Kimco Realty Corp (KIM) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, my name is Sierra, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Kimco Realty Corporation second quarter earnings conference call. All lines have been placed on mute to [INAUDIBLE] any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, please press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. It is now my pleasure to turn the floor over to your host, Mr. Scott Onufrey. Sir, you may begin your conference.

Thank you, Sierra. Thank you all for joining us for Kimco's second 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 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 op -- 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 Vice Chairman; Jeff Olson, President of our Eastern and Western Regions 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, and good morning to all. I started off last quarter's earnings call with an observation that our first quarter was one of the most eventful and active in the Company's history. I'm not sure how to describe the second quarter, other than to say it came pretty darn close. The most significant item was our announcement of the merger with Pan Pacific. By far the largest single transaction in the Company's history. At this point in the process, there is little else that we can share with you other than what is already available in the public domain. But we expect to file the preliminary joint proxy and registration statement with the SEC very shortly which will provide more information on the background and structure of the transaction. The Pan Pacific effort was led by Jeff Olson, Tom Caputo and Howard Overton, our West Coast Acquisitions Director, and involved enormous effort by many of our Kimco associates. Yet, these efforts did not divert the successful execution of a host of other transactions and new business as well as the continued focus on the enhancement of our core real estate holdings. And the quarterly operating results provided more evidence of the success of the business model.

Funds from operations per share increased by 12.5% to $0.54 for the quarter and a similar growth rate for the six months. Cash flow from operations continues to grow at a healthy clip increasing by 21% to $234 million through six months. EBITDA increased almost 18% for the three and six-month periods. Simply put this, business model is working. If you look back at our operating results and business activity over the past four years, you will see a continuous process of harvesting value from prior investments while planting the seeds for future growth. The quarterly and six--month income numbers reflect the breadth of these activities to complement the increasing cash flow of our core real estate holdings while also continuing acquisition development and other new business investment to set the table for future earnings growth. With this in mind, the board of directors approved an increase in the quarterly dividend of $0.03 per share, or a 9.1% increase. But as much of our strategy is about growth, it's also geared to addressing risks. Milton will explain more about this in a few minutes.

Investment activity to date has increased in most areas of the Company. This includes growth in wholly owned properties on the balance sheet, primarily the result of our entrance into Puerto Rico, and the utilization of proceeds from our disposition program into higher quality assets including shopping centers in California and the New York metro area. Internal growth continued the trend seen in the first quarter as overall same-site NOI increased by 5 per -- 5.5% for our core consolidated portfolio. Interestingly, we also look at the same site impact of our other jointly held properties classified in the parent portfolio including Canada and Mexico and the composite number is actually about 6.3%. And again, these numbers are before any accounting items such as straight-line or FAS 141 or any one-time receipts such as lease termination fees or bankruptcy settlements. The effect of the acquisitions and internal growth contributed to the $17.3 million increase in quarterly net operating income versus the prior year.

Profits from our management business continue to grow, contributing total SFO of 33.6 million for the quarter, an increase of 7.5 million or about 29% from 2005. Included in the current quarter is the final incentive management payment from our partner in connection with the liquidation process of the KimStyle portfolio which was a consequence of our decision to buy a substantial amount of the remaining ownership in that entity. Interestingly we were also able to earn an equity kicker from the sale of a property in Gainesville, Georgia, that we have been managing since 1962. We did not have fee title interest in this property but are having a management position with an equity incentive feature is another example of the myriad ways we own real estate and can create and extract value from them.

We continue to produce earnings before the other business units. During the quarter we captured upsides on the payoff of an acquired mortgage loan and sold various positions in certain debt and equity positions, reinvesting the proceeds in new opportunities. Our KBI business sold two projects and numerous outparcels and delivered 6.6 million of gains after taxes. Balance sheet capital structure remains healthy and we were pleased that the rating agencies maintained our rates level after the Pan Pacific merger announcement. During the quarter we completed a successful consent solicitation to our bond holders revising certain definitions in the bond indenture to reflect the changes in our business model and increased flexibility while continuing to provide appropriate protection for those bond holders.

I've increased the earnings guidance range slightly, reflecting the positive tracking of earnings through the first half of the year, and the continued business activity which has countered my earlier concerns about short-term dilution from last quarter's equity issuance in connection with our admittance into the S&P 500. Current range of FFO per share is now between $2.16 to $2.18 per share, and a successful completion of the Pan Pacific transaction as currently contemplated will occur too late this year to have any meaningful impact on the 2006 number. I will provide a range of estimated FFO per share for 2007 on the October conference call. And now I'd like to turn it over to Dave Henry.

