Kimco Realty Corp (KIM) 2004 Q4 法說會逐字稿

Good morning ladies and gentleman. And welcome to the Kimco Realty 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 questions following the presentation. It is now my pleasure to turn the floor over to your host, Scott Onufrey, Vice President of Investor Relations. Sir, you may begin.

Thanks, Maria. 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 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 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'll now turn the call over to Mike Pappagallo.

Thanks, Scott. Good morning all. As reported earlier this morning we ended 2004 by meeting our fourth quarter and full-year FFO estimates of $0.90 and $3.55 per share. If there is one phrase that summarizes this past year, it would be "getting the job done." When we entered 2004 our targeted FFO growth was about 7 percent or $3.46 per share. We put forth what I thought was somewhat aggressive acquisition estimates of $600 million in a heated marketplace. We assumed about 3 percent internal growth in the portfolio with some increase in occupancy. We talked about accelerating our disposition of marginal property, targeting about $100 million of proceeds, generating merchant building gains, continuing the liquidation of the Conover assets, building a book of business in Mexico, and executing on the transfer of the acquired mid-Atlantic Realty assets into our management program.

I think it's safe to say that we did get the job done and more. We ended the year with a 9.9 percent per share growth in FFO. Occupancy increased to 93.6%, an almost 300 basis point jump over 12 months, and the highest level in our 13 years as a public company. Over 3.2 million sq. ft. of new leases were signed, and an additional 1.4 million sq. ft. of leases renewed. In terms of sourcing and underwriting our total new business generation exceeded $2 billion, including the $1.2 billion acquisition of Price Legacy with DRA Advisors and over $750 million of other purchases. We closed $120 million in Preferred Equity deals and invested over $100 million for purchases of securities, financings to retailers, and other investments. Yet the use of Kimco's capital was only a fraction of that total, underscoring our strategy of acquiring for others, while retaining management and a small equity stake.

Our development business generated over $12 million in gains after taxes, while funding its capital needs on its projects through sales and construction financing. We established the Kimco Income Fund on behalf of a group of insurance company investors, initiated new programs with others, including LaSalle Investment Management, and continued to expand the GE and DRA relationships. And we maintained a strong balance sheet without diluting our shareholders' interest.

With respect to the fourth quarter's reported results, a few specific comments with respect to the movements are worth noting. Quarterly net operating income declined by $1.5 million reflecting the fact that the prior year's levels included all 41 of the acquired Mid-Atlantic Realty Trust Shopping Centers, whereas the current quarter only had 10 centers remaining. This underscores the success in moving out most of the assets to the various management programs during the year, as we said we would. In fact, separating all of the increases due to acquisitions and reductions for sales and transfers, the same site NOI totals 81.3 million versus 78.5 million in the prior year or a 3.5 percent increase. Same site occupancy grew by 40 basis points to 93.4 percent from 93 percent at September 30th.

The continued emphasis on acquisition and management with partners is clearly demonstrated in the growth of our management and fee income, and the percentage of our income. Total FFO from assets where Kimco serves as a manager was just over $24 million for the current quarter versus $19 million in the prior year quarter. The Kimco Developers Team knocked out 2 property sales in the fourth quarter, driving the substantial increase in profit contributions versus the prior year. Momentum continues into the first quarter as we sold the project in Arizona and will be closing another sale in early March. As usual, we continue to separately dispose of outparcels.

We once again had a positive adjustment to income tax expense, as in the prior year. This benefit was related to the true-up of prior year taxes, and a revised estimated rate for 2004 due to the characterization of certain of the Conover distributions for tax purposes. This was somewhat countered by the charge for an asset impairment for a former Ames box in Ohio that we felt had limited opportunities for releasing, and after considering various alternatives we will most likely now dispose of the property.

The overhead numbers took a little bit of a beating this quarter jumping over $3 million from last year. About $1 million of that jump relates to 2 items, the additional cost of expensing stock options and the cost of Sarbanes-Oxley. Both of these items hit hard in the fourth quarter as the majority of the stock options are granted and subsequently vested in December, and most of the Sarb-Ox work for the auditors we've done over the past 3 months. There is also an increase in operating staff and corresponding office and technology costs to support a growing management business where the benefits are seen in the reported management income.

With respect to balance sheet management we experienced a flurry of investment activity near year-end and accordingly our credit facility balances aggregated $282 million at the end of December. Nevertheless, credit ratios, such as debt-to-equity and debt-to-book capitalization, were similar to prior-year levels. Covered [ph] ratios are still a solid 4.1 times for debt service and 3.8 times for all fixed charges. Whereas we expect to carry balances on the line of credit throughout much of the year, it will fluctuate based on the timings of transactions and the transitional natures of some of the funding. As an example, approximately $100 million of the line of credit borrowing in December related to the purchase of a 50 percent interest in the Factoria Mall in Bellevue, Washington, as well as interim mezz [ph] financing to support the Price Legacy acquisition. We will recover much of those fundings replacing a mortgage on the Factoria Property and by selling certain properties as planned from the Price Legacy portfolio.

