. And I don't see that there will be substantial (indiscernible). And having said that, I know our portfolio. And I know where I think there are dramatically lower rents and there will be increases. So it goes by -- like real estate, you know? Location, location, location? It's very specific. And that's why when you get done, on balance, we're using a 3 percent number, which I think is a pretty good estimate. But David, I don't see that -- really where we are that you're going to have substantial growth in rents in the future.

You're looking at the numbers. You know, the average rents are pretty low. But just watching (ph) those and getting higher rents free those (ph) up current market -- considering the size and scope of our portfolio, it doesn't have a tremendous effect. Most of those lower rents aren't (technical difficulty). And they're enjoying those relatively low rents.

And we try to make as many as-is deals as possible.

Right, and so your CapEx numbers are lower than your peers. That makes sense.

CapEx in just renovating properties.

We won't pull any punches here, Dave. If you look at the portfolio in the aggregate in any one year, which may only represent 3 or 4 percent of the total portfolio that turns over -- we're not -- I don't foresee us having any sort of eye-popping rent growth numbers. We recognize that it's going to be more driven on the occupancy, more driven on better management of the centers, and more ancillary income tactics to enhance the overall net operating income, and not necessarily driven by pure top-line rent growth on the tenant side.

Last detailed question -- when management fee income was up $1.5 million -- I'm sure that's related to your various buckets. But can you give us a little bit of detail on what that was?

I think the bulk of the variance year over year was more driven by the KROP side of the (indiscernible) acquisition side -- those fees you get -- acquisition (indiscernible) as well as the ongoing management fees. I would quote roughly that of about the million and (indiscernible) probably 400,000 -- 350,000 to $400,000 due to increased acquisition fees. And the balance was due to what I call the more traditional -- more properties under management, more leasing commission, more (indiscernible) management (multiple speakers)

Then I guess the better question is -- the $4.5 million -- how should we grow that? Or what is a reasonable run rate?

Again, if you scope out -- I think the acquisition fees in total of that 4.5 million from this past quarter, I think I'd say that's somewhere about $800,000. Okay, so when you got that as a baseline, taking that off the top, it says (ph) that that's my kind of run-rate management fee on the existing portfolio. But using any acquisition scenario or even disposition scenario, in the case of GE, because (indiscernible) there are, and the increased when Dave's commingled gets off the ground, there will be certain fees and asset management fees and that. You've got to add to that total based on your expectations (technical difficulty) assumptions on (indiscernible) generation. I see it continuing to grow, but on a steady-state basis, you're looking at the fourth quarter number -- maybe at about 3.8 (technical difficulty) steady.

Won't there be a lump as you convert the mid-Atlantic assets over to JVs?

That quarter will be lumpy, yes.

Matt Ostrower, Morgan Stanley.

Several questions -- Mike, you refer to some supplemental disclosures that (indiscernible) help to explain the tax number? Can you refer me to that again? I wasn't clear where you were pointing to.

Page 4, supplemental disclosure underneath the net income for common shares. There's a line that says income lost subject to income taxes, fourth quarter -- it's the bracketed 3987.

Okay, thank you. And then on the mid-Atlantic transaction, I know you put out a press release saying you closed on October 1. Is that -- my numbers made it look like it didn't all come through at one time, potentially. Did all the net income related to that come through starting on that date?

Yes, sir. It did.

Okay, great. And the yield we've been using is something in the low 8's? Is that correct -- not, obviously, adjusted for any sales?

Right, I think the going cap rate is roughly about 8 3 -- something like that.

Okay, great. And then I guess just a question for Milton -- are you concerned at all about a short-term increase -- more than just sort of the seasonal year-end increase in bankruptcy, but is there a potential for a short-term increase in distress? It seems to me that there's been more development on the grocery side than we've seen in a while -- not building development, but just development in credit, like Winn-Dixie's announcement. I guess Ahold is going try to divest of some stuff. Dominic's (ph) wasn't, I guess, was not a failable (ph) transaction. Even Eckerd sounds like it's not going all that well. Are we starting to see the beginnings of more distress there? And if that's the case, why would you sort of still stay in the acquisitions market?

