Kimco Realty Corp (KIM) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Kimco Corporation second-quarter Earnings Conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Vice President of Investor Relations Mr. Scott Onufrey. Sir, you may begin.

Thank you, Holly. Thank you all for joining us for Kimco's second-quarter Earnings Conference call. First, I would like to read for 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 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.

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 website.

Presenting this morning are Mike Pappagallo, our CFO; Dave Henry, our Chief Investment Officer and Vice Chairman; 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.

Thank you, Scott. Good morning, all. We are pleased to report another quarter of strong operating results, carrying over the positive momentum established in the first three months of the year. Reported FFO per share of 87 cents hit the mark on the consensus estimate. And the absolute numbers show an FFO per-share rise of almost 21%. But we acknowledge that last year's numbers were revised to include a charge for the elimination of issuance costs associated with the preferred stock series that we redeemed. Even adjusting for that charge, per-share results grew by over 10%.

At this point in the year, we feel confident that we can achieve the current $3.53 per-share First Call consensus, which is a penny higher than the high end of our previously indicated guidance range. The activities this past quarter were dominated by the substantial placement of assets into the various institutional co-investment programs, as has been our objective stated over the past couple of conference calls.

In total, 29 assets were moved from the Mid Atlantic Realty Portfolio as well as other recently acquired assets, distributed among the GE program, newly created Kimco Income Fund, and transactions with other investment partners. Along with those transfers came the de-leveraging of the balance sheet, which has been temporarily increased primarily due to the Mid Atlantic Acquisition Bridge facility.

Overall debt was reduced by $424 million, excluding the construction financing, with the result an increase in debt service and fixed charge coverages to 4.1 and 3.8 times, respectively.

Also, this morning, we priced a $100 million two-year floater at 20 over LIBOR to replace a similar floating rate bond that is maturing next week. Note that other than what is outstanding on our credit facility and construction loans at any one time, the permanent debt stack is 94% fixed and thus resistant to increases in short-term rates.

Notwithstanding the movement out, there was a healthy level of new business moving in, but I will let Dave expand upon those activities in a few moments. Probably the most encouraging development during the quarter was the increase in the core occupancy levels by an additional 50 basis points to 92.4%. We had expected a leveling off of the occupancy growth primarily due to the aforementioned transfers of assets out of the parent and into the joint venture program. However, the combination of new acquisitions, the disposal of some underperforming property, and the effect of re-development and leasing activity helped to grow the parent occupancy levels. Same-site occupancy, which covers 449 properties in the core, increased .2 of 1 percent to 92.4% as well from March.

Quarterly net operating income grew by $13 million or over 15% to 97.4 million. The increase is due primarily to acquisition activity over the past 12 months accounting for about $10 million of the increase, with the balance representing same-site growth of $3 million or 4%.

With the transfer of the properties into the co-investment programs, earnings growth was experienced in that category as well, both from the income associated with our minority equity positions, and the assortment of fees for acquiring, leasing, and managing the property. Total FFO contribution from our management activities and the earning from equity in these programs is $25.7 million, which is 7 million or 37% higher than last year. Outside of the ownership and management of shopping centers, the mix of different business activities remains a solid contributor to overall FFO levels. Our preferred equity team continues to build its book of business and generated a $1.5 million increase in earnings versus the prior year quarter.

Real estate sales in our Blue Ridge holdings, as well as the sale of the final property in the Montgomery Ward portfolio, added earnings and offset lower financing and investment income for the quarter; as prior year levels included participation upsides on the loan to Aims (ph), to facilitate its liquidation, as well as gains on sales of mortgage bonds and securities. On the merchant building side, pre-tax gains at $3.2 million were recorded primarily from the sale of phase one of a project in Birmingham and a buy-out of KDI's interest in another project from the partner.

The Birmingham project includes an additional earn-out based upon final lease-up of that phase, which is under way; and therefore, we expect the balance of the gains to be captured in subsequent quarters. Looking ahead, we have set forth some preliminary guidance for 2005. Although this is three months earlier than we customarily provide numbers, we thought it important to address the facts that the street's current thinking on our '05 growth rate is slightly less than the low end of our thinking of the growth. An FFO per share range of between $3.75 and $3.82 is our view at this point. These levels, assume aggregate new business generation at levels similar to this year with a shift probably to more deals in Mexico, continued merchant building gain, and finalization of the Kimsouth asset sales program.

The parent operating portfolio will benefit for some major re-developments coming onstream, including further activity at the Westlake Shopping Center, a Costco-anchored center in Chula Vista, ground-up (ph) projects in Maryland and Delaware that were part of our Mid Atlantic Realty Trust acquisition, and an overhaul of a former K-Mart center outside Chicago.

We also factored in continued origination of more creative assignments and an investment opportunity, including offering financing and disposition services to retailers and purchase of complex or mispriced debt or equity instruments supported by the underlying real estate values.

And with that, I will turn it over to Dave to talk about our our investment activity for the quarter.

Thanks, Mike. Good morning. I am pleased to report that Kimco had a terrific quarter in terms of new business activity. In the U.S., we successfully placed an additional 26 mid-Atlantic properties in various co-investment partnerships and joint ventures. 16 properties totaling 179 million were transferred to our joint venture with GE Real Estate. In addition, eight other mid-Atlantic properties totaling 158 million were transferred to the Kimco Income Fund, KIF. Our new commingled fund consists of five insurance companies and a California fund investor. In total, KIF consists of 12 properties aggregating 269 million with average property leverage of 65%.

