Kimco Realty Corp (KIM) 2006 Q1 法說會逐字稿

Good morning. I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Kimco Realty Corporation first quarter earnings conference call. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Scott Onufrey. Sir, you may begin your conference.

Thank you. Thank you for joining us for Kimco's first quarter earnings conference call. First, I would 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 filing. 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 information measures are available on our website.

Presenting this morning are Mike Pappagallo, our CFO, Dave Henry, our Chief Investment Officer, Jeff Olson, President of our eastern and western region, and Milton Cooper, our Chairman and CEO. Mike Flynn, our President, and several other key executives are also available to take your questions at the conclusion of our prepared remarks. In the interest of fairness, we request that you respect a limit of two questions, with appropriate follow up, so that all of our callers have an opportunity to speak with management. Feel free to return to the queue if you have additional questions.

I will now turn the call over to Mike Pappagallo.

Thanks, Scott. Good morning. First quarter of 2006 represented one of the most eventful and active 90-day periods in the Company's history. Of course, our admittance into the S&P 500 was a watershed event for the Company, and for all those who have been associated with our past and current success. As much as what it means to what has been accomplished, we hope it also signals the next phase of our evolution as a real estate investment, management, and financial services Company.

This quarter was also defined by the substantial levels of investment activity throughout our different business units, as well as the demonstrable progress in our portfolio leasing and redevelopment activities. Our quarterly operating results were quite strong, posting a 12.8% increase in FFO per share. The portfolio metrics underscore a healthy and active portfolio base. This was evidenced by an internal growth rate of 5.5%, which was the consequence of strong releasing spreads, redevelopment activities, and occupancy gains over the comparable period. Margins remain solid at 73.2%, even after factoring in the carrying costs of the FNC portfolio, which cut into the margin by 40 basis points. Same-space releasing spreads were 16% higher for leases signed during the quarter, and 14% when looking at the trailing four quarters. And whereas occupancy for the parent portfolio was flat from December levels at 94.6%, included in the numbers are the acquisition of five locations with dark boxes, representing about 80,000 square feet for our pro rata share. that will be redeveloped for new tenants over the rest of the year.

The quarterly income statement shows increases in most categories versus the prior-year period. The net operating income line jumped almost 12%, reflecting net acquisition activity in the core over the past year, as well as the strong internal growth level. Assets under management have grown substantially over the past 12 months, and now stand at about $8 billion in value. FFO from these programs, including management and other fees, contributed about $29 million, or just under 25% of our quarterly FFO. Increased investment in the preferred equity drove a $3.2 million increase to a $9.9 million income level for the quarter. We increased our marketable securities position, even though it may not appear that way on the balance sheet, but remember that the completion of the Atlantic Realty transaction removed that investment from the securities portfolio, and is now part of our real estate assets. More activity on both the buy and sell side contributed to higher earnings in this area. Other income expense amounts reflect the receipt of the latest installment of Sears holding stock as consideration for our rejection claim in the K-Mart bankruptcy. Finally, KDI merchant building gains were lower this quarter, purely a function of timing and expected as part of our full-year plan.

On the new business front, the volume of activity has been substantial. Dave will comment on more detail in all that we have been doing, but the bottom line is that in 2006, so far, Kimco has invested over $500 million of capital in assets, with a total value of $1.3 billion, and over ten million square feet. These investments have taken various forms, from direct fee ownership of operating properties for our own account and our institutional partners, land for our development programs, preferred equity capital, a stock acquisition, and various other loans and security positions. Another $75 million was deployed for our development activities in the U.S. and Mexico, as well as the redevelopment and expansion of our existing centers, the issuance of ten million shares of common stock in connection with our inclusion in the S&P 500, with the response to both the unique opportunity to raise equity in a non-disruptive manner, as well at support the substantial level of actual and expected business investments, all within the context of our balance sheet and capitalization philosophy.

Recognize that since 2003, the year of our last equity offering, we've invested over $2 billion of capital, even after considering proceeds from dispositions and liquidation of other investments. And we believe the next three years will be as active, if not more active, than the past three. We thought it prudent and responsible to take advantage of a, literally, once in a lifetime situation to replenish the equity base to support our future growth plans, and we have significant capacity on the balance sheet now to tap the debt market and our line of credit to fund future opportunities. The equity issuance naturally caused a short-term dilution pressure, but we feel the corresponding level of activity counterbalances that impact, and, accordingly, I'm leaving our previous 2006 FFO guidance unchanged at a range of between 212, to 216 per share.

And now, I'll turn it over to Dave Henry.