Thanks, Mike. Good morning. As Mike mentioned, we had a wonderful quarter of new business activity capped by our pending merger with Pan Pacific. In the U.S., in addition to the Pan Pacific transaction, we acquired 33 additional property interests during the quarter, comprising 4.8 million square feet with an aggregate cost of 537 million. Of note, our co-investment program with UBS Wealth Management added two large shopping centers, a 447,000 square foot retail center in Framingdale, New York, and a 231,000 square foot retail property in Sturbridge, Massachusetts. Over the past year, our UBS joint venture has grown to $558 million comprising 3.1 million square feet with 15 additional properties scheduled to be added to the venture this year. Other major acquisitions during the quarter included retail properties purchased in Philadelphia, Pennsylvania; Portland, Maine; and Mayaquez, Puerto Rico.

With our various institutional partners we continue to be very competitive buyers of first class shopping centers across the country. Our institutional joint ventures now comprise more than $8.5 billion and our partners include many premier institutions such as the New York Common Fund, UBS Wealth Management, GE Real Estate, LaSalle Investment Management, GE Pension Trust, and Prudential Real Estate. We are very pleased to be managing high quality retail assets for these institutions, and we believe this activity will grow substantially in the future.

Our Preferred Equity program was also active during the quarter. Within the U.S., we closed on five new Preferred Equity investments totaling $35 million covering 13 properties. Overall, our Preferred Equity program, including Canadian transactions, has now closed on 81 separate transactions, totaling $429 million, representing 228 individual properties with 38 separate partners. After five years, our Preferred Equity business is now well-established with an excellent track record and a strong pipeline of opportunities.

With respect to U.S. development, our KDI business unit was also active during the quarter. KDI closed on a new development project in Anchorage, Alaska, containing 256,000 square feet with anchor tenants including Michael's, Petco, and Bed, Bath and Beyond. In addition, KDI also acquired 100 acres of land for the new Avenues Walk project and invested approximately $90 million in its current pipeline -- pipeline of 37 shopping center development projects.

In Kimco Select, our opportunistic investment business, we invested approximately $16 million to acquire an equity interest in two large buildings in Houston, Texas, and Albany, New York. Kimco Select continues to invest opportunistically in a wide range of property types and financial instruments, including mortgages, bonds secured by real estate, and corporate debt of public real estate companies. In our retail property solutions business, where we provide capital and services directly to retailers, Kimco funded its share of the Albertson's acquisitions, comprising 661 grocery stores and 101 related properties. Subsequent to quarter end, the Albertson's partnership also acquired 50 fee properties and ground leases underlying Albertson's and Super Value stores.

Looking at our international operations, Kimco continues to build its portfolio of properties in Mexico through both development and acquisition. During the quarter, we closed on two new retail development projects in Mexico, an 83,000 square foot shopping center in Puerto Vallarta, which will be anchored by a Soriana grocery store and a 767,000 square foot shopping center in Guadalajara, which will be anchored by an HEB grocery store and a -- and a Synapolis (ph) movie theater. Also in Mexico, our joint venture portfolio of net leased industrial buildings with American Industry added a building net leased to Cessna Aircraft and expanded one existing property net leased to Warner Industries. Overall, the American Industry portfolio now contains 59 net leased industrial buildings comprising 6 million square feet.

In Canada, Kimco funded a Preferred Equity investment on three existing shopping centers comprising 205,000 square feet in three smaller cities in Quebec, and we closed on a large Preferred Equity development project in Montreal, Quebec. The development project is a particularly large property of 1.2 million square feet being constructed in phases on the former Montreal General Motors plant site.

Overall for the quarter, we are pleased to report that each of our operating businesses has excellent momentum with a strong pipeline of activity. It is also gratifying to note that our operating units are working well together to originate new business opportunities. Acquisitions, Preferred Equity, joint venture development capital and retailer services all have common customers and significant cross-selling opportunities. This bodes very well for our new business during the balance of 2006. Now, I'd like to introduce Milton for his comments.

Thanks, Dave. While our business and future seems superb, we must, in my opinion, continually think about that four-letter word, risk. And I would like to point out some of the risks we see in our strategy for mitigating them. The risks relate to the wild cards in the price of oil and interest rate escalations. Which in turn affect our most serious risk, consumer spending. An additional risk is an unforeseen event in a major U.S. city.

Now, our strategy has been designed to mitigate these risks by the following: One, asset diversity. We have over a thousand property interests with no single property accounting for more than 1% of our total gross assets. Two, it tenant diversity. There are only four tenants that account for more than 2% of our rental revenue. And these tenants are Home Depot with 3.5%, TJX, 3.1%, Sears, 2.7%, and Kohl's, 2.4%, all decent credits. Three, geographic diversity. We are geographically diverse throughout the United States, and approximately 10% of our flows are from Canada and Mexico. Canada has substantial natural resources per capita and a strong economy. Mexico's middle class is growing rapidly and our major tenants are Wal-Mart, AG Butt and Home Depot.