Finally, two other mid-Atlantic properties comprising $33 million were transferred to our new joint venture with LaSalle Investment Management. Three additional mid-Atlantic properties will be transferred to the LaSalle venture in the third quarter.

In addition to the mid-Atlantic properties, Kimco also closed the joint venture with DRA Advisors, a large pension fund advisor, on the previously purchased house and marketplace property. The 662,000 square-foot Target-anchored shopping center in Towson, Maryland. The Towson property represents the second property joint venture closed with DRA Advisors.

Looking at U.S. acquisitions, Kimco purchased six shopping centers aggregating 903,000 square feet and $92.4 million. The new properties purchased are located in Madison, Tennessee; Manchester, Vermont; Houston, Texas; Roanoke, Virginia; Tampa, Florida; and Tempe, Arizona. Looking at our U.S. joint ventures, the GE Real Estate venture, as of today, stands at 38 properties comprising 5.4 million square feet acquired at a cost of $623 million. Three other properties are targeted to be added to the venture during the third quarter. The portfolio itself continues to perform very well with occupancy at 95%.

Our joint venture with New York Common, and several other investors here, sold one property during the quarter, and now contain 69 properties and 14.4 million square feet with occupancy at 97%. In our Kimsouth joint venture with Lazar on the former Conover Property Trust Portfolio, four properties were sold during the quarter and one property was sold subsequent the quarter end. The recent sales totaled $46.5 million.

To date, the Kimsouth venture has sold 24 properties totaling 2.3 million square feet at an aggregate price of 178 million. The venture anticipates selling at least nine other properties in 2004, with the remaining six targeted at 2005. Our Preferred Equity business continues to build momentum, with seven additional transactions closed since our last conference call. The program now contains investments in 40 properties with an aggregate investment of $120 million. Our Merchant Building business, KDI, was also active during the quarter. KDI completed sales of two shopping centers and sold portions of ten additional properties at an aggregate price of 47.4 million.

In addition, KDI invested approximately 43.3 million in its current development portfolio of 24 shopping center properties during the quarter and also moved forward on three new transactions: a 500,000 square-foot Target-anchored shopping center in Burlington, North Carolina; a 320,000 square-foot project in Central Islip, Long Island; and a 90-acre auto mall project in Chandler, Arizona.

Kimco Select, our opportunistic investment business, was also active during the quarter. Together with Foothill Capital, Kimco Select provided 22 million of real estate financing. In connection with the acquisition of Chef Solutions (ph), a food service business which was recently sold by Lufthansa to Questor, an investment fund affiliated with Alex Partners (ph). Kimco Select also purchased approximately $4 million from existing K-Mart bond, secured by eight properties.

Kimco Exchange, our 1031 brokerage business, has also made a solid contribution this year. To date, the business has closed 19 transaction, aggregating more that $100 million. The 1031 market continues to expand and the the Kimco Exchange business represents an attractive growth opportunity.

Looking outside the U.S., our RioCan venture in Canada closed on the previously announced Clarkson Crossing Shopping Center, 196,000 square-foot property located in greater Toronto, and commenced construction on 169,000 square-foot expansion of our Sudberry Shopping Centre.

Also, I'm pleased to announce that during the quarter, RioCan and Kimco agreed to jointly market a new preferred equity program for retail properties in Canada. This expansion of the RioCan Joint Venture is initially targeted to invest 100 million Canadian in selected preferred equity opportunities. The program continues our close and successful relationship with Canada's largest REIT and represents an excellent new opportunity to invest in Canadian retail properties. The RioCan portfolio itself continues to perform very well, with occupancy at 98% on a total portfolio of 7.6 million square feet and 34 properties.

Also, within Canada, we closed onan second preferred equity investment with Sterling Center Corp on a property in London, Ontario; and we participated in a recapitalization of the Company's convertible preferred offering. We also approved a new joint venture with Sandalwood Management to acquire a portfolio of enclosed grocery and anchored shopping centers in Quebec.

Looking south of the border, Mexico, Kimco closed on three new development projects during the quarter, and we are in the closing process on three additional transactions. In total, Kimco has approved nine investments in Mexico, comprising three existing properties and six development properties, totaling 2.1 million square feet. All of the properties are grocery-anchored shopping centers, with HEB (ph) in four properties, Wall-mart in four properties, and Soriano, a large Mexican grocery store chain, in one property. The total project cost of the nine approved transactions is 155.5 million, with Kimco's investment expected to be approximately 76.1 million. GE Real Estate and our local operating partners are anticipated to invest the remaining 79.4 million.

It is encouraging to note that the nine projects involve nine different markets and four different regional operating partners. In addition, we have an excellent pipeline of new investment opportunity, and the overall market for retail development remains very strong, with U.S. big-box (ph) retailers expanding aggressively.

Now, I would like to introduce Milton for his comments.

Thanks, David. I will be very brief.

I would like to review the rationale for one aspect of our business plan. In high school, in economics 101, we learned that price is a function of supply and demand. The demand for simple income-producing fee-owned real estate is at an all-time high. Our cost of capital is such that we cannot join in the frenzy and buy in volume at these present prices for our own account. But there are many forms of ownership in real estate other than fee-simple interests. They are more complex; and as a consequence, the demand is less. We don't mind the complexity if the price is right. And let me give some examples.