Thanks, Mike. Good morning. We had a active quarter across a broad range of new business programs and investments. In Canada, we had a particularly strong quarter, as we expanded our portfolio by vesting in 30 additional properties, through six preferred equity transactions and one joint venture. This was Kimco's most active quarter in Canada since we began investing in the country in 2001. Our portfolio now contains equity interest in a total of 126 properties, comprises 15.9 million square feet. Our investments in the first quarter of 2006 included two new development project in British Columbia, a major redevelopment project in St. John's, Newfoundland, and investments in 27 other existing properties in various Canadian cities, including Ottawa, Winnipeg, Toronto, Montreal, and Windsor. Canada continues to be a very attractive market for us, giving its stronger economy, growing population, stable government, barriers to entry, and limited competition on a relative basis with the U.S. Our circle of Canadian operating partners continues to grow, with two new major Canadian real estate firms closing deals with Kimco during the first quarter.

In Mexico, we continue to increase our development activity with two large projects commencing in 2006. The two projects are located in the second and third largest city in Mexico, Guadalajara and Monterey, and comprise 1.080 million square feet. In addition, our joint venture with American Industries on net-leased industrial and distribution buildings expanded its portfolio by purchasing two more net-lease buildings and expanding three other existing properties. Overall, our portfolio in Mexico now contains 79 properties, containing 11.2 million square feet, and our pipeline of new business opportunities is strong, and exciting.

During the quarter, Kimco also expanded into the Commonwealth of Puerto Rico, closing on the first two properties in a seven-property portfolio, comprising 2.1 million square feet, at a total cost of $448 million. Puerto Rico is an excellent retail market, with strong demographic and retail per capita, roughly half of the continental U.S. We hope the seven-property portfolio will become the foundation for growing our investments in Puerto Rico through acquisitions, development, and preferred equity.

In the U.S., Kimco also had a strong quarter, acquiring a total of 34 shopping centers, comprising 3.7 million square feet, in California, Nevada, Texas, New York and Hawaii, a new state for us. A substantial number of the shopping centers will be transferred to our co-investment programs with various institutions. Our total assets under management have grown significantly, and now stand at $8 billion. The related asset management acquisition and property management fees continue to enhance our co-investment return and FFO results.

Our preferred equity business in the U.S. also had a very good first quarter. We invested approximately $84 million in 11 transactions, comprising 40 separate properties. Kimco's preferred equity business, including Canada, has grown to a total of 195 properties, totaling 14.1 million square feet, and $310 million of aggregate net investment. Since the beginning of the program, approximately $55 million has been repaid, with profit participation of $22.5 million. The business now has a solid track record of close to five years and a wonderful group of regional partners and customers.

Looking at the development, Kimco developers, KDI, was also active in the quarter, closing on four new development project; Phoenix, Dallas, Nashville, and Chambersburg, Pennsylvania. Anchor tenants include Target, Home Depot, and Publix. Overall, Kimco currently has 41 active development projects in the U.S., Canada, and Mexico, with a total project cost of $1.5 billion, comprising over 15 million square feet. The development pipeline is also strong, including 16 potential development projects in the U.S., ten in Mexico, and one large project in Canada. As we have previously discussed, almost all of our development project are structured as joint ventures, in which Kimco provides capital and leasing assistance to experienced and talented regional development partners. The joint venture model has been successful for us, because we combine our national tenant relationships and experience with our regional partners' knowledge of local markets, construction costs, building regulation and the entitlement process.

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

Thanks, Dave. A shopping center portfolio is by far the largest component in our FFO, and a very important force for our growth. Jeff Olson has been monitoring our progress in working towards the goal of a dream portfolio, and I've asked Jeff to give all of you a report on that progress. Jeff?

Thank you, Milton, and good morning. Our strategy is to remain focused on owning properties in major metropolitan markets with significant barriers to entry; below-market rents, strong tenant sales volumes, high tenant credit quality, and redevelopment potential. Today, 62% of our pro rata share of annualized base rent and approximately 70% percent of our real estate value is derived from seven core markets; New York metro, California, Florida, D.C. Baltimore and Philly, Canada, Puerto Rico, and Chicago. Let me walk you through each of these markets briefly.

New York metro is our crown jewel. It is our largest market, representing 12% of our pro rata share of annualized base rent. Within this portfolio, over half of our rent is derived from centers anchored by a supermarket. Our average New York supermarket generates $727 a foot in sales, based on gross square footage. The remaining 50% of our New York metro portfolio is comprised of power centers and freestanding stores. The overwhelming majority of our big box retailers are posting sales in the top 10% of their chain. The most striking aspect of our New York properties is the amount of big box leases with both below market rents and short-term lease expirations.

Over the next ten years, approximately one million square feet of big box leases expire, with no options remaining. The average contract rent is $7 a foot. This compares to market of $30 a foot or more. This will create significant growth in our same-store NOI, as these leases mature, prior to any consideration for redevelopment or expansion opportunities. An example of this is our most recent acquisition of Highland Shopping Plaza, the largest community shopping center on Staten Island, and our fifth property in that market. Three big box tenants comprise 159,000 square feet. Their current rent averages $3 a foot. We believe market is closer to $25, and the leases for all three of these tenants expire within ten years, with no options remaining.