Four, our Preferred Equity business. We have a substantial Preferred Equity business with about 350 million outstanding with participations in 206 properties. Our participation in the cash flow of the properties is preferred over the equity investment of a third party with a first loss position. Five, we have business units that are counter cyclical, our distress business and bankruptcy business are examples. Six, our management business. Our management business is a good business, and I believe also counter cyclical. In a rising tide of lower cap rates and oil and increasing rents, all ships rise. Management becomes much more important in tougher times. Bear in mind, that management fees have priorities over both equity distributions and indeed debt service. In the real estate business, when times are good, it's location, location, location. When times are tougher, it's people, people, people. And we are blessed with a fabulous team of people. And finally, and most importantly, our balance sheet. We have a have strong balance sheet with relatively low debt.

So while we are hopeful that the risks do not become a reality, we are well-situated defensively and offensively, and we also feel very confident about the inherent growth in our business plan. And with that, we'd like to answer any questions you may have.

Sierra, we'll now take questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Rob -- Ross Nussbaum of Banc of America Securities.

Hi, it's Christine McElroy here with Ross. Can you give us some color what your current equity investment is in the Albertson's deal and what's the time frame for liquidation of that investment?

The actual dollar investment listed in our supplemental package is a shade under $51 million. At this point, the time period in holding the investment is still subject to analysis because the business plan is being crafted and we're undertaking and in the process of creating the strategy for the maximization of value, be it operating or real estate. And so really that's -- that's where we are at this point.

Okay. And then on page 26 of your supplemental, the -- the 741 million of assets in your develop and hold pipeline, does that include properties that you intend to contribute to the GV's or just those that you'll hold 100%? And how do you decide which assets will go into that bucket versus the merchant building pipeline? And can you also talk about yield?

The -- the development hold properties represent properties that we expect to hold in the parent portfolio for the long term. The merchant building category on that page represents assets that we plan to sell and have opened up consideration to selling many of those into our joint venture programs if all the circumstances are correct. So that's really the breakdown between the two. We will make the decision on hold or merchant building usually at the inception of the deal. Jerry Friedman and his team will bring every project to a formal investment committee. We will not only review the economic and -- and deal structure but also address whether this is best suited for flip, an arbitrage process or whether we would like to ultimately put them -- hold them in the parent or put them in a joint venture. I think the composite yield that you can look for these -- these projects overall is probably north of 10%. And I'm kind of blending in some of the grocery anchor chains which are lower, as well as some of the Mexico projects which are higher.

Okay, thank you.

Thank you. Our next question is coming from Jonathan Litt from Citigroup.

Hi, this is Andija Giraj (ph). I had a couple quick questions about the same store NOI, if you could break down what percentage of that is -- what percentage of the total pool is considered same store and excluding redevelopments, what would same store NOI in the quarter be?

I'm not sure I understand the first part of your question. I did mention on my prepared marks that the same-store growth for the quarter, for the consolidated parent portfolio was about 5.5%, which was also the similar number as -- as last quarter, and that we did take a look at some of the unconsolidated joint ventures that we have that we categorize as parent holds, including Canada and some of the Mexico properties. And that number, when you include the pro rata NOI year-over-year and add that to the total, actually increases to 6.3%. The question with respect to the composition between redevelopment, as I indicated in the last call, it's kind of a blurry line between redevelop -- what is pure redevelopment versus what is simple retenanting that may require the breakup of a box or two. That said, and to be consistent with the projects that we list in our supplemental report, in separating the 5.5% for this quarter, approximately 2.5% came from all sites other than the redevelopment inventory that you see in our package.

Okay. And my first question was out of your total portfolio, what percentage is considered same-store?

I would -- I would say that if you look at the 2005 and net operating income, the baseline is about $83 million.

Okay. And last year on the second quarter call, you disclosed the 2006 guidance. How do you feel about 2007 consensus at this point, given that it's implying 10% asset slow growth. Do you feel comfortable with it?

I'm not going to make any comments on that. I will provide the Company guidance in the third quarter.

Thank you.

Thank you. Your next question comes from Scott Crowe from UBS.

Good morning everyone. My understanding of the pay-in-pay assets is that they're smaller in native, a little bit of CapEx. Do you have an expected spend for pay-in-pay in expected yield, and if not, when do you think you'll be in a position to comment on this?

I think we'll probably be in a position to comment on -- after the deal is closed, but we do believe the properties are in decent condition. We've -- we've underwritten every one and -- and we're pleased with the yields.

And just on that, do you have any comment on what -- what the -- the acquisition yield was for the portfolio?

Yes, in most of the write-ups that occurred right around the announcement basically had it in the low 6's range, the 6-2, 6-3 range.And that was -- I think that was a pretty fair approximation of where the numbers would shake out on a -- on a go-forward basis.