Our Preferred Equity business, which is now $120 million and growing rapidly, consists of interest in real estate that are loans with participation in the growth of cash flow and in the value of the real estate. We only invest in properties that we would like to own but are not for sale. We do not own title to real estate; we do not have the benefit of depreciation; and we don't manage the property. But we do own an economic interest in the cash flow growth in the real estate. And that is tantamount to an ownership in the real estate. Now, these transactions are not easy to execute. The documentation is complex, and the number of interested investors as a consequence is less; and consequently, the demand is less.

Similarly, we have a management business with kickers and other interests in the real estate [managers]. Another example of ownership that is not fee-simple is our purchase of 60% of the shares of Big Bowl of the Blue Ridge, a public company which owns 20,000 acre of land in the Poconos, two ski slopes, and some shopping centers. Now, one of the consequences of this approach is that our equity in the real estate is more difficult to value by the methodology used by almost all of the analysts community.

Now, since we believe that our value is significantly higher than the estimate of net asset value currently used by the analytical community, one of our challenges is to be able to have available for our investors all of the valuation metrics for over 700 various real estate interests. It may be a very good time to work on this process since I believe the fair value accounting is coming and would be good to prepare for it.

Just one more comment on NAV (ph). I call your attention to page 21 of our supplemental financial information. You will note that now, our top 10 -- of our top-10 tenants, the number one is Home Depot. And properties under long-term leases to Home Depot command a very low cap rate.

Well, it is a very exciting time for Kimco. We continue to increase our cash flow per share and to reduce our debt ratio. The result will be a safe, growing dividend. Most importantly, it is energizing to watch our management team that is so passionate about its business.

And now, we would be pleased to take any questions.

Holly, we will be happy to take questions at this time.

Thank you, sir. The floor is now open for questions. If you do have a question, please press star, 1on your touch-tone phone. If at any point your questions have been answered, you may remove yourself from the queue by pressing the pound key. We do ask that when you pose your question that you please pick up the handset to provide optimum sound quality. Once again that is star, 1 to ask a question.

Our first question is coming from Ross Nussbaum of Banc of America Securities.

Hi, good morning, everyone. I'm here with Amy deLone. A question on KDI. I can see that you sold just under 100 million of assets year-to-date. And the year-to-date gains on the income statement after tax look to be just under 6 million, which would imply about a 6% return. And that just seems a little light to me. What am I missing in that analysis?

There are probably two things which affect your thinking. Well, first, you may look at it on an after-tax basis. We generally look at it on a pre-tax basis. But putting that aside, I think two of the drivers: in one case, we sold actually a phase two of a project that we were happy -- we were happy as part of the overall acquisition to get out of before it was developed, and we sold it to a third party for just under $5 million. There was no gain. We essentially just recovered our costs, and it will be used to improve the economics of the first phase.

Also, one other project was sold that we actually were bought out of a project, and we took about a million dollars worth of profit and recovered our full cost. And that certainly wasn't, you know, the traditional percentages that we normally get on a full development. But we just felt that that was the best course of action. And we usually sell a variety of pads as well. That as a general -- as a general practice, if there still is a lot of development to go in the center, we won't look to get -- you know, we won't look to recognize gains on those pad sales. So it is a combination of those factor, Ross.

And the other point that I had made about in the Birmingham project where we had sold it, and contractually the price was set but there was still some lease-out to go, and when that is completed under the terms of the contract, we will bring in the rest of the gain, which I expect to be $750,000 to $1 million.

Okay. Thanks. That's helpful. Dave, a question for you. In terms of the transfers from MART to the JVs, what was the cap rate used in those transfers?

It was based on our actual cost. And it depends on the different properties. But in the low 8s, high 7s I think.

Okay. So you didn't flip these for a profit and book any profit?

No, sir. Our actual cost.

And what do you have right now in terms of an acquisition pipeline for the second half of the year? Should we expect similar activity to the first half?

Well, right now under contract -- well, we're almost at the stage of contract and it's about 80 -- $75 to $85 million worth of properties. That's kind of the closest to the pin that we're looking at, at least another $100-plus million that are in various stages of due diligence. And that's just [INAUDIBLE] -- that's just fee-simple purchase of properties. We have no shortage of opportunities in the Preferred Equity pipeline. We've got, as Dave pointed out, a variety of Mexico opportunities. And we continue to find some new opportunities on the Canadian side as well. And even Ray Edwards' business of opportunistic purchases and retailer financing, we've got a few things that we've got out to bid right now.

Mike, your ownership stake in those assets wouldn't be 100%, right? Most of those would go into the funds?

With respect to those properties? Yeah, as a general proposition, Ross, we usually close them into the parent. There is some short-term loads that come into the parent account, but ultimately most projects will find their ways into one of the ventures. The only exception might be, as we said in the past, if there is a re-development opportunity in a particular location, or to the extent that we are selling properties out of the core, some of the underperformers and so on, some of these properties are very old, we do have tax, tax gains; and we might look to buy a property into the core to replenish the flow and to execute a 1031 exchange. So every transaction is a little different. But based on its characteristics, most of them will find their way into one of the funds.

Thank you.