California is also an A-plus portfolio for Kimco, and represents 11% of our rents. We've purchased over 40 centers in this market, over the past four years. Over half of this portfolio is anchored by a supermarket whose average sales total $640 a foot. The other half is predominantly power centers and freestanding stores, anchored by Cosco, Home Depot, Coles,K-Mart and Lowe's. And like our New York portfolio, our big box tenant sales earn the very top of their respective chains. Our most notable property in California is Westlake Shopping Center, which also happens to be Kimco's largest single investment. We recently completed Phase 1 of our redevelopment plan with the opening of a two-story Home Depot, Trader Joe's, and Costs Plus. Our Trader Joe's is reportedly ranked number seven out of 230 stores In the country. Phase 2 will be completed within 12 months, with the addition of TJ Maxx, Linens 'n Things and DSW.

Now turning to our third largest market, Florida, which represents 11% of our rents, our grocers in Florida are generating $437 a foot in sales. We have many redevelopment opportunities in this state, as a result of the strong population growth and rising land prices, especially in Miami, Fort Lauderdale, and Orlando. We are working on several mixed-use redevelopment opportunities throughout our Florida portfolio.

Washington, DC, Baltimore, and Philadelphia collectively represent our fourth largest market and account for 9% of our rents. Approximately half of this portfolio is anchored by a supermarket, with average sales of $475 a foot. This portfolio was primarily a result of our purchase of the Ralph's Company Community Center division in 2001 and Mid-Atlantic trust in 2003. We like the high barriers to entry of these markets, stability and [insil] nature of our properties, all of which should foster additional redevelopment opportunities in the future.

Canada is our fifth largest market, representing 8% of our rents. It is an attractive region, due to its strong resource-rich economy, growing population, stable government, and extensive barriers to entry. The majority of of our Canadian properties are located in primary markets, such as Toronto, Vancouver, and Montreal. Puerto Rico is now our sixth largest market, representing 5% of our rents, when including the remaining properties we have under contract to purchase. We like Puerto Rico because our U.S. retailers can't stop talking about it. Their sales are very high as a result of the dense population, high consumer spending, and limited competition. And finally, Chicago is our seventh largest market, representing 5% of our rents. Our Chicago portfolio contains well-located insill sites and high income suburbs.

In summary, these seven markets, which again collectively represent about 70% of our real estate value, are important ones to grow, as we work towards our dream portfolio. Our overall plan to reach our dream includes the following: First, we will continue to dispose of those C-quality assets with minimal prospects for value creation. We currently have about $300 million of property in the market; second, we will opportunistically acquire A and B-quality properties with growth potential for our core portfolio and joint venture programs. Examples of this during this past quarter would include Highland Shopping Plaza, Cupertino, FHK, Puerto Rico, and the Crow portfolio; and third, we will develop new properties for the core portfolio, such as Tustin [Legaseg], which is a one million square foot power center situated in the heart of Orange County, California; and, finally, fourth, we will place an intensive focus on creating value and upgrading our shopping centers through redevelopment. We currently have 42 project in our redevelopment pipeline totaling $254 million in costs. We expect to complete most of these projects over the next 18 months at unleveraged returns in the low teens. We are pursuing many other redevelopment opportunities throughout the balance of our portfolio, as well.

Scott? Or Milton, I'm sorry.

Thanks, Jeff. We all know that a dream portfolio is very important. What is of as equal, if not greater importance is a dream team. I've mentioned many times that the best thought-out strategy is worthless unless you have people to execute. Dave Henry, Mike Flynn, Mike Pappagallo and I all feel that our number one priority is to constantly develop, mentor and monitor our team. It's an ongoing process, and a source of gratification to all of us, and we feel very proud of it. It's our most important off-balance sheet asset. With a dream portfolio and a dream team, good things have to happen.

I think Mike, Dave and Jeff have covered all of the business points that I wanted to comment on, so we would now be happy to answer any questions you may have.

We will now take the questions.

[OPERATOR INSTRUCTIONS] First question is from Ross Nessbaum of Banc of America Securities.

Hi, it's Christy McElroy here with Ross. Mike, you talked about activity that's stronger than expected, offsetting some of the dilution from the equity issuance. Can you specify what assumptions have changed in your guidance, specifically with regards to the acquisition and disposition volume, G&A, other income and gains?

Christine, I think you put five or six questions into that in one [LAUGHTER], But that's okay.

Well, I only get two, right?