So in summary, it was a terrific year by all accounts. But we need to keep it rolling in 2005. I'm still keeping with the range of FFO guidance previously provided to you of between 3.77 and 3.83 per share, which incorporates the First Call consensus view of $3.82 per share. In order to illustrate the assumptions underlying this estimated growth I'll do some quick math using the 3.82 per share level. FFO would need to grow by $38 million using an average share count that considers increases only for normal stock option exercises and the DRIP program. Of that amount I'm estimating about $15 million coming from the U.S. shopping center portfolio investments, which is defined as the consolidated property portfolio, as well as the other numerous single-property joint ventures. And about a $17 million increase from the management business, including our piece of equity ownership in those programs. And finally about $5 million more from income from investments in Mexico. I expect roughly the same contribution for merchant building sales as in 2004.

Likewise, the aggregate income from the other business units, which you see displayed on the earnings statement as income from other real estate investments, mortgage financing income, interest and dividends, and other income expense, when combined will be about the same.

The growth in the quarter was based on a 4 percent internal growth level tracked off the annualized fourth quarter amounts and adjusting for acquisitions in that quarter and the seasonality of percentage rent, plus a net net 205 acquisition, meaning new acquisitions offset by dispositions, which I expect to be about $150 million. On the Investment Management business on behalf of institutions I'm estimating $600 million of new activity. And my assumption of stable earnings levels for the other business does not mean it is standing still. The combined FFO contribution exceeds $80 million in total and this year items such as incentive earnings from the Conover liquidation and increased contributions from the Preferred Equity business will replace profits on the now completed Ames assignment and the payoff with the KMS bond investment. With that I'll turn it over to Dave Henry to talk a little bit more about our investment activities.

Good morning. I'm happy to report that Kimco had another strong quarter in terms of new business activity. In the U.S. Kimco and DRA Advisors completed the previously announced purchase of Price Legacy Corporation. The Price Legacy acquisition added 33 shopping centers and 7.7 million sq. ft. of space to our assets under management. Overall, Kimco now manages more than 240 properties and $5 billion in its various joint ventures in third-party management agreements.

In our GE joint venture in the U.S. we acquired a 237,000 sq. ft. property in Laredo, Texas, for 23.6 million and subsequent to quarter-end the venture acquired a 301,000 sq. ft. property in Roanoke, Virginia, for $25 million. Two other properties that were acquired by Kimco during the quarter--a 91,000 sq. ft. grocery anchored center in Baltimore and an 89,000 sq. ft. shopping center in Rockford, Illinois, are targeted to close into the GE venture during the first quarter. To date, the GE venture has purchased 44 properties at a total cost of $690 million, of which 7 properties and 2 outparcels have been sold for gross proceeds of $81.3 million. The portfolio itself continues to perform very well with occupancy at 95 percent.

In our joint venture with LaSalle Investment Management, a former Mid-Atlantic property in Bel Air, Maryland, containing 122,000 sq. ft. was transferred into the venture during the fourth quarter. The LaSalle venture now contains 6 properties acquired at a total cost of $111 million. In our Kimsouth joint venture with Lazard on the former Conover property trust portfolio, 4 additional properties were sold since our last conference call totaling $69 million. To date, the Kimsouth venture has sold 29 properties, totaling 3.1 million sq. ft. at an aggregate price of $272 million. We are hopeful that the 10 remaining properties in the Kimsouth portfolio will be sold in 2005.

Since our last conference call, there has also been acquisition and disposition activity in our parent portfolio. In addition to our previously announced purchase of a Lowes anchored shopping center in Valdosta, Georgia, and the 11 property metro-New York portfolio, Kimco acquired the remaining 50 percent interest it did not own in a 75,000 sq. ft. shopping center in Tampa, a 209,000 sq. ft. shopping center in Clearwater, Florida, and a large 524,000 sq. ft. property in Bellevue, Washington. The latter 2 properties have attractive redevelopment prospects. During the quarter, Kimco also sold 6 properties for $38.9 million.

Our Preferred Equity business was also very active during the quarter. Within the U.S. we closed on 5 new Preferred Equity transactions totaling $21 million comprising 9 properties. Overall, the Preferred Equity program, including several Canadian transactions, has now committed to a total of 213 million for 70 individual properties. Six properties have been sold to date and the program has outstanding commitments of approximately 193 million.

Our merchant building business, KDI, was active as well during the quarter. KDI completed the sale of 2 shopping centers and sold portions of 8 additional projects generating proceeds of $39 million. In addition, KDI commenced development of 5 new properties during the quarter. In Kimco Select, our opportunistic investment business, we invested 19.5 million in various real estate related securities and $32 million in connection with an existing sale-leaseback transaction in Pittsburgh. In Retail Property solutions, where we provide capital and services directly to retailers, Kimco led an $18.5 million secured financing for Tidymans, an independent grocery store operator in the Pacific Northwest. Kimco also participated in an $8 million secured loan for Priceless Kids, a children's clothing store operator.

Looking outside the U.S., in Canada where we are very pleased to have started a relationship with Anthem Properties, a former public real estate company based in Vancouver, Canada. As part of a recapitalization associated with the company becoming private, Kimco provided C$43.6 million as a Preferred Equity investment in a portfolio of 12 existing shopping centers located in various cities in British Columbia and Alberta. We anticipate providing additional equity and debt capital to help Anthem acquire and develop new shopping center properties.