Okay. Great. And thanks Mike. And just -- just further to that, could you just comment on the option to raise sort of $10 per share in equity, which I think accounts to about $400 million?

Right.

Around the close of the transaction?

The thinking -- the thinking behind that is that in -- in -- in projecting where we would be at the presumed closing of this transaction, and considering all of the other things that were going on in our business, that we wanted to leave open the possibility, have the flexibility to issue some level of equity if we needed to. Whether that be for proper balance sheet calibration in number and extent of other investments available to us, et cetera. And we thought that utilizing the merger as a very efficient and non-disruptive manner to issue some equity, would be the right way to do it. And we basically came up with a number that gave us the maximum flexibility. But to be truthful, Scott, it may be that amount or it may be zero. And I think for us it's just going to evaluate as we get closer and closer what our composite balance sheet position is, and then make a decision.

Okay, great. Thank you.

Thank you. Your next question comes from Christeen Kim from Deutsche Banc.

Hi, good morning guys. As a follow-up to the question on development yield, could you comment on how much higher the development yields are in Mexico versus the stuff you're doing in the U.S.?

There is a wide range of development yields in -- in Mexico where we're doing smaller centers where a large percentage of the income comes from the anchor tenant, I'd say that the yields are in the low teens, 11 to 12%. In -- in a more typical shopping center where we have a significant amount of local space as well as what we call sub-anchors, development yields range from 14 to 16% unleveraged.

So on average, you'd say around 12, 13 then? For the stuff that's under construction now?

At least 13, yes.

At least 13? Okay. Great. So when's the property to Puerto Vallarta then?

Well, sometime in the winter probably.

That sounds like a good plan, especially because we're up in New York. My next question is on the acquisition outlook, given this large P-in-P portfolio that you've purchased -- purchased, have you made any changes to your acquisition outlook in terms of higher yielding assets for this year and next? And also if you comment on just what you're seeing in terms of cap rates, if you're seeing cap rates easing up at all?

I'll make a comment on the first question. And as we had mentioned in our press release, at the Pan Pacific announcement, that we expected substantially all of these assets to find their way into one or more institutional joint venture programs. So in terms of thinking about our acquisition assumptions for the rest of the year, I think you almost have to cordon this off as kind of a separate transaction with its own special characteristics, and that basically our view that we talked about last quarter, where we put out some numbers about roughly $900 million of acquisition volume for the year in both the core and likewise similar amount for our institutional programs, ex Pan Pacific, I think we're pretty comfortable that -- that those are still the right numbers. I'll let Tom make a comment about cap rates and the like.

We are still seeing unabated demand for institutional quality real estate, particularly in-fill supermarket anchored shopping centers. So cap rates are still in the low 6's for institutional quality centers, and can get down close to 5 if there's much -- either a redevelopment opportunity or substantial increases in cash flow projected during the whole.

Great. Thank you.

Thank you. Your next question is coming from Matt Estrower (ph) from Morgan Stanley.

Morning. I guess a technical question and then a conceptual one. On -- on KDI it looked to me like margins were down somewhat in the quarter. I know that those can be erratic. But is that -- if we read anything into that in terms of -- in terms of a trend going forward? And -- and margin declines in development in general?

Matt, I just need a little clarification in terms of defining when you say margin and what numbers you're --

Looking at the gain -- the gain that you report, it's not a perfect measure, I know, but a gain you report divided by the overall proceeds, the proceeds that you list in your supplement for each one of the project sales, and we look at that both before and after land sales as part of that.

Yeah, I think the -- I don't have the exact numbers in front of me, but I think the range was about 25 to thir -- to 35% of the proceeds. And that I don't think is -- is very atypical of our -- of our situ -- of our structure. And of course some of these sales also --and -- and in this case one of the sales did have an earn-out feature, so to the extent that the last dollop of leasing is completed we'll get an incremental amount of cash proceeds and can recognize the balance of the profit. So those comments are kind of very broad, but.

That margin that you're referring to you think -- that's the second quarter number you're talking about or is that -- you're talking about just a general range for what you would be producing going forward?

The number I mentioned was -- was the second quarter number.

My numbers were more like in the sort of low double digits like 11 for 12%, I'll follow-up with you on that.

Yes, I'd be happy to follow up with you and get into the specifics of the two sales -- the two gains that generated the number on the P&L.

Okay.

Divided by the sales price. But you had a conceptual question as well?

Yes, I guess more for Milton. It's been one of the -- one of the things you all have talked about for retail for a while has been sort of overall improvement in balance sheets for the -- for the retailers themselves. Through consolidation and healthy fundamentals. It -- i seems pretty clear that that may be reversing to some degree with this -- what seems to be a very substantial trend towards privatizations. And I just wanted -- Milton, you look a lot at risk, with things going on like Michael's and rumors that there's more going on every day, to what degree do you think investors need to be worried about average credit quality for the now large private segment of the -- of the large private segment of the -- of the retailer front?