Thank you. Our next question is coming from Michael Bilerman of Goldman,Sachs.

Good morning, Carrie Callahan is here as well. I was wondering if you can talk a little bit about the Preferred Equity business and maybe give us a little bit of flavor for maybe some of the investments that you have closed out and what the returns have been.

Preferred Equity business essentially is a way for us to participate in assets, shopping centers primarily, that we would love to own, but for various reason, are not available to us. For instance, owners may not want to sell for tax reasons, or these may be opportunities that have been tied up by others, and they're simply looking for ways to get financing to acquire properties. So we think it is a natural extension of our ability to put out joint venture capital, our ability to buy properties, and now, also to finance them. So the two core principles of the Preferred Equity program are, one, they are properties that we would otherwise love to have in our own portfolio or a venture of ours; and secondly, that we get true equity upside in the transaction. We will not do deals just for straight interest rates or fee. All of these deals have a kicker of some fashion that allows us to participate in the cash flow and the back end.

As we mentioned, we're now up to about 40, 40 properties, and these include properties ranging from Canada to Mexico that we've done on a Preferred Equity basis. To date, three properties have been paid off. And all of the IRRs have been in the area of 20% or better. So obviously, it has been a great time, with cap rates declining, so I'm not sure that's the final test of the program. But the initial results have been excellent. And as I said, it is so complementary to what we do for a living, and for our people, when they're calling on property owners, to be able to offer participating financing as well as acquisition or development, it is good for your business.

And maybe we can just spend a moment on Sterling Center Corp. You know, this is a JV with an asset you started last summer, and then I think you committed almost 20 million bucks to the company to buy out some convertible debentures; and you just stepped up activity with another two assets. What is the strategy you have with Sterling? How has that relationship evolved? What opportunities do you see going forward? And you know, maybe you can comment as to what your investment is currently in the company, both from an equity and a debt perspective?

Sure. Well, the Sterling is -- it is an interesting company because it is located both in Canada and in the U.S. They now manage and own over 20 million square feet of retail, primarily in Canada. We met with them starting several years ago, and have looked at a number of transactions. We have now completed two Preferred Equity deals on very attractive opportunity -- shopping center opportunities in Canada, and we just closed a third Preferred Equity deal on a re-development project in Miami, Florida. Quite a large one. We also have a pending joint venture on a large land parcel they own in San Antonio, Texas, that we hope to develop together. We like the company; we like the management. They have a long history -- a history in Canada. They have found some very attractive opportunities on a negotiated basis, instead of just bidding on an auction basis. So -- and they have invited us into these transactions.

We helped them recapitalize a convertible preferred issue. I think our total outstanding commitment is 20 million, but we are participating that -- with some others. I think our total investment to date is 4 or 5 million, something like that, U.S. And we anticipate doing other things with Sterling. We value them as a partner and customer.

And then does your new, I guess, RioCan venture with the Preferred, is that exclusive? Or can you do Preferred with Sterling in Canada and with RioCan?

We can -- what we have done is offer RioCan opportunities to invest in our Preferred Equity transactions to date in Canada. They chose not to do the two with Sterling. One, because they had a shopping center right across the street that they were managing, and they thought it would be a conflict; and the second one was really quite a very small opportunity. And they thought that was too small. And actually, it has been an education process with RioCan to get them as excited as we have about Preferred Equity. And as I mentioned, I'm very happy to report they are now fully embracing the concept of offering a Preferred Equity in Canada and we are going to do it together and promote it widely and hopefully it will lead to some very attractive opportunities. Riocan Management and Sterling Management know each other quite well and they're friends, so we don't see any real conflict.

And just quickly for Mike, on the management and other fee income, the 7 million, how much of that -- can you just break it out, how much did you earn from just parceling up some of the MART assets, and how much of is ongoing management of fee income, and maybe did you have any special advisory work that may have boosted up that number?

We didn't have any special advisory work of any significance this quarter on the $7 million number. I would say that the acquisition fee component this quarter, as it related to all of the transfers in, was probably in the neighborhood of $2.5 to $3 million, with the balance being what I guess you would call the more typical ongoing fees for management and leasing activities.

Okay. Thank you very much.

Okay.

Thank you. Our next question is coming from Matthew Ostrower of Morgan Stanley.

Good morning. Just more of a big-picture question on guidance. Given that you sort of hit in the quarter and also given, you know, at least the last couple couple of quarter, Milton, you seem to be ringing a somewhat more cautious tone. Can you give a sense -- it sounds like you've got some more visibility for numbers, and can you give us a sense for where that visibility is coming from specifically?

Matt, let me take that. When we provided the guidance last go-around, I think we had a range of like 347 to 352, and someone had asked the question, you know, considering where you were, you know, what was going to make you go to the low end of the guidance. And really my response was that as it related to some of the more transactional activities, you know, selling properties, completing acquisitions that were in the pipeline [INAUDIBLE], for whatever reason they would fall out. And just from my vantage point today, as I think about the remaining sales to be completed, some of the execution on some of the debt capital that we have or, you know, the debt instruments that we have that will be monetizing and so on, I just feel that the risk is relatively low, that would be at the low end. So when I looked at the 352, which is my high end, and another penny to the street, you know, from my perspective, we were pretty much there. So it really was additional time frame of getting comfort that some of the things that potentially could drop out really aren't going to drop out, or that we've got other alternatives in the event that they do.