Also in Canada, Kimco purchased an additional C4.4 million of convertible debentures issued by Sterling Centrecorp as part of its recent balance sheet recapitalization. Sterling is our existing joint venture partner in 3 Preferred Equity transactions and a joint venture development on our large retail land parcel in San Antonio. We also anticipate closing on a fourth Preferred Equity transaction with Sterling on 2 shopping centers totaling 116,000 [ph]] sq. ft. located in Saint-Eustache, Quebec. Kimco has also committed to provide equity capital on a 100,000 sq. ft. shopping center to be developed in Waterloo, Ontario, in a new joint venture between Sterling, Kimco, and a local developer. Also in Canada, in our joint venture with RioCan, Kimco exercised its 2.5 million warrant-position to acquire an equal number of RioCan shares at the exercised price of C$11.02. In addition, Kimco purchased RioCan's interest in a recently completed 287,000 sq. ft. shopping center in Grand Park, Ontario.

South of the U.S. border, in Mexico, Kimco continues to increase its acquisitions and development activity. During the quarter, we started construction on a new 522,000 sq. ft. shopping center to be anchored by Home Depot and H.E.B. in Reynosa, Mexico. In addition, construction has been completed on a 125,000 sq. ft. H.E.B. anchored shopping center in San Luis and second phases in both our Monterrey and Juarez shopping centers have recently been completed. We anticipate starting at least 3 more development projects during the first quarter of 2005, a 123,000 sq. ft. Home Depot anchored property in Pachuca, 171,000 sq. ft. Wal-Mart anchored property in Acapulco, and a 521,000 sq. ft. Wal-Mart anchored property in Guadalajara.

During the quarter GE Real Estate also purchased a 50 percent interest in our existing Juarez Shopping Center, bringing total assets in the GE/Mexico joint venture to $55.7 million. In addition, GE Real Estate plans to participate in our Mexican development projects, as well as the existing properties we have purchased.

Finally, as previously announced, Kimco together with AMB, will provide capital to G. Accion [ph], a public real estate company in Mexico, go private in March of this year. Kimco will own slightly under 20 percent of the new private company, which will continue to be one of our major joint venture partners in the acquisition and development of shopping centers in Mexico. Now, I'd like to introduce Milton for his comments.

Thanks, Dave. I would like to very briefly describe our strategy. Our strategy has 3 components. First, we must carefully analyze where the best opportunities lie and assess the risk. Secondly, they should be synergistic with our existing business activities. For example, our Preferred Equity business is synergistic with our Acquisition business. In the course of seeking out attractive acquisition opportunities you will find an owner who does not wish to sell, but would like Preferred Equity. The third, and by far the most, most important aspect and component is retaining, motivating, and mentoring talented associates and joint venture partners who are accountable for our growth and performance.

Now individuals with exceptional talent are hard to find and individuals with exceptional talent, business savvy, integrity, and a long-range perspective are so much harder to find. But these unique attributes are the sign [indiscernible] for our success. And the challenges require a team that possesses the requisite skills, knowledge, judgment, practical business people with entrepreneurial fervor. And an essential ingredient is that we count on for our long-range success is our ability to engender in others the desire to do business with Kimco in complete trust. That's a challenge for any business to attract and retain talented people.

Appropriate financial rewards are, of course, important and necessary to attract the best people, but I'm convinced that a culture that has a collegial team atmosphere, a culture that discourages sharp elbows, a culture that emphasizes the importance of a corporate soul, can be extremely rewarding in many ways beyond money, particularly to team players who will be gratified and enhanced intellectually and emotionally by the Kimco experience. We seek these type of people for our organization and really believe that they will deliver the best long-term results for all of our shareholders. And with that we would be delighted to answer any questions.

Maria, we'll now take questions.

[OPERATOR INSTRUCTIONS]. Your first question is coming from Michael Bilerman with Smith Barney.

Good morning. John Litt is on the phone with me as well. I was wondering how your existing or potential new joint venture partners are looking at and I think Mike used the word "heated" acquisition environment today?

I assume you're taking it from the perspective, Mike, of how these partners are viewing the marketplace and whether they're feeling the prices are too rich?

Exactly.

I think it's always been our approach to try and match the interest of a particular joint venture partner and their expectation of returns to the right asset. So I think there is still a very aggressive desire for properties by institutions to put money at work in real estate, and I think our job is really to attempt to match the right property and the quality of the property with the return expectations of that investor. We need to be mindful, no matter what properties we may be seeking that we're not overpaying or that we have a good long-range view of the acquisition price. But I don't think that necessarily the institutions are shying away from acquiring real estate. In fact, it is that demand that's keeping prices where they are today.

And are they looking at it from a sort of infinite life or just holding assets for the long-term or do you have access to the capital where there is - - you know, it's a collection of assets?

Each partner has a different perspective in their time horizon. Some of the investors are much more IRR focused, so their horizons are generally short and they'll make extensive use of leverage. Other partners are looking very much as a long-term bond and are less concerned with short-term movements and are even gravitating more towards an unencumbered structure. So it really - - it is across the board. And each, again it's all about each matching up each partners' expectations and their return thresholds with the asset and some of that is driven by their time horizons.

And how much capital do you think you can raise from the people that look at it from a bond or a long-term basis?

Really the shortage isn't the capital, the shortage is the appropriate product. We have no problem finding institutions that would like to put the money out in long-term with the first-class properties. The issue for us is buying right and buying smart.

The issue of risk.

Mike, I just wanted to go over the guidance in terms of the acquisitions, you said net 150 in the core and 600 within the JVs?

Yes.

And so those are separate from each other?

Yes.

And then just on RioCan, how much stock do you currently have and what is your built-in gain?

We have 2.9 million shares with an average cost of about 11, 11.50.