Well, to the extent that there is a going private transaction, we all know that the funding of that is 90% debt or very substantial debt far different from a Michael's balance sheet with no debt. And that debt increases risk and couple that with what appears to be weakness in consumer spending. We -- we think there should be caution and concern over retail credit.

Are -- are you more hesitant that you were before to do deals with those types of retailers?

No, because the deals that we do, what Ray Edwards does, every time we do a deal, we see what our position is -- you mean in -- in new leasing? We look at our own real estate, what -- how we think they'll do, and whether -- and limit the amount of capital we're putting in. The risk on new deals, on new leases really depends on the amount of tenant improvement you do and where -- what you think will happen at a particular location.

Okay, thank you.

Now, I'll have to tell you, given a choice, if there are two tenants vying, and one has no debt on the balance sheet and one is loaded with debt, I think you'll know which one we prefer.

Right, unfortunately it seems like that choice is becoming more difficult these days.

It is.

Thank you.

Thank you. Your next question is coming from Craig Schmidt from Mer -- Merrill Lynch.

Good morning. Pan Pacific, where you say that the most likely end up in institutional joint venture hands, I'm wondering would this include some new names?

We really can't say at this point, Craig. I mean, I have been asked that question after the announcement, and I think you have to underscore Dave's earlier point in his prepared remarks that we have a wealth of existing relationships and that really is kind of our first -- our first stop in these sort of situations. But we will look across the board. We have many relationships with institutions that we don't have existing programs with as well. So it really, for us, is a situation of trying to maximize the transaction structure with the right partners. And that's what we're in the process of doing right now.

Okay. And also, in regard to Albertson's, are the -- the vast number of those stores going to remain supermarkets or do they also have the ability to be released to general merchandise?

Hi, this is Ray Edwards. The intent is that the vast majority of the stores will remain as supermarkets. We announced a -- a closing of about 125 stores about a month ago, and really other than that, we feel that the core of about 500 stores are very viable supermarket operations.

Thank you.

Thank you. Your next question is coming from Jeffrey Donnelly from Wachovia.

Good morning, guys. I guess the first question is for you, Milton. Two-part question, actually. First, could you share your outlook for asset pricing? And second, with cap rates softening, at least on B-quality assets we keep hearing and financing costs rising and there's some signs of maybe slowing growth and market rents, I'm curious what led Kimco to acquire Pan Pacific, your largest acquisition that would potentially could be peak pricing at least in terms of cap rates?

Well, insofar as where cap rates seem to be going, I agree with what's implied in your question, there is a bifurcation on the lower quality assets, I think cap rates are increasing. On the higher quality assets, we have not seen thus far any decrease. Pan Pacific, as we've mentioned, was a strategic acquisition of what we thought was a very strong portfolio, and we felt that it would expand our management business.

Okay. I guess as a follow-up, is it fair to say that you guys are on the sidelines for large acquisitions until you digest Pan Pacific?

Not fair at all. We -- we are -- our balance sheet is such, and -- but we think our ability to quickly have institutional investors in Pan Pacific would -- just fuels our appetite. Quite the contrary.

Okay. And then just one last question. Mike, just as a point of clarification, does your '06 guidance include Albertson's and Pan Pacific?

It does not include either one of those. And Albertson's in particular, as Ray alluded to is a bit of a longer term strategy is terms of capturing value. So I don't expect to have much to talk about in Albertson's until well into next year.

Okay. So, I mean we should not expect anything for Albertson's necessarily to flow through the financials this year. Or --

That's correct. That's correct.

Thanks.

Thank you. Your next question is coming from Greg Andrews from Green Street Advisors.

Good morning. Mike, you mentioned that you earned some fees from the liquidation of the Kimsouth venture. Could you tell us how much and was that in the management fee line item? And also how much was the equity kicker for the other property in -- in Gainesville?

Yes, that -- those two specific items, Greg, it's a little over $4 million on the Kimsouth transaction, and a little over $5.5 million for the Gainesville asset disposition. So looking at those two items in isolation, they are -- they were obviously contributors to the quarter. The Kimsouth item was in the management fee line. The Gainesville transaction was in the other real estate investments line, as it really wasn't a fee, it was more of an equity kicker, analogous to some of the equity participations we enjoy on the Preferred Equity business of the we felt that was the better categorization.

Sure, great. And then, David, I see this project in Guadalajara is actually very large, and I wonder if you could just comment a little bit on how you -- you found a development project of this size you describe as an in-fill location. Could you tell us how you source something like this, how you underwrite it, did you have a partner involved? Help us just understand the thought process behind such a big development.