That's shrewd of you, so I'll do some. I think it's -- basically, the primary assumption changes. In our last call, we talk about core acquisitions ranging between $350 to $750 million, and joint venture or institutional programs at about $600 million. I think at this point, both of those numbers I'm scaling to roughly about $900, $850 to $900 million each, and that's a consequence of what has happened so far and what's in the pipeline. And the only thing I think you'll need to do differently in your modeling is just to pa -- is to be attentive to the percentage of economic ownership that Kimco has, because one of the things that we did do was to take on a 5% ownership interest in -- in certain of the Crow Holdings assets, which I think were about $380 million, so you have to rejigger your computations about the Kimco's share and the returns.

But those were the basic framework of the acquisition activity, and those really -- those activities really will drive the increased FFO dollars, which in turn are somewhat counterbalanced by the additional shares. Most of the other things roughly are the same as where they were in our last discussion as that relates to Kimco developers gains. I did target a little bit less this year, primarily a timing thing from years past, and then perhaps maybe just a slight increase in the all over income sources. We're getting a few more profit dollars on some of the dispositions of the FNC properties, as well as a little bit more marketable security activities. But those I would point to as slightly higher than the original expectations.

Okay, and then that kind of leads into my next question, regarding the interest you acquired in the six shopping centers from Crow Holdings, can you talks about some economics behind the fee income and promote structure, and why you decided to take only a 5% interest?

The only thing I could comment on is that this was an opportunities just to increase our assets under management. The management fee structure is consistent with many of our other programs. But other than that, and because they were brought to us, we didn't earn an acquisition fee. But other than those factors, they're pretty much the same as most of our other ventures. And again, this is all a consequence of us continuing to try and build a third-party management business, and we have some very good relationships with the Crow people, and we thought this would be a great way to potentially expand that business.

Great, thanks, guys.

Our next question is Christine Kim of Deutsche Bank.

Hi, good morning. I think you may have mentioned this earlier, but what was driving the higher other income this quarter?

That was the receipt of securities or stock of Sears holdings, which was the consequence of our rejection claim from the K-Mart bankruptcy.

And how much was that of the other income?

About $11 million.

Okay. And also, you've been able to maintain a high occupancy, and you had a pretty significant ramp over the past few -- past year. Do you see that as sustainable for the rest of the year or do you expect that to grow higher, taper off?

I certainly expect it to be sustainable, and I think we'll have increases as well, but not to the extent that we've had it over the past couple of years, and it's particularly where we -- where the base, where we started from a couple of years ago. And even with respect to many of what we call our redevelopment activities, not all of those redevelopment activities are additive to square footage. Generally they may be recombining and changing existing square footage. So I see some occupancy growth, but certainly not at the pace of the last couple of years.

The higher occupancy, is it that being driven by just very strong retailer demand, or acquisitions?

It's a combination of the internal growth, and releasing, acquisition activity, and over the period of time, we have disposed with many of our C-quality assets, which had low occupancy, so really is a combination of all of those forces. But I think that the bottom line is that it is another metric to underscore an improving portfolio quality, and our movement into the right direction with the portfolio that has all of characteristics that Jeff had outlined.

Great, thank you.

Our next question comes from Michael Bilerman of Citigroup.

Good morning. John Litz on the phone with me, as well. Mike, I was wondering if you can comment on the 5.5% increase in the same-store NOI? So I guess at first blush it seemed a bit high, given that your probably same-story occupiny -- occupancy increase is probably 20, 25 basis points, yet about 10% rent bumps. So what's really causing that increase? Is it the redevelopments? Is there something else happening on expenses? And what is your outlook, going forward?

Michael, first, I wants to know why you are third today, instead of first? I guess you have to ask the questions on this call. The driver was both absolute rent growth, as well as some of what we are calling the redevelopment coming on stream, and those I think were the two key drivers. And, you know, year-over-year occupancy did increase probably in the neighborhood of 40 basis points from like 94.1 to 94.5, looking at pure same-store occupanc -- same-site occupancy, I think knows are the key drivers. We did get a big uplift on the comparable period, particularly for some of the sites that have been undergoing some pretty serious releasing and redevelopment activity.

But again, I caution you on the -- what we're characterizing as redevelopment, many -- in many cases, is not adding net square footage. It's simply dealing with an existing footprint and moving tenants around, and putting in new tenants. It's not very different than if we kept the same four walls, same demised area, and you put in a new tenant and gave them a $20 a foot allowance. So be careful when -- when people talk about redevelopment that is a negative because, actually, it's just a part of the activity that we're doing.

Would you say about half was probably due to the renovations or expansions and half due to core leasing and occupancies? Is that a fair --

No. What I can say is when you look at the entire -- all of the locations in have some redevelopment activity going on -- and we're looking at the entire site, not maybe just the sub-component of those leases and activities -- of the 5.5%growth, about 2.5% of it is due to those locations. About 3% is what I -- for lack of a better time, what I would call pure, same-store growth.