Well, the two are not mutually exclusive. You happen to be right on. We are increasing staff and increasing overhead in a distressed area rather dramatically, anticipating that there will be more activity. And our acquisitions -- really, the two are not mutually exclusive. We'll do acquisitions if they make sense. And our prognosis is not very exciting for acquisitions in light of the disconnect between the availability of money and the availability of returns. So that -- but we'll do them if they're there. But we do see increased activity in the distressed area.

And I mean I guess that makes sense from the standpoint of the credit side of the equation apparently getting worse. But aren't you also facing a lot more competition on the distress side?

Anytime you have anything that grows, you're going to have competition. And we expect to have great competition on everything we do.

Okay. I guess -- I mean just a last question -- it looks like TI and leasing commissions ticked up in the quarter. Did you address that already?

No, we did not. I think in some respects that the uptick in the fourth quarter reflects -- as in any business, in the fourth quarter, we move aggressively to sign kind of any opened leases and really make the year-end push to getting everything locked in. If you were working for Mike Flynn, you would really understand what I mean. And along with that will come the increased spend, the commission dollars that go with it. It's really more of a timing issue than anything else (ph). You look at the third quarter (inaudible) TI or the leasing. It was unusually low. And I think it's really timing more than anything else.

Paul Morgan, Friedman Billings Ramsey.

With the acquisition, the $600 million number that you threw out -- that is the gross volume? Is that correct?

Yes, that's right.

Second, with respect to occupancy -- your comment about going up to 92 percent by the end of the year -- I assume you'll take a tick back down when you place some of the MART assets into your JVs. So that's your parent occupancy (multiple speakers) section for the end of the year?

I would have considered the reduction in the occupancy percentage by taking the MART assets out until we can attain 92 independently of the MART properties.

Jeff Donnelly, Wachovia Securities.

A couple of questions. First, on Kmart -- setting aside for a moment the base rents you've achieved on those spaces versus what was in place, I was wondering if you could give us a sense for what expense recovery clauses are like for the new tenants versus what was in place? I guess what I'm aiming at is were you able to improve reimbursements on these replacement tenants, and we'll see better recoveries going forward? Or is it something less than that?

I would say it would be the same, Jeff. I mean most of the Kmart leases were (indiscernible) conventional net lease position -- some included group (ph), some excluded group (ph), capital items. But essentially, most all of the leases that we are signing on the new tenants base have similar net lease provisions.

Question for Milton. I know you won't name names, but I was wondering in what segments of the retail business do you expect maybe over the next two or three years that you will see more activity for your retailer solutions department? For instance, do you think it'll be in big boxes or in-line mall space, grocery or apparel? I would suspect that there will undoubtedly be stress in the retailing industry. I'm just trying to understand if it will fit in segments that are most suitable for your capabilities?

Let me put another way -- I expect from what we are seeing the area that will have the least distress will probably be in home furnishings, anything related to the home -- home improvement, the Bed Baths, etc. -- that type will have less. Everything else will depend on the competitive position -- apparel, which you taking a deflation scenario, what's happening in China (indiscernible) We all know about supermarkets. So it will really be a time when companies with weak balance sheets will not have the staying power. It's going to be broad. And I really don't -- it would be very difficult to identify which ones.

Okay. And then I guess just two last questions for Dave. How did the recent Winn-Dixie announcements impact pricing and marketability of their naming Winn-Dixie anchor properties in the Kimsouth portfolio? And I guess more broadly, is there an opportunity for you guys around this somewhat ailing grocer maybe to make a preemptive play for their real estate?

Well, looking at your first question, clearly, it is going to have an impact on the remaining properties that we haven't sold. Lenders are pulling back a little bit on exactly how much debt they'll put on a Winn-Dixie-anchored center. So we anticipate the prices to soften a little bit.