And you're planning on holding that or disposing?

Holding. And if you're [indiscernible], Mike, are we going to hold it for 10 years? I'm not going to comment on that. But I think the mindset is that we will hold these shares. If you recall we did have an additional number of shares and we did monetize a portion of those. But on balance, this is much more of a longer term hold.

Right. I think John has a question as well.

I just wanted to follow-up on Michael's question in terms of the investor appetite. Is there is sort of a cap rate or IRR threshold that you think they won't go below, and if you have a sense to what that is, it would be interesting to us? Because there's clearly a lot of product that we're hearing about, one large West Coast portfolio in particular. And even your low acquisition assumptions for '05 relative to what you did in '04, I'm just kind of curious of what those thresholds are so we can get a sense. Because we kind of know what's going on in the acquisitions world about what levels your JV partners may stop playing at.

You know, when we talk about cap rates, Jonathan, the most important aspect is to recognize that it's a guess, really, what will the income stream be over 10 years and what will the terminal exit strategy. That is really dependent on so many factors. But the challenge for us in looking at deals is to be sure that (a) the income stream will maintain itself. Not everything always goes up. To me it's more an issue of quality and where are the properties, and what will you really have. And that's a judgment call and different people look at the same asset differently.

If one believes that there won't be a downturn in an income stream, that there will be growth and that is the big "if," investments can become very aggressive. Our job is to use our years of experience and all of the input in the regional people to make that call on behalf of ourselves and our partners and that's a challenge. And the cap rates are just guesses as to where it's going.

So your sense is that given the current environment for acquisitions, you have the capital, depending upon the opportunity - -

That's right.

- - as you perceive them to do the transactions you want to do? You're not saying, hey, we can't take this anymore?

No. If the deals are right there is absolutely no shortage of capital. The issue in a changing environment what's going to happen to the properties that you're acquiring. That's the issue. Capital is not the issue. The issue is, are the returns going to be there.

Final question on - - and you can comment on this if you want. Is the toy situation and the CalPers (ph) situation?

I can't comment on either.

Okay, had to try. Thank you.

Your next question is coming from Ian Weissman with UBS.

Good morning. My first question is for Milton. I was wondering, Milton, if you could comment on the recent wave of department store consolidation accelerating in the industry over the last few quarters, specifically as it relates to Kmart and Sears and what you think the implications are for the sector?

All right let's --- there continues to be consolidation. I'm not sure what will happen with the May Company, whether they'll be Federated. Insofar as Sears and Kmart, I think it's really positive for the sector now. It's not easy to compete with Target and Wal-Mart, but the combination of Sears and Kmart I think has a couple of things going for it. Two things in particular.

One, the combination has some wonderful exclusive brands. The key word is "exclusive" because it's going to be tough to compete on price with Wal-Mart, but an exclusive price you don't - - exclusive you don't have a price issue. And that's Martha Stewart, and by the way, I think Martha Stewart is going to get much better in March, it's going to get hotter, and Joe Boxer and Craftsman - - what's the other? Kenmore, Lands End. So they have those brands.

The second and most important to do with anything in retailing, you have an owner with a big stake. And I think you've heard me say that tough supermarket business, nothing is tougher. But the three best supermarket operators, Wegmans, HE Butt and Publics, the common denominator is that they're all private. And in the combination of Sears and Kmart you have Eddie Lampert with a huge stake. And there have been some savvy investors, I can't remember their names but they have been in the press, who have put money in in a liquid fashion, tying up money for 5 years and paying promote to Eddie. And here the Sears/Kmart combination has that without a promote. So I imagine there will be conversion of a lot of KMarts to Sears and you may see some growth. So I think it's going to be positive.

Can I infer from your comments that you think it's more of a retail play than a real estate - -?

Oh, yes. I do. Even the - - if you think about the person he hired, who is a fellow from Brands, I would think you can't - - the kind of commitments you have ongoing with the huge credit card business which Citibank bought, we have to continue that. I think it's a retail play.

You anticipate other bidders throwing their hat in the ring?

I don't know. I have no idea.

Just turning quickly to my final question related to your retailer service businesses. Bankruptcies were down quite a bit last year, about 25 percent. The business for you guys has been uncharacteristically quiet over the last, call it 6 months or so. Can you just give us an update on the '05 pipeline there?

Ray, this is Ray.

Ray Edwards speaking. For Retail Property Solutions, the main focus is not necessarily bankruptcy, it's assisting retailers in maximizing and generating some liquidity from the Company primarily from the real estate. So sometimes that comes through bankruptcies and doing designation rights or buying their real estate. But what we have is a pipeline where we're doing transactions with retailers. We're doing financing with them and sale-leasebacks on their real estate. And we closed, as Mike and Dave mentioned, with a $18.5 million loan to a retailer out of the Northwest.

We have a number of other retailers that we're looking at assisting that we don't think have any - - bankruptcy is not in the picture for these people. We just think it's a good real estate interest position for us to take with nice current yields for Kimco. And I really think the growth of our division, our department, really is not in the bankruptcy world. It's in generating those type of opportunities.

Well, that takes me to my next question. In talking about the financing side of it, can you guys comment on news that you and GE Capital will be providing about $180 million to Penn Traffic as part of that company's emergence from bankruptcy?

Well, in the Penn Traffic, Kimco is leading a piece of about a $30 million piece of a $180 million transaction. GE is the primary lender on that. We're doing basically a Tranche "B" based on the real estate and GE is doing it on the inventory.