Sure. We -- we have an existing partner in Guadalajara that we feel very strongly about, his name is Ricardo Carubias (ph) and this would be our second major project with -- with Ricardo. We're -- we're developing a Wal-Mart Supercenter anchored, also a large project in Guadalajara that we call Centro Sir (ph), and this -- this project which we -- we call Motorola is -- is a follow-up project. The tenant demand is -- is very strong and the -- the size of the project and the costs of the project is driven by land prices in Guadalajara. Land is -- is very expensive. And this is an in-fill site, it was a former plant site for Motorola in -- in Guadalajara and it's really a Main and Main kind of intersection. And we have a lot of anchor tenant interest, a lot of sub-anchor tenant interest, and so we think this thing is going to be a pretty good -- pretty good home run. We also as part of this, acquired some -- some additional land that -- that is actually zoned for residential that we may spin off or we may actually develop over time, depending on the success of the retail portions. But our thinking is that the returns are very high, we've got a proven partner who knows Guadalajara, and we feel very good about this particular project.

And just as a follow-up, what -- what's your percentage stake in that?

The partner has about 30%, he's contributing a large measure of the land. Like most of our large projects, this one GE Real Estate will have an option to invest 50% of our portion, and they are -- they are evaluating it at present.

Great. Thank you very much.

Thank you. Your next question comes from Mike Mueller from J.P. Morgan.

Hi, a couple of things. First for Mike, you talk about the sequential pickup in mortgage financing income. Is there anything substantial and one-time in nature there?

Yes, we did -- we did settle on --on a mortgage investment that we had that we bought at a pretty large discount and the mortgage was actually repaid at -- at close to par. And -- sorry? Right. That was at $0.94 on the dollar. So the large variation quarter-over-quarter can be attributed really to -- to that number.

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

Good morning. Milton, I wonder if I could go back to and press you a little bit more on your comments with regards to risk. It seems fair to assume that you are characterizing as being in a rising risk environment. I wonder if you can draw upon your experiences and say when this period most -- what this period compares to in previous cycles?

Well, I'm not sure there's a comparable period in that many of the risks in retail before were overbuilding, overextension by retailers. This, I guess, really deals with the consumer. And my concern is that the consumer is stretched pretty far and it's evident in really Wal-Mart's results, the Dollar stores, and it may now, with what's happening with adjustable rate mortgages, which were not a factor in prior periods, it's relatively new, and there was not except one period of the oil embargo, this kind of spike in gasoline prices. So I think it's a different phenomena, and I think the -- it will boil down to consumer spending.

You don't -- you don't compare this to the early 90s? I mean, it was '91, '92.

'91 was overbuilding, it was a re -- economic recession that came about in the '80s in real estate. This, I think, where really is to be focused on the consumer more than -- more than the 90s were.

Okay. And in terms of your strategic response to your -- your caution about the outlook and your awareness of risk, I can understand you pursuing the dream portfolio strategy that yo've talked about in the last couple of calls. Can we see you -- can we expect to see you cut back on developments on a go-forward basis?

Well, developments, Jerry Friedman has a wonderful business relating to joint venture partners. If a property is entitled and you have a good growth area, and you have a tenant leases signed with major credits, your risk then is the cost of construction. And there in our type of shopping centers the time of construction is much shorter, which involves risk, and the relation of construction to land is lower. It's not like a huge mall or an office building or an apartment house. So we weigh that, and Jerry watches that very carefully. So that it will depend on tenant demand by tenants that we deem credit worthy. If we have that, it should not inhibit our development business. But we will watch credit.

Okay. Thanks so much.

Thank you. Once again, if you do have a question, please press star then the number 1. Your next question is coming from Rich Moore from RBC.

Hi, good morning, guys. Just to follow up on that last question, Milton, what are you seeing in terms of retailer demand? I mean, how would you characterize demand for spaces in either your existing portfolios or -- or -- or the developments?

Well, the anomaly is that the demand is so vibrant and so strong, let me ask Jeff what his -- Jeff has been involved --

I mean, Rich, I would say, certainly in the coastal markets we are having a hard time meeting the demand for the retailers. And in many cases, we have waiting lists. The retailers for now are being much more flexible than they used to in terms of their prototypes, which is helping them secure space, but it also helps us in our redevelopment pipeline because they can be more creative. So, we have not seen any -- any downtick at all, if anything, I think we're seeing more competition for our space especially in those A-quality centers.

Okay. And could you guys -- could you guys offer an explanation for why you think that might be? I mean, why, for example, Milton, you're seeing these danger signs for the consumers? Are the retailers just missing these signs or are they slow to react or why? Because I don't think it's uncommon that the retailer demand is high in other portfolios as well. What would -- what would your thoughts be for the retailers? Why are they doing this?