Okay. And then the second question I had was just more on the topic of assets under management. You've talked a little bit about that on this call. Talked about the Crow Holdings, wanting to increase assets under management, taking a 5%. How much do you want to grow that business? You've talked a little bit about it over the past month and a half about maybe growing to seven -- at $75 billion. How do you think about what investments will comprise that asset under management and how you will fund your share of of those investments?

I'm going to refrain from specific numbers. All I can say to you is that we intend in this -- market in this environment, and we're going to continue to be very aggressive in increasing the assets under management. But I'm not going to give you a specific dollar amount. And in terms of how we are going to finance it? I think if you'll look back at our 14-plus year track record, you understand how we finance our balance sheet between debt and equity, and maximize the amount of cash -- free cash flow. And I don't think we're going to change our balance sheet philosophy in terms of how we finance our economic interests in these institutional programs.

How about the what, in terms of what you invest in? I know, Milton, you commented in your shareholders letter that you're looking at more complex investments, whether it be mortgages, leasehold, debtor in possession, and ownership of stock in corporations that are real estate heavy. Is that going to be a larger part of the investments going forward, or will it be strict real estate?

The major part will still be real estate. As I -- as long as you referred to the letter, we will constantly look for off the beat track investments that can yield the kind of returns that we've gotten in the past. But as I've mentioned, it will be a modest portion of our equity

Great. Thank you.

Our next question is from Matt Ostrower from Morgan Stanley.

Morning. I guess to follow up on -- more on the acquisition side, you talked about $900 million I guess of JV acquisitions and said that we need to tweak the economic interest. I guess to be more specific, is the Crow Holdings deal, is that something that we should thinking of as more the template to go forward? So are you saying that we should be lowering your economic interest going forward on average in the $900 million you're talking about?

No, Matt, it was just a comment for this year's assumptions by the individual who had asked the previous question, in thinking about the numbers from my previous statements in the last call, that we did ramp up the acquisition activity. But I just wanted to be mindful that, unlike the typical math that we work with Kimco maintaining a 15 to 20% interest, in this case or for piece of the total, we have a smaller economic interest. Going forward, looking out at the next X-number of years, I still think, as a general rule, to maintain a -- just for argument's sake, say a 15% average interest on new deals will be the norm.

And I guess the follow-up, the $900 million of it -- $900 on each side, I guess you could say represents, I would assume, some kind of a middle-of-the-road scenario for you. How -- you know, how much further could you go? Are you -- given Milton's comments previously that we're fairly bullish about assets under management . Is it fair for us to say that, well, that's your --that's what is in your projections this year. It's even more likely that you exceed that, and is there -- can you give us any sense for how much more you could do than the 1.8 this year of the total --

Matt, I think at this point, that's probably the best number that I could offer up, based on what we have done so far, and what I can see -- what I can visualize, based on the pipeline I look at with Tom Caputo all the time. And recognize that this year, that the core portfolio acquisition, fully half of that relates to the Puerto Rico acquisition, which really was a more strategic move into the market. Many times I've said to you -- and Milton has said that most of the investing activity will be through the institutional programs, and I think, as a general rule, that remains true. But this year, it's been a little bit -- a degree of outside acquisitions in the core, primarily because of Puerto Rico.

Is it fair to say that that, given the circumstances that we're under and Milton's previous comments that the possibility this time on the probabilities rather than actual numbers. The probabilities of exceeded your projections on the acquisition side is greater this year than in previous years?

Yes.

Okay, great, thank you.

Our next question is from David Harris of Lehman Brothers.

Good morning, everyone. I wonder if you could share with us what you're seeing in terms of any movement on cap rates on your acquisition, disposition activity? And related to that, can I just ask whether Jeff would be willing to share with us the underlying cap rate assumptions that allow him to express the 70% of value from the seven core markets that he referred to earlier on?

This is Tom Caputo. Answering the first question in terms of cap rates, we are seeing for A-properties cap rates in that .5.5 to low six range, maybe 6.25. And for the B-properties, it could be 6.75 on up to 7.25. And then there's a great differentiation with the C's and all other properties. We've see no let-up on the A-properties in terms of cap rates. Not going down any more, but they're definitely holding steady.

And as it relates to the seven markets that comprise 70% of the value, the majority of what we own in the seven markets is in the A to A-minus range. And if you just take those cap rates that Tom reviewed, I'd say that the cap rates that we used are very consistent with those.

Okay. If you will indulge me, I have a two-part question related to your overseas activities, which you obviously showcased in terms of your prepared remarks. Can you just share with us what your return expectations are in both Mexico and Canada? This is what you could be do -- achieving with the same dollar invested here in the U.S. And, then, second part to that question is -- this is probably a question for Mike, I guess, could you tell us what the -- given your increased exposure to these markets, what a 10% change in the U.S. dollar versus the lune and peso would terms of it's FFO per share impact?.