What type of returns are you looking at?

We're still negotiating that with the company at this point. So it's probably too early to say.

Okay. Thank you very much.

Thank you. Your next question is coming from Paul Morgan with FBR.

Good morning. I was hoping you could just comment generally on your experience over the past year or so with the retailers and perceiving their operations as being primarily a real estate play and auctions of Mervyn's and other retailer chains that have been going on. Whether you think maybe it's reached a point versus, say, the late 90s where the risk-adjusted returns on these types of opportunities have fallen below your hurdles?

Well, I think (a) expectations have been raised generally in all types of investment. But I don't think that - - I think you have to appraise each one, Paul, differently and I think there will still be opportunities. It will be the combination of looking at a retailer primarily from the point of view of what they're doing as a retailer and real estate can be a secondary backup. So I think there will still be opportunities.

And then in terms of the Factoria Mall acquisition, can you talk about the strategy there, whether acquiring enclosed malls for redevelopment may be something you may look to do more going forward and maybe a little bit specifically about the timing of that redevelopment?

Hey, Jeff, are you on?

I am on. Hi Paul, it's Jeff Olsen. How are you? On Factoria only a portion of the mall - - only a portion of the project is enclosed and it's mostly a big box retailer center there. So we don't envision getting into the mall business per se. But what we found with Factoria is it's just a terrific piece of dirt. I don't know if you're familiar with the location, but it's on the Southeast corner of the 405 and the 90 in Bellevue, Washington. And we are studying all of our options now, talking to the retailers, coming up with various redevelopment plans, and I expect that we'll have something fairly firm in the next 6 months.

There was originally like a town center proposed for that. Is that part of your plans there or is that dead?

We're evaluating our options and have not concluded anything insofar as building out a town center. But one of the things we really liked about that real estate after talking to the retail community is how much the retailers wanted to be there. And so that will likely be our focus for that property.

And then on the Price Legacy portfolio, maybe you can characterize the timing of realizing, leasing upside, how much upside you think there is, where rents are versus market for the cost of [indiscernible] centers specifically?

Jeff, you want to take that?

Yes, I'm happy to take it. The Price Legacy portfolio is a very high-quality portfolio that was - - the upside I would say is fairly limited in terms of improvements through occupancy gains. But what we did find in the portfolio is a series of below-market rent opportunities and so we do expect over time to release those stores as the leases come due. And there are a couple redevelopment plays that we're working on within the portfolio as well, specifically in Pentagon City. But it's a little too early to comment on when that's going to take place.

Okay. Great. Lastly, could you just repeat the same-store NOI number that you gave? I missed that.

Yes, for 2005, planning on a - - or estimating a 4 percent growth. This past quarter was 3.5 percent.

Okay. Thank you.

Thank you. Next question is coming from Ross Nussbaum with Banc of America.

Hi, good morning. Am I reading it right that in the fourth quarter you bought a hospital? [laughter]

Can you tell we all have colds. We're all sick. Do you think we're that sick? [laughter].

We haven't ventured quite that far away. What we ended up doing is pursuing an opportunistic situation where we actually bought several parking garages and medical office buildings that are part of an original sale-leaseback to a major hospital in Pittsburgh. But it's a long-term sale-leaseback, we're not the operator.

So we don't have to worry about you going into the healthcare business?

No, sir. [laughter].

I'm not sure who this one is for, but your portfolio is now almost 95 percent lease and as we look across the rest of the shopping center REITs, they're right around there. How worried are you that new construction is about to pick up here now that portfolios are getting pretty full?

The wonderful thing about our business is folks do not build shopping centers on spec. We have major anchor tenants that do their feasibility and demographic studies and take long-term leases on these projects. So in our case, and most of our peers' case, these projects are largely preleased before they're built. We're not building large amounts of spec space in our industry, it's largely spoken for. At the same time, retail sales are increasing and supply and demand seems to be pretty much in check.

Okay. A different question, Dave. In Mexico in the developments that GE is buying into, what are the terms that they're getting? Are they getting it at cost or are they getting it at market?

We basically have 2 joint ventures with GE in Mexico. Our first venture which we really started 2 years ago they bought a 50 percent interest in existing properties that we were acquiring in Mexico and we brought them in at cost and there is a small asset management fee we charge them, but it's not that significant. Quite frankly, GE does contribute a lot of asset management and underwriting and Treasury expertise and accounting expertise. As I have mentioned before, they have 60 real estate professionals on the ground in Mexico, so they're a wonderful partner.

They've recently decided to expand into a second venture with us to participate 50/50 with us in the development projects. In these projects Kimco will receive a fairly substantial development fee for putting the deals together in a larger asset management fee. So the economics will be a little better for us on the development side because we do an awful lot of work putting these deals together and we're a little bit ahead of GE on those deals.

Final question, I think this one may be for Mike. Your leasing activity was up pretty substantially in 2004 and yet if I look at your tenant improvements and allowances, they were down year-over-year quite dramatically. Can you address the difference there?

Ross, it's Mike Flynn. I have a bit of a cold, but we generally like to spend other people's money if we can. We certainly look at the credit and, of course, if the credit is great then we will put money into TI. But generally our approach is to keep the rents below market and look to the upside going forward, again, in the portfolio having below-market rents. So where we have the opportunity to make a deal without putting Kimco capital in, we look at that very seriously and very closely.