I think in part, Rich, is that a lot of the retailers didn't really penetrate the urban markets before, and now they're realizing how profitable they can be. And they're almost must have markets for them. And -- and that is in part pushing the demand up.

And in retail, retailers motivate people, have excitement in what they do, always need to increase their top line. I'm not saying it's wise or -- or risk averse, but that is historically what retailers do. And they are continuing it.

Very good. Thank you. Yes, I agree. Then a quick question on these -- these little extra units that were -- were on the income statement there, I think there were about 600 units. Is that related to Puerto Rico or is that something else? They're in the earnings calculation.

The increase in units, and you'll see this continue over time, will be either Puerto Rico or in this case there were a couple of assets that we acquired in the New York metro market in Center Reach (ph) and in -- and in Bay Shore that -- that did have units attached to it. You'll see that on the acquisition chart. And that was really the cause of -- that was the extra in the unit calculation this quarter.

Okay. And you're saying -- you're saying, Mike, that those can fluctuate over time?

Yes, you'll -- you'll -- you'll continue to see some activity on the unit side maybe as the rest of the Puerto Rico assets close and/or other transactions like the two New York assets.

Okay. Very good. Thank you, guys.

Thank you. As a reminder, if you would like to ask a question, please press star then the number 1. Your next question is coming from Paul Morgan from FBR.

Morning. In terms of -- Jeff, you mentioned the demand in the -- the coastal markets being strong. I mean, should I read into that anything about the less supply constrained markets, the demand there for anchor space in particular, and maybe as that relates to the prospects for the Albertson's locations?

I mean, I do think the demand for the more secondary locations has weakened, and I think those properties could continue to be at risk. Ray, I don't know if you want to comment on --

I can -- I can kind of give some guidance, we have announced the closing of about 125 of the Albertson's stores, and we have been extremely pleased with the interest that we've had on the 125 stores from retailers. A 25 to 50,000 square foot buy out of some of those retailers that are looking to expand, then our interest from grocers and non-grocers has been pretty strong on those 125 stores to date.

If it's -- if it's not a grocer, who's looking for that size location in a neighborhood center?

Well, you know, you have -- for these, some of the structure, in Northern California, they're more like 25 to 30,000 square feet, so you have a lot of the [INAUDIBLE] to power leaders interested in those locations. For the bigger boxes, you have electronics chains and the sporting goods locations and the pet stores are looking to divide the space up. And there will be a lot of split spaces for us but some single-tenant users.

Okay. And then --

Paul just to clarify in the secondary markets, so much of it is site-specific and depends upon expected population growth. And the demand, I would say, certainly is greater where the housing demand is. But in areas where the population is decreasing, I think that's when --

All of our stores in Northern California and Florida that are closing, so that's why there's a demand there.

Right. I guess really in that to your -- your dispositions, I might have missed -- missed if you mentioned it, I'm looking at your schedule here, there's the GE joint venture dispositions in the second quarter, but then in the parent, a lot of the dispositions there are in California, you talked at prior calls about getting out of the non kind of core markets and the negative population growth markets, and how should I think about that in context of what I'm looking at for your second quarter dispositions?

Let me just address California real quick because one of the things we did earlier in the year is we bought the FHK portfolio which in total was about 20 properties. And we sold off the bottom 20% of that portfolio, which was primarily shadow-anchored retail and secondary markets. And so what we wanted to do is purify that portfolio and the bulk of what we sold in California was related to FHK.

And the others were properties that we felt were on our disposition list, Macon, Georgia; Rochester, and they follow getting out of the markets that we want to get out of.

Is there any update to your disposition guidance for the year?

Not really, Paul, at this point.

Okay, thanks.

Thank you. Our final question is coming from Mike Mueller from J.P. Morgan.

Hi, I'll try not to hang up on you guys this time.

We wondered what happened, Mike.

Yes. I'll get the answer to the other question from the transcript. But on -- in the commentary you were talking about, planting seeds for future growth and also mitigating risk, I was wondering when you think of the P-in-P deal, does that deal fall into one bucket more than the other?

The P -- the P-in-P deal, again, was primarily not only to enhance the quality of our aggregate holdings but also to grow the management business that we have and have stated many times that we wanted to grow aggressively. And I think when you look at those two reasons, Mike, it kind of addresses both. It addresses the growth in -- in absolute assets under management and good returns on an FFO and an IRR basis, and addresses those risk issues that Milton had talked about earlier. So we really think it fits both. And when you hear the tag line that it was a strategic acquisition, it's for those reasons of both growing but also mitigating risk and dealing with a safe -- the safety issue.

Okay, thanks.

Thank you. We have a question coming from Ross Nussbaum from Banc of America Securities.