Well, let me take a stab first at our return expectations. And, obviously, it varies by country. We try to take a hard look at the risk-reward equation, as we go into countries. I would say, in general, Canada has a little bit lower return expectation than Mexico, which we believe has more country risk associated with it. but even in Canada, we expect slightly higher equity yields, because of the complexities and the tax consequences associated with being an investor in Canada. So I would say we're looking for returns on equity in the mid to high-teens in Canada. Whereas, in Mexico, we are looking for returns on equity of 20 and above, over time. And as we've said before, we think we'll be able to achieve that, because we have something in Mexico that we don't have in many of the other markets that we're investing in. And that is we've full CPI, increases in every single lease we have in Mexico. We have percentage rent and we have real rent growth in the local space, all of which should drive the top line income.

n addition, there is potential, and hopefully probability, that cap rates will come down over time, as more institutions circle Mexico and it becomes a more accepted place to participate. So, definitely we look for a little higher return as we look around the world, and I think we've mentioned that we're looking in Central and South America, as well, as we would expect higher returns to offset the country risk.

In terms of the currency, I'll swing it back to Mike, but in general, we look to hedge as much as we can. As an example in Canada, we put Canadian dollar debt on the properties, and our equity is invested through our Canadian dollar line of credit. Only thing that's not hedged perfectly is the income from the portfolio. And to follow on that, David, and just [tantitizing] Canada and Mexico, looking at foreign-denominated flows, 10% decline in both the Canadian dollar and the Mexican peso probably would impact our current earnings from those two sources by maybe $4 million or so. That's probably no more than a couple of pennies a share, so it won't be that impactful from our perspective.

But there is a natural hedge in the leases in Mexico in that a peso -- with a peso shrink, there should be an increase in volume, and we have percentage rent clauses in every lease and cost of living adjustments, so there is a form of currency hedge in the Mexico leases.

Okay. Can I assume from that there is no currency impact included in your '06 guidance?

That's correct.

Okay. thanks so much.

Our next question is from Jeff Donnelly of Wachovia Securities.

Good morning, guys. I guess this question's for David and Milton. Just anecdotally we've been hearing that institutional interest in retail real estate development has been waning in favor of other property sectors. Are you seeing something similar, or just closer to home are you folks seeing softening in the number of interested JV partners or a shift in market terms around joint ventures?

I think you are right. There has been some hesitancy on some institutions looking at consumer demands slowing down, and they're beginning to shift into apartment and office as opportunistic. Our existing stable of investors, though, remains very bullish on our particular sector, and has been investing with us aggressively. But I think from a high level, you're right. There is -- that there is some movement among some the larger pension fund advisors, and some of the pension funds insurance companies to shift a little bit out of retail into some of the others. But we continue to see strong demand by investors to partner up with us, strong demand for properties, and we anticipate growing quite a bit with our currents partners, and some perspective investors that we've been talking with for a while, that are interested in an extension of the products that we're looking at. I think Milton has talked before about, for instance, a land fund that we might put together. That's created quite a bit of interest, especially in a country like Mexico, where it looks like you could get very strong returns by investing in the next set of land parcels, perhaps two to three years out. So things like that are exciting ways for us to continue to grow in our sector with these institutions.

And I guess sticking with you, Dave, or Milton, what can you tell us about the nature of your interest in Albertsons? I think that was a question that was off the table last quarter, but specifically, just anticipated investment returns, strategy or hurdles you guys perceive?

We expect to be able to comment more on that at your next call. It's still off the table for this quarter.

Thanks. I had to try. [LAUGHTER]

Our next question is from Craig Schmidt of Merrill Lynch.

Good morning. I guess this is for Dave Henry. In looking at the development in Monterey, the land is $12.8 million and total costs of the project $35, $36 million. It seems like the land is a greater portion of the value of the development in Mexico than perhaps U.S., and it also seemed like it had a rather high FAR relative to U.S. shopping centers. I wonder, is this a true relationship between Mexico and the U.S.?

I think that's, in general, very true. It depends on the city in Mexico, but both Guadalajara and Monterey are very expensive cities for land. And, in general, land in Mexico can range from 25 to 50% of the total -- total cost of the project. So land is more expensive, the construction cost is far cheaper than comparable in the United States. And then, remember in Mexico, we're developing. in large measure. enclosed shopping centers, which generally have more square footage to them then our regular neighborhood community centers here in the United States.

Are parking requirements similar or is there a less demand for parking?

The requirements are similar. There is less demand for parking, because many of our -- many of our customers come by bus and walk to the shopping centers, since the density is absolutely amazing around some of these shopping centers. So a large proportion of the customers actually walk to the shopping centers.