That said, we have quite a nice cushion in terms of the prices we'd been getting and our budgeted prices to achieve the returns we've budgeted. So we don't anticipate that to have a material impact on our ability to dispose of those properties. And we continue to have our opportunistic hat on at all times in looking at properties that may have Winn-Dixies that we think could be replaced at higher rents or other things. So we continue to look at opportunities where we find them.

Okay, just the last question was on the mezzanine finance business. This is a segment of the industry that continues to heat up as valuations rise. And the growth in your business has been pretty strong. And it's accelerating on a sequential basis upwards of 20 percent. I recognize it's still small relative to the overall company. But what are your expectations for this business in '04? What sort of competitive advantages do you have versus other traditional providers? And I guess what are you doing to highlight that capability this year?

Well, we are pleased that it is getting some momentum. But you're also right to note that it's still relatively small. And the individual investments and the individual bets, if you will, are relatively small. What we're trying to market and what we try to sell to perspective customers is the fact that Kimco brings more than just capital to the table. We do have an expertise in leasing. And we do have an expertise in helping to underwrite properties to be acquired. We can help somebody assess whether retailers are happy in this space, whether they're going to expand, and so forth. So we bring to the table more than just capital. And we also bring to the table 45 years or so of relationships with all sorts of people in the industry.

So we're now getting our fair share. And what's particularly encouraging to some of us is that its multiple and repeat business with some of the same people. In at least one instance, we've done four deals with one individual. So it's beginning to build. And we like it.

Ross Nussbaum, Smith Barney.

I'm here with Jon Litt. First question, probably for Mike -- the $600 million of gross acquisitions -- obviously, your share of that's going to be lower. Do you have a ballpark of what your pro rata share is going to be?

I think the way we've kind of mapped it out in very broad terms -- probably half of that we would look for -- I'll call it the GE (ph) -- or the 20 percent bucket, if that's kind of the right phrase. And the other is 300 is going to be scattered throughout -- David mentioned a couple of items on the RioCan side, the potential of perhaps additional funds, (indiscernible) investment funds (indiscernible) RioCan would be 50 percent. There would be another 50 percent bucket. And then maybe 50 to 100 million in the core. So half to (ph) the 20 percent level, and then I guess if you blended the other 300, it may come to (indiscernible) slightly higher. That's the best that I could kind of put on the chalkboard at this point.

Okay, that's helpful. And you mentioned that there is going to be disposition activity outside of what's going on at mid-Atlantic. Do you have what's in your guidance in terms of disposition?

At this point, I put a preliminary number of $100 million. Right now, we organizationally are undergoing a top-to-bottom review of all of the properties that (indiscernible) candidate for this market (indiscernible) prospect, etc. So that number may change over time. But that's a number I put on the floor at least in developing know the '04 purchase plan.

And that number obviously excludes the properties that are going to get transferred over to the JVs for March?

Yes, sir. Mid-Atlantic I've just kind of culled out separately, and recognized the net effect of the mid-Atlantic transfers to the programs will simply reduce the existing indebtedness aspect on our balance sheet (indiscernible) line of credit (indiscernible) purchase.

So if my math is right, you may end up being a net seller this year?

Conceivably, particularly in the parent portfolio -- conceivably, we will be a net seller.

Okay. This is the either for Dave or for Mike -- the Kimsouth-Lazare joint venture -- you sold 118 million of assets in 2003. Can you tell us what the gain was versus your allocated purchase price for those assets?

I'd like to correct it -- some of that was sold at the end of '02. So when Mike responds on the gain side, it really covers two years, probably.

I would say that on a pretax basis, our portion of Kimsouth -- gains probably in the neighborhood of -- I think it was about $11 or $12 million. The other thing to recognize, Ross -- and that's income from other investment line (ph). The thing to recognize there, Ross -- that is tax-affected. So you need to take the 40 (ph) percent off of that (indiscernible) You may be aware -- Kimsouth -- well, the entity itself is established under one of our tax (indiscernible) subsidiaries and (indiscernible) for obvious reasons that this is a portfolio that requires inventory to be disposed of immediately, and we cannot run afoul of the dealer (ph) rules. So we grow (ph) and we run that through the (indiscernible).