And does that go for 2005 guidance as well? Or is that something else?

As I suggested in my comment, generally I like to wait another quarter when we complete our annual round-up budgeting process for each of the properties and so on. Notwithstanding with that, I think I would be disingenuous if I said we didn't have thoughts about 2005. And when we think about -- when we roll kind of our own top-down analysis of where we think we're going to be, and we use similar acquisition assumptions, and we see the pipeline in our development program and what we expect from them and the things like the Kimsouth asset disposition program and some of the things that are in the hopper, you know, we're looking at it and we're saying, there is still a relatively wide range in what we've provided, 8-plus -- 8, 9 cents, but even the low end of what we're thinking was still higher than where the street was at. And I just wanted to at least, if nothing else, to clarify that our thinking is higher than maybe what -- maybe built in to some of the First Call numbers. And as we move towards the end of this year and closer to '05, I hope to provide more specificity in terms of the how. But I just felt uncomfortable that we were thinking more than maybe what the market was thinking, and I just wanted to close that gap to a certain extent.

And specifically, on '05, I know you don't want to provide too much specifics, but did you mention KDI and gains from that as being part of your guidance. Would you expect the gains in '05 from that business to be higher than they are in '04 or do we start to see those gains sort of level out over time?

The way Jerry and I have kind of thought through the business, we expect them to be in rough proximity to where they will be this year. We're thinking $17 to $18 million of gains this year, on the development side, and probably a similar amount next year, with -- you know, probably a notch higher. But again, there is variability in that number, but we don't -- I don't necessarily see a significant variation one way or the other at this point.

Okay. And then I guess just a couple of, I guess, more transaction questions. There has been so much written in the press recently about Mervyn's and your company's potential involvement. I guess, question one: I assume you can't give any, you know, guidance as to whether you're involved or not or any kind of negotiations; but I would love some kind of comment if you can. And then more specifically, one of the questions I'm getting a lot anyway is whether Kimco would actually be involved in actual operations of a retailer, whether it is Mervyn's or somebody else; and I just wanted to get your policy on that.

Yeah, I think, you had kind of figured it out that we really can't comment on anything of that nature. So I would rather just, you know, not even bring up the comment or bring up the discussion at this point.

Can you comment on, in more general terms, as to whether you would be willing to be involved in operations of a retailer?

No, I would rather not comment on that.

And then finally, just can you comment on whether any of your locations have been involved in these -- in the K-Mart dispositions recently?

Well, it is not official. Our guess is that two of our K-Marts will probably be acquired by either Home Depot or Sears. That's a guess.

Okay. Thank you.

Thank you. Our next question is coming from Jay Leupp of RBC Capital Markets.

Hi. Jay Leupp with David Ronco. Could you give us just a little bit of comparison between or among the cap rates that you're seeing on the acquisitions that you closed this quarter in the U.S. compared to what you're seeing in both Canada and Mexico? And also maybe a similar analysis of the differential in occupancy rates in those portfolios and the reasons for that?

Sure, just -- and this is very, very general, but in my opinion, cap rates in Canada are still slightly higher than the U.S., but the gap has narrowed greatly and it is maybe 20 basis points or 25 basis points now. Good shopping centers in Canada are now trading in the high 7s. And that is, you know, kind of where we see cap rates in the U.S. now, for good quality properties, in the mid to low 7s in some cases. So I think Canada remains a very attractive market for us. The occupancies in general are higher. Partly because there's just not as much retail in Canada per capita as the U.S., and retailing is very strong there. So in general, we see occupancies a little bit higher in the centers that we go after, and cap rates just a tiny bit higher, as opposed to two years ago, when there was a good 100, 150 basis points differential in cap rate, and it was a wonderful time for us to be acquiring in Canada. It has really narrowed quite a bit now. And capital has flowed north of the border as well.

In Mexico, it is just a whole different game. You have to remember, when you're investing peso, your cost of the pesos is expensive unless you're taking a huge risk in terms of a mismatch. But in general, cap rates for existing properties in Mexico are in the 12-ish range; and we can develop, we think, somewhere between 13 and 15, depending on the anchor tenants that we're attracting. But the bet in Mexico is a longer-term bet, where the gross income increases due to real rent growth and annual CPI adjustments in Mexico. So we're hoping that we grow the top line in our Mexico investments while the cap rate has an opportunity to go down, as capital flows into Mexico. So I would say Mexico is very different than Canada and the U.S.

Okay. And just one quick follow-up. Westlake Shopping Center here in San Francisco, we were out to see the property recently; looks like you've got a lot of moving parts there. Could you give us just a little bit more color on the progress of the repositioning?

Hi, this is Jeff Olsen. You know, we made a lot of progress recently. We just signed a lease with Home Depot, who will be doing their second two-story concept in the country, about 100,000 square feet where the JC Penney building currently resides. At this point we're also building out space for Trader Joe's, and then we signed a lease for Cost Plus, who will go on top of the Trader Joe's [INAUDIBLE]. So we're very optimistic. We're putting about $30 million into the property. And so far, everything is meeting our hurdles.

Thank you.

Thank you. Our next question is coming from Ian Weissman of UBS.man of UBS.

Yes, good morning.

Yes, good morning, how are you?