And I think, Ross, what you see in this year's numbers is more - - this year's deal is more a reflection of that situation than perhaps the year before. And it really will depend on the deal itself and what leases are coming off and what we need to incentivize tenants to come in.

On the earlier Kmart boxes they may need to put in more TI and that would have happened 2 years ago. In the last year, we had the opportunity to restrict the capital investment in many situations.

With the portfolio now almost 95 percent lease, should we expect that number to remain at or around current levels?

It really depends, Ross, on the opportunity and the credit. Again, it would - - you're talking about the investment amount? The occupancy, we would feel that it's at 93.6 now as Mike mentioned. We feel very comfortable that 94 plus is where we'll be at in '05. From the addressing the investment part, it will really very much depend on the deals and the opportunities.

Thank you.

Thank you. The next question is coming from David Ronco with RBC.

Hi, good morning, guys. I'm here with Jay Leupp. David, a question for you on your international - - your North American markets. Just wondering if you could talk on returns on development and on acquisitions in Canada versus Mexico with kind of related risks in each market and where you see those going over the next year and how that might influence your capital allocation decision?

In Canada, as we've talked and as you've seen yourself it's getting difficult to buy at good returns the way it was 2 years ago when we first went up there. Cap rates have joined the U.S. in tumbling down and we together with our various partners, including RioCan, have simply been unable to buy at the nice cap rates we've enjoyed for so long.

We've kind of shifted our focus more towards Preferred Equity opportunities and development opportunities. Similar to the U.S., you can still develop in Canada to very attractive gross margins. The development fields that we have participated in were building to a 10.5 to an 11 percent unleveraged return on cost and given that cap rates are now sub 8, the gross profit margins on these development deals are still very attractive.

In Canada, as you know, it's difficult to build though, in terms of entitlements and so forth, and it takes time to put those deals together. But where we can find attractive development opportunities, we jump on them. Canada is just a whole different kettle of fish. We think the enormous population growth and demand as Mexico shifts from an informal retail system to a more formal retail system; for instance, 65, 70 percent of sales in Mexico is still street vendors and people selling from their houses. So as this shifts to a more traditional-type of retail sales, there's going to be enormous demand for shopping centers. So we like the opportunities to develop down there. And we think there's a lot more upside over time both in the rents and the ability for cap rates to come down as institutional capital comes into Mexico. So the development plays I think in Mexico are more attractive than in the U.S. and Canada from that respect.

Right. And I'm guessing since you've talked about a lot of opportunity remaining in Mexico, the answer is no to this question but I will ask anyway. Any consideration of any other Latin-American markets?

I think logically it makes sense for us to follow our big box tenants. So to the extent that Home Depot and Wal-Mart and others march south into Latin America, we would look at that over time.

Okay. Great. Thanks.

Thank you. Your next question is coming from Craig Smith with Merrill Lynch.

Good morning. Assuming the Kmart/Sears merger occurs this spring, are you anticipating any further sales or closure of Kmart stores, particularly those that don't fit into a conversion to a Sears grand?

I really would have no idea. I would imagine - - my hunch is that the Kmarts that overlap after they've still profitable will be operated and they'll now have the advantage of having additional brands, and they have some very low rents. So the economies of scale and the combined operation may - - really can enhance those Kmart units, by adding brands where there's an overlap. It's hard to say. There might be some, but I don't think it will be dramatic.

And on your 39 ToysRUs stores, do you see many of them being converted to BabiesRUs or more affected by a sale?

I don't think any would be converted to BabiesRUs. I don't think so. Ray is indicating he doesn't think so and I look at Ray.

Okay, thank you.

Thank you. Your next question is coming from Carey Callaghan with Goldman Sachs.

Good morning. You mentioned that you had redevelopment opportunities at both Clearwater and Bellevue in the parent and I know Jeff spoke briefly about Bellevue, but what are the redevelopment dollars and the redevelopment yields that you expect for those either independently or in aggregate?

Generally with redevelopment, simply because we have the land that's there and the structures are there, generally we see it in the mid-teens when we pencil it out. In terms of the dollar amounts associated with it, as you might imagine it varies across the board. I think if you look in our supplemental report you'll see generally what we've been spending on the major redevelopment projects.

In any given year, it can be 30 to $40 million. I think the last 2 years we've been running at about a $35 plus million clip and this year it may even be in - - 2005 might even be a notch higher as Westlake really gets into full swing, as well as a few others. So in broad terms I think those are the sort of dollars involved and with about a mid-teens return on the investment.

And then just separately, in Mexico, David, you mentioned you were going to have 3 development starts in the first quarter. For the full-year can you give us a sense of the number of development starts and the dollars involved there as well?

Well, I have to caveat everything in Mexico by saying it's like three-dimensional chess now. It's extremely complicated to put all the pieces together in a development project because you have local partners. You have tenants. You have your entitlements. You have infrastructure. You have a lot of different pieces moving together. As we've mentioned before we're now up over 4 million sq. ft. of deals that we have approved in general to be developed. We anticipate, if all goes well based on the deals that we have approved, we're projecting about $170 million of our own money going out. That is on a total cost of about just under $400 million. This is assuming we participate with GE. And this is over a two-year schedule.