And one last thing, the 5.5% same-store NOI, is that a quarterly number or an annual number?

That's just a quarter-over-quarter, Craig.

Thanks a lot.

Our next question is from David Fick from Stifel Nicklaus.

Hi, a couple simple questions. Dean Jernigan had taken the huge storage out. What does that mean to your relationship?

It's probably going to wind down our joint venture with Dean. As you probably know, we've sold quite a few of the assets in our joint venture. In general, we're very excited for Dean. It's a wonderful opportunity for him, and the Amstel family's a wonderful family, and they have a great portfolio. So we're excited for Dean about the opportunities to run a very large platform, a large portfolio, self-storage. We're sad. We probably won't be doing as much with him, although Dean has mentioned he will look for opportunity for U-Store-It and Kimco to team up together in some form or fashion. But at this point, there's nothing specific, and our venture in the United States is probably in the disposition mode at this point.

And, secondly, your relationship with Feldman, can you just comment on where that is? Is that strictly a -- a mez-type relationship or are you looking to expand that?

At this point, it's a preferred equity relationship. We have one existing transaction with Feldman and we're looking for a seconds. We like them principles, and we -- and we're intrigued with what they do in a mall. They try to convert it more to a life-style and power center from a traditional department store-anchored mall. And to the extent we can participate with them on a sound basis, we will continue.

If I could cheat a second, G&A run rate?

I'm going to stay consistent with last quarter, David, and looking at the full year at being somewhere in the $65 million range.

Thank you.

Our next question is from Scott Crowe of UBS.

Good morning. My question is just on the [inaudible] impact of the shift of the ten year bond. It's moved quite a bit. Do you expect that to impact cap rates going forward and if not --

I think it will. I think as leverage becomes less positive, and in some cases, negative, you are going to see a movement in cap rate. I think we're already beginning to see a little bit in the C-properties, or B-minus properties in the market. It's tougher is sell these things and prices have -- have dipped a bit, and our 1031 exchange business reports that cap rates have moved up about 25 to 30 basis points, especially on those smaller out-parcels that are purchased by leverage buyers. So I think you're beginning to see an impact already, and I suspect you'll see somewhat of an impact over time.

Well, the secular change may be the risk premium may be coming down as the perception of real estate risk has really improved, so it will counterbalance, to some extent, the interest rate increase.

Okay, Thank you very much. Just as a follow up, have you guys had a look at mill?

No, we're not.

Thank you.

Our next question is from Steve Sakwa Of Merrill Lynch.

Good morning. I just had one question with regard to maybe development, Milton. A number of the larger big box retailers, like Home Depot, have announced a pretty big slowing in their store opening plans, and some of the other tenants that have really taken a lot of space, like dollar stores, has cut back square footage. How is that maybe impacting your business, both development, and some releasing of the big boxes that you have in the portfolio?

Well, the -- you're quite right, and the dollar stores, and I think all retailers who depend on the consumer whose disposable income is low, will be affected and that, of course -- the dollar store customer is hurt dramatically more with the cost of gas than the Target or department store customer. So the -- and that's continuing in other areas. On the other hand, the -- our development business has never been better and that may be the nature of our business with our joint venture partners. But our backlog is at historic highs, and the demand for new space continues, albeit the two examples you made accurate,so it's still strong, Steve.

So you're not seeing, I guess -- I realize the '06 pipelines and things are set in place, but do you think that the fact that Home Depot's basically announced that their going to open half as many stores as they have, basically, that's 100 less stores a year that they're willing to open. How do you think that impacts volumes, you know, for you and the other national developers and what do you think that does to yields?

I think A, development yield have come down. Insofar as lack of demand from Home Depot has been, I think, more than offset by Wal-Mart, Target, Cole's, Lowe's. The aggressive retailers are expanding and have a thirst for additional locations. And balance, I think, is continuing.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] Our next question is from Michael Mueller of of JPMorgan.

Hi, good morning. Question for Mike. I'm looking at the balance sheet, the accumulated and other comprehensive income, which I believe is largely security gains that have yet to be recognized.

Yes.

Can you talk about a time frame for that to hit the PNL, and maybe kind of dovetail it into the other net line item? Should we, for the balance of '06, expect any other lumpiness or large items to hit, like we have with the Sears stock in the first quarter?

Okay. First, Mike, analyzing the number, particularly in light of the end of the year, remember that a sizeable amount of it went down simply because of the Atlantic Realty transaction. There was unrealized gain that manifested itself into an asset acquisition so that -- those numbers disappeared. I don't -- I can't give you a specific time frame on when that accumulated other income will actually hit the income statement, because the portfolio continues to regenerate, and we'll find new deals that will replace deals that we liquidate. I think the best way to look at it is if you analyze the income statements over the past couple of years and first quarter of this year, there's going to be some level of income -- maybe it's in the $20 to $30 million range, maybe more or less in a given year -- but it will be a consistent stream of income. And we will continue to acquire new security positions where we see our undervalued positions or particular circumstances, so I would expect that just to continue to regenerate over an extended period of time, with individual quarters maybe going up and down because of the timing of disposition versus new deals.