I was wondering if you could possibly comment on your recent bid to buy the Chi-Chi's Restaurant chain.

Ray is here.

Chi-Chi's Restaurant chain, our bid is for a designation right, similar to what we did with K-Mart in 2002 and with Montgomery Wards in 2001. We're not looking to operate the Chi-Chi's chain. If our bid is successful, I think the Company will be winding down their operations, and we would be selling the properties free and clear of any operator.

All right. Given that most of the -- I think most of the locations are mall-based and given, you know, the required buildout of a restaurant, would you be -- is it a must that the replacement tenant is a restaurant chain?

No, I mean they -- well, they're mall-based. They are, you know, pad sites on malls; they are not in-line stores. And most even other restaurant operators would probably be demo'ing the buildings, most of their own, and rebuilding them. So we think it will be interest from other users, for outparcel [spaces], not just restaurants [INAUDIBLE].

Okay. A question for Mike. What is your same-store NOI growth for the quarter?

4%.

4%?

Yeah.

And what are your occupancy goals for year-end?

I think in the last call, we had talked about a desire to get to 93%. So I think as a goal or kind of a view to where we could likely be at the end of the year, based on releasing momentum that we have, that is a distinct possibility.

Okay. Thank you very much.

Thank you. Our next is coming from Lou Taylor of Deutsche Bank.

Hi, it is Chris Capolongo with Lou. I guess since you brought it up and you're talking about valuation, I was wondering if you could go through some of the major, call it maybe non-income producing assets on the balance sheet, maybe some things that we just can't see from the detail, perhaps, for instance, maybe K-Mart shares that you hold, there are costs; and I'm sure the cost is $14 and currently it is $70. So maybe things like that, or other major items that people should recognize?

Well, we have -- it is all over the lot, including investments in public companies that own real estate, Blue Ridge, Atlantic Realty. We have remainder interests where there isn't income, but it is an interest in real estate where the property income will flow 14 years from now, complex that we've done. We have properties that we have really had, I guess, much lower rents where the new users will be much higher. I'm just trying to think -- there are so many different places. If I could -- I think it is in the preferred equity. All that we pick up.

I would say that one of the things we're talking about is when you look at the balance sheet, the marketable securities, you know, for the most part, the equity is already at market; so there is not, you know, there is not much difference there. I think to the point about Preferred, Preferred Equity as an investments, which is sitting in the other real estate investments line, [INAUDIBLE] point that we need to do a better job of valuing our interests there because we're carrying that interest in effect at cost, and we even take -- even though we don't don't get tax depreciation, we do depreciate down our book investment, because we're picking up the income on a GAAP basis, which includes -- which includes some depreciation. So there is a situation where the investment balance and Preferred Equity is actually declining, but the underlying value of the investment is in most all cases going up. You've got situations like that. Even in our management activity, where you see management income, whether it is, you know, acquisition fees, but if it is the ongoing recurring management fee, I think we need to do a better job of putting a better valuation on that management -- that management fee to better get an overall perspective of the company.

In the other assets or in the other real estate investment sections, we have things like remainder [INAUDIBLE] interest, for the most part, where you're not going to get cash flow for a long period of time. We have that on our books at cost. We have a leveraged lease that we bought that underlying series of United Artists property, which again is at our purchase investment, where the underlying value is much higher. We have distressed bonds that we acquire in the normal course where we feel the underlying value is much higher. So, you know, one of the challenges that we have -- one of the challenges that we have is to take all of these individual pieces, which individually are not material, begin to aggregate them, do valuations on them, and then put them in a form that will be more transparent to the investment community and something that we can track over time. And that's really our objective over the course of the next -- over the next few months, to try and come up with something that is more cohesive and gives better visibility to what we believe to be our valuation. And we will admit it. We haven't spent the time in an organized process to value every instrument and every economic asset that we have on an ongoing basis. We're intuitively know what we need to do and are concerned with creating value and creating earnings, but, you know, that's kind of where we are at this point.

Okay. Great. Thank you very much.

Thank you. Our next question is coming from Mike Mueller of JP Morgan.

Hi. Two questions. First, on the Preferred Equity business, you're at 120 million now. Was wondering if you could give some sort of insight as to a year, year and a half down the road, say the end of '05, how large do you think that business could be from an investment standpoint? And secondly, following up on a prior question, looking at the first half of the year acquisitions in the U.S. is about 350 million, basically all of them were done for your own account. How much of that do you think will stay on your books versus be contributed to the JVs?

Well, looking at Preferred Equity first, I think we're budgeted to hit about 200 million by the end of next year. And we would be very happy reaching that. Our pipeline is strong, but you have to remember, the average Preferred Equity investment is very small, a couple million, 2.5 million or so. So the vision is that at some point we have -- we have 100 or 150 equity interest in wonderful properties, with an aggregate investment of a couple hundred million. It would be nice to be at that level by the end of next year.

Okay. Mike, on the acquisition question, always a tough thing because we are -- we usually say buy everything in the parent first and then ultimately transfer them to joint ventures. In thinking about, say, maybe on a full-year basis, be it this year or next, I think when all is said and done, you're probably going to have a net increase in the core. I will say about $100 million. In other words, the acquisitions that we will put and keep, less the disposition activity, with the balance ultimately finding their way into the joint ventures. Very rarely directly, usually going through the parent for an interim period of time, but ultimately finding their way -- finding their way there.