Hi, it's Ross Nussbaum, just two follow-ups. One, I don't know who wants to take this one, but if I look at your releasing spreads for the quarter and over the trailing 12 months, how would you break that out in terms of how much of the growth is coming from small shops versus anchors? Is one disproportionately benefiting the numbers?

I'm -- I'm just thinking of absolute -- absolute volume, I think it's more driven by the small stores. If you were to put -- if you were to put an anchor -- a particular guess on that, I would say the small stores. Because the anchors you don't have a lot of rollover on any one -- at any one point. If you can, there's a lot of below market rate rent in there. Bit it's just -- you could see it from our rollover schedule or in the supplemental report that you just don't have a lot of anchor roll.

I would agree with that, Mike. I think that if when we break up the larger box into -- breaks it into different units, then there may be some good upside in breaking the box. But to replace a large tenant today, the upside is probably not too great. So, I would agree that the smaller stores is where we have seen it the last couple of years.

Okay. The other question I have is that there's been a pretty significant wave of privatization of some big box retailers over the last year and we've yet to see any real meaningful store closings out of those guys which I would have expected they would have rationalized the chains a little more. Is that a trend that you're expecting to see offer the next year or two, or are there, in fact, just the chains are operating sort of top to bottom, you know, profitably?

Ross, I think and I'll ask Ray to talk, add anything that he sees, the -- when there's a privatization of a retailer, the most important thing for a retailer's people at the store level, et cetera, so I think most of the equity firms are smart enough to know that they have to be very careful about that from a morale point of view and an operating point of view. And they will be slow to announce store closings unless there is real strong losers. And you can address Albertson's with what strategy was there.

Yes, I mean I think the benefits, you know, sometimes that come through for retailers in going private is what we saw in Albertson's, is there was this -- a group of 100 stores that we announced closing on day one were I think pretty obvious stores on a profitability level to close. But as a public company, they didn't want to take that one-time hit and they kept keeping these stores that were losing money, I think on average something 200, $300,000 a day, these 125 stores. So as a private company, the benefit could be that you can kind of look at either these stores unemotionally and -- and do what's right to make the stores more profitable. I think what we were able to show the employees there, that how by -- by doing this, we can get ourselves a solid core of stores and have a business that is very solid and can grow in the future. I imagine that other private companies, people take companies private look at it the same way, Milton.

Okay. So it sounds like it wouldn't be an irrational thought to see that the number of store closings could tick higher over the next year or two, especially with the consumer under a little more stress?

Yes, that could happen. Yes.

Okay. Thank you.

Thank you. Our final question is coming from Matt Estrower from Morgan Stanley.

Thanks. Just a follow-up on the same store growth. Can you just walk through math a little bit? If you sort of assume 10% of the portfolio is rolling and you're getting 10 or 15% spreads on that, that's 1 or 1.5% growth, you get 70 bips in occupancy, that gets you to to low to mid 2s, and then you guys reported at least in the supplement it looked like margins are pretty flat, so how do you go from a low to mid 2's to a 5.5% growth rate?

You're -- you're making broad assumptions which I realize you have to do off of some things on financial statements viewed at in isolation. And I guess we have the benefit of being able to break down the growth in NOI period over period between and individually on an asset by asset and property by property basis. And when we broke down every one of those real estate assets that were in the comparative numbers year-over-year, the growth was at the numbers that I had mentioned to you. I mean, you have occupancy, you have the redevelopments that we had mentioned earlier, which are bringing an absolute amounts large -- large dollars to -- to the bottom line. And recognize that there is clearly a timing difference between numbers you're looking at on a new lease schedule, and when those close flows actually hit the operating statement, Matt. And in this case, as I -- as I mentioned to you in prepared remarks, that we're looking at everything on a pure cash basis. So I think the statistics that you look at now on leasing spreads and rollover and so on really tend to have an effect later on, not currently. And take and make a broad generalization. And one of the challenges in our business is we'll continue to look for opportunities in our portfolios with our redevelopment teams that you don't even see in today's numbers. And that's always been something that we've been able to do, is to extract some value above and beyond what's -- what's obvious.

Mike, do you also look at sort of a same store revenue and same store expense number, I think it's not something you disclose regularly in your supplement, but is that a number you guys look at?

To get to that, we do have the componentry, and the reven -- the revenue increase is of a sim -- in a similar direction as the overall net operating income. I mean, there's been some efficiencies in certain expense categories, but insurance costs have gone up quite a bit year-over-year. Right, and most of it is passed to the tenants but it still has the effect of reducing the absolute level of margin, or that doesn't improve the level of margin.

Right.

And that's really been the primary counter balance to the normal efficiencies we see in expenses.

Okay. Thank you.

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

Thank you. This concludes today's Kimco Realty Corporation second quarter earnings conference call. You may now disconnect your lines at this time and have a wonderful day.