Okay. And then one other thing. Just looking at the merchant building pipeline, it looks like there are about five or six projects, I believe, that are completed and waiting to be sold, about $70 million. Can you give us an idea of what the timing should look like for the balance of the year? Do you expect anything to close in the second quarter?

Based on current projections and working with Jerry, the most of the dispositions will occur -- based on our plan -- in the second and third quarter. But as history is a guide, timing does have a tendency to slip and to move around, but we expect the bulk of it to occur in the second and third quarter.

Okay. Thanks.

Our next question is from Paul Morgan of FBR.

Good morning, just one quick question. When I was looking through the acquisitions, you know, this one property struck out, Cupertino Village, at, seems like close to $600 a foot. Is there anything particular or is that a redevelopment or are you going to contribute that to a joint venture or would you say that's just representative of that market?

Hi, Paul, it's Jeff. And at Cupertino, we plan to redevelop the center and expand it. It is a wonderful piece of real estate. If you've been out there, there are 220,000 people that live inside a three-mile ring. I think the average household income's around $115,000, and the way we underwrote it, prior to any redevelopment expectation, we believe that our NOI growth will be in excess of 5% annually, but we bought it for the redevelopment potential.

Okay. And is it because of the land availability there, or really, if you are to buy now site in the same market that that would be the price per foot generally? That's the market pricing.

We believe there's excess land on our property that will allow us to build additional retail and maybe even other uses.

Okay. Thanks.

Our next question is from Dennis Maloney of Goldman Sachs.

Hi, good morning. You touched on tenant health a little bit, but I was wondering if you could give us a little bit of color in terms of your outlook for store closures and bad debt in '06, vis-a-vis '05?

I expect that it'll be greater in '06 than it was in '05, based upon what -- concerns about consumers health. So that I don't think we're going to have the kind of year that we had in '05. I think there'll be more closures.

Are you budgeting a number of square footage to loose to bankruptcy? What might that be and how does it stack --

I really don't know in that I really don't know who might, but I was just answering your question. My opinion is there'll be more in '06 than there was in '05.

Okay. Thank you.

Our next question comes from Michael Bilerman of Citigroup.

Got a couple of follow-ups on the income statement. You said that $9 million was earned from the preferred. What else rolled into your income from other real estate investments this quarter?

On that caption, which I believe that the total was $18 million, most of it was due to the disposition of sites in the FNC Realty portfolio, and then some slight amounts with respect to our KIM South disposition activity of the process of primary -- other items above and beyond the preferred equity investment.

Okay, and then just on the interest dividends and other investment income, how much of that $12.3 million was due to securities gains, and what made up the balance?

About $7 million or so was due to turnover, with the balance being recurring interest and dividends.

And is there anything left -- I mean, the Sears, you said it was the bulk of the other income expense, the other $12 million. Is there anything else that we should be thinking about in that line item for the rest of the year?

I think the way you should approach it is that we have continued to demonstrate the continuous ability to generate earnings in that line, and that we'll continue to do so, both from our existing positions, as well as new positions.

So those are two separate lines, One's the interest dividends and other --

I'm speaking about the interest dividends and other investment income line. As it relates to other income and expense, by its very nature, it's more specific one-time oriented, if that's the right phrase, and I don't have any other material items projected for that line item, based on what I see between now and the balance of the year.

And then can you comment on the large -- the one large project in Canada, $216 million, that you are evaluating? And is that a fully owned, a joint venture, what type of asset?

It will be a joint venture. It's located in Montreal, and we are still in the initial stages; we're not really ready to get into too many more details.

Is it more of a mall-ish type asset?

No, no. It's more of a traditional power center. There'll be a small life-style component to it, but it's just a very large project in Montreal.

Can you just comment on the Westmont portfolio? Is that a hotel company and what sort of investment did you make?

Yes, it's a joint venture investment with Westmont Hotel Company. This is our third investment with the Westmont folks. We like them a lot. They had an opportunities to basically repurchase their equity interest in a group of eight hotels across Canada from the Whitehall Group, The Whitehall Group was nearing the end of their -- their fund life. Under a negotiated transaction between Westmont and Whitehall, we provided some of the equity capital to acquire those hotels.

And what position in the cap structure are you?

This one is a parry pursue joint venture, 80/20.

Thank you.

At this time, there appear to be no more questions. I'll turn the floor back over to you, Mr. Onufrey.

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

Thank you. This does conclude today's conference call. You may now disconnect.