If that's the case, it sounds like the pretax returns are in the 10-percent neighborhood, and the after-tax would be obviously lower than that. Has this met your expectations in terms of the returns you're getting?

I don't understand that.

Yes, well, remember that we're talking about our share. And Lazare actually owns more than we do. So the gross gains have been a lot bigger.

Much larger returns than that on the whole.

Okay. So the gains that you described as your share --

Our share, which is less than 50 -- it's in the 40s.

Final question -- just clarifying on the Frank's nursery. What was your original investment there?

In terms of the stock portion of the investment, it was on a gross basis about $8 million. Recognize, Ross, that when we acquired it -- if you'll recall, we acquired Frank's bond in a distressed market. So we bought them at a fraction of their face. And they did file (indiscernible). They did emerge, and we received stock in exchange for those bonds. This is exclusive of the secured financing we have with them.

From a valuation perspective, at the time, there were no issues. The only disadvantage -- one disadvantage in getting stock versus holding onto debt securities is that, considering our ownership interest in excess of 20 percent, we now of course appropriately use the equity method of accounting. And Frank's, like many marginal retailers, takes net income -- net losses in its GAAP financials. So essentially, what has happened over time is on a noncash or book basis, we've reduced that investment/exposure down to nothing.

So from our perspective, it becomes in any respect -- I don't want to call it a hope (ph) certificate. But at this point we've got nowhere to go but up. And the ultimate -- hope for a plan (ph) for a turnaround at Frank's.

So if I understand correctly, you may actually continue to report a loss subject to income taxes in '04 to the extent that Frank's has negative net income?

No, our losses are limited to our assessment (ph) of the equity method of accounting. Therefore, there will be no further charges resulting from Frank's activities. The only time you would (ph) reduce that is under (indiscernible), is when we would -- if you have explicit or continuing obligations and certainly (indiscernible) shareholder exposure (inaudible) opportunities (indiscernible) at this point.

Enrique, we have time for one more question.

Michael Mueller, J.P. Morgan.

A couple of questions -- on the development profits, given the size of the portfolio, how it's picked up over the past year or so, as well as what's been completed -- you said you're still looking for a relatively flat year-over-year development process?

Yes, I think that is there. One of the things that I factor into that, Mike, is -- I'll just use the example of Santee (ph), which is a developed (indiscernible) in my formal remarks -- but there was one where we were in partnership with Revista (ph), and we elected slightly (ph) to forego the sale of that assets, which, gosh, I think may have generated -- could have generated -- I'm going to guess -- net of tax, maybe 8- or 9-tenths a share. But we elected with that -- because that property was such an excellent property that we were able to finance entire property and get out all of our money and then some and still have a residual flow to the company of about $1 million a year for us.

So that was a strategic decision that was made -- even though it was our merchant (ph) building portfolio -- and you know, our basic premise is merchant building is to build and sell -- there are going to be situations where we will think it's best in the long-term interest in the company and the shareholder value to perhaps finance out a number (ph) to keep the residual cash flow. There maybe -- I'm not hinting at it, but there maybe similar situations in '04. So what I've done from a financial planning perspective is to put the gains on a merchant building sales at rough parity -- maybe a notch higher in '04, and for lack of a better term, I'll have (indiscernible) see what develops. But with that's my thinking behind why I made that point about the number.

Okay. And just for David real quick -- the value of 18 or 19 properties you said for MART that being attributed to GE -- what was that number again?

I'm sorry, go ahead?

18 to 19 MART properties being contributed to GE?

(indiscernible) about 250 million.

Thank you all for joining us, and we look forward to speaking with you again next quarter.

Thank you, and thank you, callers. This does conclude today's conference. You may disconnect your lines at this time. And have a pleasant day.