Sure.

That's just a rough approximation.

Okay. So net core growth of about 100 million, and then the rest --

Right. Net of disposition. Right.

Okay.

And then the rest runs into the program.

Okay. Thanks.

Okay.

Thank you. Our next question is coming from Alexander Goldfarb of Lehman Brothers.

Yes, hi. Just following up on the acquisition. So you're still on track to do the 600 million for the year, correct?

Yes.

Okay. If you can just give a little bit more flavor of what you're investing on this Preferred Equity in Canada, are the properties going to be like Frank's type or are they going to be like Earl Scheib's type?

No, no. Preferred Equity again is, in general, oriented towards properties that we would like to acquire and hold longer. Longer term. So in general, we're investing in high-quality shopping centers. And we're simply putting in the capital structure between an existing or to-be-placed first mortgage, maybe in the area of 60 to 70%. And we will put the difference between that 60 or 70% all the way up to 85 or 90% in exchange for a preferred return somewhere between 9 and 11%, and a negotiating piece of the deal. Sometimes they are as high as 70%. So it depends on what we can negotiate and the risk/reward of the individual transaction. But Canada, like the U.S., is geared towards high-quality real estate, and not necessarily turn-around plays.

Okay. So you don't see -- right now, you don't see the turn-around plays up there the way you do you in the U.S.?

I'm just saying in general, the program that we just talked about with RioCan will be designed more for stabilized properties that are either being acquired or refinanced by owners. There may be an occasional turn-around play or opportunistic investment that will be structured as Preferred Equity rather than as Direct Equity. So, again, we follow opportunities wherever they may be.

Okay.

And preferred equity just gives us a way to do it in certain cases.

Okay. And looking at your Mexican ventures, the nine properties, a few of them have already gone to the GE; we can assume that the balance will go -- also go into the GE when they're up and stabilized.

Yes -- Well, not necessarily when they're up and stabilized. What GE has told us is they would like to participate with us on the development opportunities as well. And the structure will be a little different in terms of the fees we will earn on the development transactions but, in general, that they will still remain a 50/50 partner. Both in the existing properties, and the development properties.

Okay. Is the development aspect new? Or that was already --

For GE, it is new.

Okay. Yeah, because that seemed different than previous.

Yes, they've -- I think they now share our excitement about Mexico, and realize the way to build a high-quality portfolio is really through development right now. The market is just so limited in terms of existing high-quality retail property. It's really -- all of this big box development is new to Mexico. So the way to really participate is to join in the development side. And I believe GE is recognizing that and is anxious to participate with it.

Okay. And just wrapping up, the [KIR] sale, can you just -- is that a -- do you expect these to be ongoing?

No, I think in general, the portfolio is pretty stable. This was one that we didn't like particularly at all, and felt it was a great time to get rid of it. So -- but in general, we're very proud of the portfolio and going to hold on to it long term.

Okay. So we shouldn't expect any future sales from it?

[INAUDIBLE], but we don't have any target at this time.

Right. Right. Okay. Thank you.

Thank you. Our next question is coming from Gary Boston of Smith Barney.

Good morning -- or good afternoon. Oh, I guess it is still morning. Here with John Litt. Just a couple of quick questions. On the 1031 business, could you give a sense of how much of the fees during the quarter came from that business? And maybe a little color on the margins there?

Well, in general, what's -- what we do in the 1031 business, it is a brokerage business; it is not an investment business where we buy and trade property. And we charge fees, both internally to KDI when, for instance, out parcels or restaurant parcels are sold, as well as the third-party business, where we charge a brokerage fee, generally somewhere around 2 to 3%, depending on the individual transaction. So it is a brokerage business, we're building it up, but we decided to highlight it this quarter because we think we're making some great momentum. More than 100 million of properties have been sold through Kimco Exchange in 19 individual transaction so far this year. About 70% of them were true third-party sales, and about 30% were outparcels and restaurants and things like that that we sold out of our own portfolio. And for the full year, or for the six months it is about $650,000 worth of net fee income is for outside -- outside brokerage activity, and we're expecting a similar clip for the second half of the year. It is in the management fee, management fee line item, and we expect a little bit more for next year.

Great. And just a couple of quick questions on your other real estate investments disclosure. One I notice from last quarter your decision rights line item disappeared. I was wondering if that just got lumped in somewhere else or --

We wrapped up, as I mentioned in my points, we wrapped up the last property for the Montgomery Ward activities, so that pretty well --

So unless you get Chi-Chi's that will stay zero?

That's right.

Okay.

[INAUDIBLE] other designation rights, it will come back. If it is material.

Then my final question. I think John has one. On your investment in Kimsouth, could you just walk me through -- the dollar amount increased even though you sold several assets out of that, out of that venture?

Yeah, a lot of it is timing-related. You know, we actually [apply] the equity accounting method so to the [extent] you have profits, you increase your investment; if you [have] cash, you decrease the investment. We had a $6 million -- our share, $6 million distribution in early July. So you're always going to [have] a little bit of a timing issue with Kimsouth; and I would expect that to continue until it is ultimately liquidated. So we're looking really to the end of '05 is when we will finalize the sales of both the remaining 15 or so properties. And we feel comfortable that the net proceeds will not only liquidate or monetize our investment down to zero, but also build in the business plan of the profits for next year.