But similar to what I mentioned in the U.S. these are projects where we have the leases in place with H.E.B, and Wal-Mart and Home Depot and others. So there's not a lot of spec development and it takes time to put these deals together. But I will say after 2.5 years of a lot of hard work by a lot of people, the pipeline is excellent. Our momentum is excellent. And I think you're going to see a solid contribution to our bottom line from our Mexico operations as we go forward this year.

Just those 3 development starts in the first quarter that you outlined in context, is that a meaningful part of 170 million starts?

I'll just look at the numbers quickly. Two of them are relatively small, the Pachuca and the - - let's see the Guadalajara is the biggest one. That's a $60 million project. So that's bigger. The other 2 are 15 to $20 millionish, so if you bring in, even on leverage, if you bring in GE for half that it gives you a little idea of the type of dollars that will be going out.

Thank you.

Thank you. Your next question is coming from Alexander Goldfarb with Lehman Brothers.

Yes, hi. Good morning. Just continuing on the Mexico theme, so per your earlier Press Release talking about a potential to invest up to 380 million by the end of '05, is that still realistic or we should think of that over the next 2 years based on your comments?

I think that is the total cost of these projects. The chance of all that money going out by the end of the year is limited because some of these projects are done in multiple phases and will spill over into '06. That said though, we do have the potential to buy some existing properties as well in the pipeline and if we get lucky and put those together, those are deals that we could put money out immediately. It's very difficult to predict exactly how much money we're going to put out and when in Mexico, but we're definitely accelerating. The momentum is there. And I think you are going to see a significant investment by Kimco by year-end.

Also that comment in the prior Press Release represented everything we have in place so far invested to date, as well as a rough estimate of what we expect to invest throughout 2005. So that 380 million was really representing both pieces.

Okay. So you have 170 million of development potential. What is the acquisition potential of in-place properties?

Well, again we have - - what we tried to tie back to in the Press Release was what we have approved and everything we've approved that we haven't closed is development. We do have some things we're looking at, but they have not been fully underwritten or approved by our investment committee. We play it pretty conservative here. We don't really like to talk about anything we haven't taken to our investment committee, so the totals that we gave you are all development projects, what we have on our books today, which is basically Monterrey, Sativo [ph], and Juarez are completed existing projects. And as I mentioned earlier on the call we just completed San Luis. So we have 4 properties that are fully up and running, everything else is development.

Okay. Moving to the Preferred Equity, what was the profit in the fourth quarter and is there anything planned in '05?

I assume when you indicate profit, it's both the yield on the financings as well as the - - any upsides that occurred with respect to disposed of properties or refinancing?

Right, it was the profit participation of the original cost.

Also, the Preferred Equity business brought in about $6 million for the quarter.

Okay. And then moving to update. If you can just give us an update on the Board's thinking with regard to executive succession?

We've covered this before. But from my standpoint we're all very happy under the current scenario. We all have different roles to play. We're very happy. Milton has done nothing but create enormous value for shareholders, including all of us around this table. So I think I speak for all of us in management and all of the shareholders that we hope Milton will continue in his current role for many, many years to come.

Okay, we hope the same as well. Just the final question, the Mesa project with Dorito. It seems to be a rather large project considering the incentives that are - - the tax incentives that are being considered for that. Can you give us a sense of the total cost of this project?

Jerry, are you on the phone?

Yes, I'm on the phone. The total cost projected, assuming we develop it the way it's planned, would be - - this is still preliminary functions, around 125 to $150 million, including the incentives.

Okay, and so your share then would be half that?

Not exact, the incentive numbers that you're quoting are - - include a lot of interest and a lot of other factors which are not in there.

Okay that's fine, we'll talk about it offline. Thank you.

Thank you. Your next question is coming from David Shulman with Lehman Brothers.

Hi. Good morning, everybody. Could you tell us how much FFO was impacted in the quarter and the year from the appreciation of the Canadian dollar?

I can tell you for the quarter, David, it was about 1.5 million in total and our split would be 50 percent, so that's about $750,000. For the year I don't have that available at my fingertips, but - -.

So if we multiply that by 3 it's probably a good number? Just because there was a big - - the fourth quarter I have got to believe was more than the rest of the year?

Yes, well, that's right. The fourth quarter using the average exchange rate is probably about a 9, 10 percent uptick.

So if we multiply that by 3 is probably close enough?

I think so. But [indiscernible - overlapping speakers] to a firmer number.

Okay. Thank you.

Thank you. Your next question is coming from Michael Mueller with J.P. Morgan Securities.

Hi, just one question. For 2005 how much of the incremental 17 million in management fees is already spoken for because of the price acquisition?

10, and that represents the throughput for the full-year effect of all the activities that occurred in 2004 on an annualized basis. So that would obviously then imply that another 7 needs to be created through new business and the normal assortment of fees before we can get there.

Okay. Thanks.

Thank you. Your next question is coming from Matt Ostrower with Morgan Stanley.

My questions have been answered. Thank you.

Thank you. Your next question is coming from David Fick with Legg Mason.

Good morning. I just have one follow-up left to one of Jonathan Litt's questions. Can you talk a little bit about the trend? You address this sort of peripherally, but the trend towards joint venture fees being more aggressive and particularly the incentive elements being more front-loaded as opposed to some of your existing structures where you've got look-backs on the promotes, and so forth.

Well, I'll just comment, David, and I'm sure you have seen it over the years, there has been a transition from structures where very large co-investment with very nominal acquisition fees and very high thresholds of promote to much more aggressive structures where the promote thresholds are much lower, the promotes are higher, there's acquisition fees, there's asset management fees, and there's generous property management fees. It shifted a little bit in favor of the operator because there's so few of us premier operators I would argue, and so much capital that it's chasing.