Question for David. You say your Preferred Equity, you're looking for 200 million by the end of next year. At your current pace, [it seems] as though you can exceed that. Is that a limit or is that a floor?

It is definitely not a limit. And we would be very pleased to see it grow more than 200 million. We just want to be careful and selective in what we do. We had a particularly good quarter, this past quarter, but there is no assurance that the opportunities will continue to flow at the same rate.

And returning to Mexico, what is the dollar amount of the 6 incremental assets?

Well, as I mentioned, the total is about 156 million. I'm not sure exactly how much, Mike, we've already funded. But if everything goes well the total cost is 156 million of which we will invest 76 million.

That includes the 3 you already have?

That includes what we've already got out there.

What do you think this grows to in a year's time?

Well, here again, we have to follow the opportunities. We do have an excellent pipeline; and I think between GE and us, we are trying to make a major push. Competition is definitely brewing out there. There are competitors that are raising peso-denominated funds that will compete directly with us. So right now, we are trying to lock up the good regional operating partners. We're trying not to lock in the anchor tenants. We are trying to be the developer of choice for people like HEB and others down there. So we're going to do as much as we can as quickly as we can.

And so there is no real dollar limit on how far you're going to take this?

No.

You had mentioned I think on Kimco Select -- and I don't know if I got this right -- that $22 million real estate investment in the food service area of Lufthansa? I don't know if I got that.

Yeah, basically we participating in financing, led by Foothill. We have a portion of the real estate section. I think we have 11 or 12 million of that $22 million, and it is secured by 14 different properties owned by Chef Solutions. And it is part of an arrangement with Foothills similar to other arrangements we have where Foothill primarily is doing the inventory and receivables. We are primarily taking a risk on the real estate side, the two loans are cross-collateralized. And we make a nice return.

Where is the real estate of Chef Solutions?

It is -- well, primarily on the East Coast in various different markets. Several of those 14 properties are distribution, and others are small light assembly --

Chef Solution is an operation that services the middle of the country. So they have three locations outside of Chicago, a couple in Texas, Minnesota.

But it is not traditional retail?

That is correct.

It is more warehouse distribution?

That is correct.

Exactly.

And what kind of return would you look to get in order to make an investment like this?

Well, in general, we're looking for a threshold returns in the teens on our capital that is put out.

Would something like this demand a greater return than some of the other investments that you make?

Not necessarily. It depends on the loan to value.

These are first mortgages on property.

Similarly, on the K-Mart bond, do you have any more detail on, $6 million on K-Mart bonds?

Well, the K-Mart bonds that we just acquired, the $4 million of [face], we acquired it for about 60 cents on the dollar. And we think we -- [INAUDIBLE] have additional value in that. We bought, I think, much less than we think that the in-line real estate is worth.

Great. Thank you.

Once again, to ask a question, please press star, 1on your touch-tone phone at this time. Our next question is coming from Jim Sullivan of Prudential Equity.

Good morning. I was intrigued by Milton's comments regarding Home Depot given Home Depot's plans to, I guess, monetize the real estate value on their balance sheet, and so a two-part question. Number one, can you confirm whether or not Kimco is in active discussions with Home Depot about their efforts to monetize? And then part two, Milton talked about the cap rate for Home Depot-anchored centers, and I wonder if you could offer an opinion in terms of what that cap rate would be?

I would guess that depending on the length of the Home Depot lease, the cap rate might be less than six.

And was the answer no to the discussion --

Yeah, we -- we never comment on anything, we just don't comment on speculation.

Okay. Fair enough. Secondly, in your supplemental, in the previous supplementals, where you address the lease spreads, you have had a separate breakout for any leasing on K-Mart space. This time, that wasn't included. Is that because there were no leases on that space?

I think it is done, Jim, more from the perspective that most of the K-Mart activities and unleased space has been dealt with; and at this point, we felt that what remained -- what remained unleased and remained vacant, that we didn't need to separate it, and we would just incorporate it as part of the core numbers. We had done that for a while back because the analyst community was interested, you know, at the depth of the situation, where we were, and what our progress was on the lease.

Okay. Very good. Thank you.

Holly, we have time for one more question.

Thank you. Our final question will be coming from David Fick of Legg Mason.

Morning. I'm not sure if this question is for Milton or Mike Pappagallo . The conspiracy theorists are running amuck with your '05 guidance, and I just want to review the issue of equity issuance and, you know, Milton's prior comments about equity not being in the cards; is that still operative?

That is true, David, that the initial -- the business plan, because of recycling, the use of joint ventures, dispositions, 150 million in free cash flow, that we expect a net -- probably a net capital need of, you know, $250-plus million; and because of where we have our debt levels and [INAUDIBLE] probably more than sufficient capacity from a debt perspective. So at this point, I work under preliminary line of thinking that there will be no equity, and I will always -- the same thing I've always said. If there is a larger opportunity with such a return that it requires a balancing of that balance sheet and the capital structure to go out with equity, I will; but at this point, I don't have it in the plan.

Thank you.

Conspiracy theory, that sounded very ominous.

Well, it came up on our morning call today. Why are they out, early, you know? What could be behind this?

I'm not that sinister in my thinking.

Well, thank you, Holly. And thank you all for joining us. We look forward to speaking with you next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day. Thank you.