So the model of a programmatic joint venture is, for instance, a public company like ours, is that a very attractive model institution as opposed to the old model of separate accounts where they hired an advisor, and then hired a property management and so forth, there were double promotes and so forth. There has been a distinct shift in my mind towards these programmatic joint ventures with strong operating partners. And as a result their economics have gotten a little better for the operators.

It's still anemic, David, compared to the hedge funds, opportunity funds, LVO Funds, et cetera.

Okay, are the deal - - I don't think you have filed any of your JV agreements in 8-Ks like some of your competitors. And so I'm just wondering if any of the current deals include, for example, current measurement of cash flow incentives where we might see a little bit more immediate pop on the cash return to Kimco from the individual property performance?

Generally not. Most of our stuff is back-ended in terms of the promotes and we do have some ventures where we're entitled to collect our share of the promoted cash flow. So for instance, if a current cash flow as opposed to a property sale exceeds certain levels, we are entitled to collect our disproportionate share of the economics on the cash flow. But in terms of the promotes that are payable to us on the disposition of property, they are generally structured to wait until the entire portfolio is liquidated and there's a real true-up if you will of what the profit is.

Your promotes right now still tend to be portfolio aggregate as opposed to property-by-property. We're seeing some shifts in that. I'm just wondering if you're looking at what some of - - I'm sure you are, but some of the other public REITs are finding apparently more aggressive capital.

Yes, and we're certainly familiar with that. I think we've had some discomfort selling some winners and taking promotes and then trying to figure out whether there's a - - where we'd have to give back that promote under some sort of look-back or claw-back. I think we're happy with the structures we have.

Okay. Thanks a lot guys.

Thank you. [OPERATOR INSTRUCTIONS]. Your next question is coming from Jeff Donnelly with Wachovia Securities.

Good morning guys. Busy day for you. First off I guess we've been hearing that Kimco has teamed up with another firm to explore opportunities with Pathmark. In broad strokes, Milton, is this a real estate play or a retailer or retail play?

We are not - - we did look at Pathmark; we're not in it. And that Pathmark, I think if anybody looks at it, is going to be a retail play in my opinion.

Okay. And then earlier in your comments, you emphasize the importance of people, your personnel to the platform, Kimco has not [indiscernible] out its departures in the last few years and given the new accounting for compensation, how does Kimco expect to retain and motivate people going forward? Longer term should we be thinking about maybe an acceleration in your labor unit costs?

I think as I mentioned earlier, and I emphasize, that the most important part for us is people, people, people. And it's going to be a combination of (a) having people who have a long-term perspective, we can't compete with the hedge funds and investment banks, who are much shorter term attracting the longer-term people and creating the culture that is rewarding.

And we are working very hard on that. We have mentoring programs, other programs, but I would imagine that we really - - we'll continue to evaluate and watch and do what's right for our shareholders and people.

And I would argue our retention rate is extraordinarily high. You may be referring to David Sandberg, but it took him 30 years to leave. So our retention rate is very, very high. We kept an awful lot of people for many, many years.

Actually a question for you, Dave, just moving on, is that Kimco has been looking around or I guess somewhat active in self-storage. Can you just talk a little bit more about what your approach is there and maybe how it's differentiated versus other options in the marketplace?

Well first, I want to assure you it's a very modest play on our part and [indiscernible]. We started in Toronto, had some very good people, from a company called Apple Storage. We have a joint venture with them. We are up to 6 properties and we have 2 more under contract. Very capable people and we think the fundamentals are nicely in self-storage and we've made some great money with Apple. More recently we have joined a joint venture with Jernigan, a founder of Storage USA, and some of us go back with Dean almost 15 years, we like him and reentered the market, if you will, and we have purchased 7 properties with Dean and 6 more pipelines. Again, these investments are relatively low.

Just like how the fundamentals are turning in self-storage and we like the fact that we have 2 operating partners that can create value in that business. And the ones we're buying are generally lower occupancy where we think we can drive occupancy higher and take advantage of a fundamental improvement in that self-storage business. But it's not going to be a major business of Kimco and our core expertise remains retail.

Do you see these self-storages to be sort of an adjunct, if you will, to retail real estate because of some of the locations that they hold in the market?

Yes. The underlying land against - - we think we have the ability to help underwrite that land for a lot of different uses.

Just one last question actually for Mike. Just in your prepared remarks you had given guidance that most of the category that I'll call other income sources would be flat I think in 2005, over they're full-year '04 results. Can you just remind - - would you mind repeating what categories you're referring to, I think it was dividends and interest income?

You thought my remarks were prepared? [laughter ]

You're an eloquent speaker.

The income statement categories that encompass most of that activity would be 4 line items, income from other real estate investments, mortgage financing income, interest in dividends, and then the catch-all other income. That is where you'll find most of the activities associated with a raise business, on lending to retailers, et cetera, the security purchases, our Preferred Equity business and so on. In addition then to that, you'll always see separately disclosed the gains on the development sales. So you pull all of those together and that really is kind of what I'm calling the other businesses.

Great. Thank you.

Maria, we have time for one more question.

Sir, at this time I'm showing no further questions. I would like to turn the floor back over to you for any closing remarks.

Thank you all for joining us. We look forward to speaking with you again next quarter.