Kimco Realty Corp (KIM) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to Kimco's first quarter earnings conference call. Please be aware today's conference is being recorded. As a reminder, all lines are muted to prevent background noise. After the speaker's remarks, there will be a formal question-and-answer session. (OPERATOR INSTRUCTIONS)

At this time, it's my pleasure to introduce your speaker for today, Mr. Scott Onufrey. Please go ahead, sir.

Thank you Augusta. Thank you all for joining Kimco's first quarter earnings conference call. As many of you know by now, after eight years as Kimco's Investor Relations officer, I'm pleased to be moving to a new role as a Portfolio Manager in our growing institutional investment management business. I've had the great pleasure of getting to know many of you over the years. And I have truly enjoyed the Investor Relation role at Kimco. And I thank you all for your kindness along the way. Fortunately we were able to entice Barbara Pooley to take over our Investor Relations program. Barbara joined Kimco in March from Colonial Properties Trust, where she handled their Investor Relations program over the past several years. We are confident she's going to do a great job. There is one thing I know I won't miss from my old job, reading the Safe Harbor language at the beginning of each conference call. Therefore I will now turn the call over to Barbara.

Thank you, Scott. I appreciate the warm welcome. And I'm pleased to be part of the Kimco team. I do think you would have wanted to read the Safe Harbor once more for old times sake, but oh well. Statements made during the course of this call state the Company's and Managements hopes, intentions, beliefs, expectations or projections of the future which are forward looking statements. It's important to note that the Company's actual results could differ materially from those projected in such forward looking statements. Information concerning factors that could cause actual results to differ materially from those forward looking statements is contained in the Company's SEC filings. During this presentation, Management may make reference to certain nonGAAP financial measures that 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 of these nonGAAP financial measures are available on our website.

Presenting this morning are Mike Pappagallo, our CFO, Dave Henry, our Chief Investment Officer, Milton Cooper, our Chairman and CEO, and Mike Flynn, our President and Vice Chairman. Several other key Executives are also available to take your questions at the conclusion of our prepared remarks. Finally we request that you respect the 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'll now turn the call over to Mike Pappagallo.

Thank you Barbara, and good morning to all. Before I review our operating results, I would like to take a moment to express my thanks to Scott, who established the Investor Relations function for Kimco eight years ago, and had done an outstanding job with the investor an analyst community. And he will continue to be a key member of the Kimco team, and we certainly expect great things from him in his new role in Portfolio Management Business Development. To say we get out of the shoot quickly in 2007 is clearly an understatement. First quarter FFO per share of $0.78 represented a 47.2% increase from the first quarter of 2006, our earnings per share jumped at a similar rate. Certainly the recognition of income from the Albertson's investment was the primary driver of the quarterly quarterly increase and indirectly benefited us as well by allowing us a bit more flexibility in the execution of other transactions for later quarters. However, more importantly, the portfolio metrics and new business activity remained on track and bode well for continued growth in FFO per share.

First let me cover the Albertson's transaction which needs an accounting road map to understand. Once again to my chagrin GAAP accounting and presentation rules have resulted in a somewhat absurd convoluted presentation to what is quite frankly a relatively simple result. Through our Kim South subsidiary, for which we own 92.5%, we invested about $51 million in mid-2006 as a minority noncontrolling member of a consortion of private equity investors. Through certain asset sales and a major refinancing of the underlying Albertson's assets, Kim South received a cash distribution of $122 million, which was $71 million above our basis. We deferred $15 million of this profit to recognize that we as part of the consortium have a potential future funding commitment under the terms of our arrangement, thus the net profit is $56 million. We are fortunate in that Kim South while a taxable REIT subsidiary has net operating loss carry forwards so that there was no tax expense associated with the accounting profit of the deal. Through the TRS we also enjoyed a retention of these retained earnings to be redeployed in other accretive investment. So that's the business perspective of the profits derived from this transaction. Unfortunately GAAP presentation now takes over.

On the financial statement, this profit is chopped up into four pieces. Operating losses that are included in the joint venture income line and extraordinary gain net of a tax, that does not really exist sitting on a separate line, and that line by the way is generated from some estimation of the residual credit from purchase accounting at the purchase state, of June 2006 and still not finalized. And we also have the big credit in the income tax line to offset the tax that really didn't exist on the extraordinary income line and then a little bit of minority interest adjustment for the 7% of Kim South that we don't own. Hey I don't make the rules, I just follow them. I'm sure you will have additional questions on or after this call, and Barbara and I will be happy to help you. We wanted to give Barbara a special challenge her first time out.

A couple of other points are worth mentioning. When we reported the Albertson's distribution in February, we raised our full year FFO guidance from $2.49 to $2.59 per share. The $0.10 delta from our original guidance that we provided late last year was to account for the fact that because of the Albertson's deal, the expected contribution from our retailers services business exceeded our expectations. Or said another way, the Albertson's result was not pure up side to our original numbers, but served as a way for Ray Edwards to make his targets and then some. But I don't think Ray is taking the rest of the year off. Secondly, while I'm not in the business of giving quarterly guidance, it should be obvious to everyone that the numbers this year are somewhat front end loaded.

Our core real estate holdings continued to show solid, steady results as was evidence by a year-over-year internal growth of 4%, a 10 basis point increase in our occupancy to 95.6% since December and releasing spreads of 16% on new leases and 8% on renewals. Our acquisition activity was healthy with purchases of shopping centers valued at $1.3 billion through late April. And this figure includes the previously announced acquisition of 19 properties from proholdings in GE. Most of the assets were placed in our program with credential, although certain properties were kept in the core REIT to redeploy proceeds from our disposition activities as well as holding some for future programs.

The Management Business benefited this quarter from higher assets under Management and from profits in the disposition of assets from the crop portfolio. A year ago, we had 217 assets under Management for institutions with a minimum base rent of $425 million. One year later, those numbers are 366 assets and base rents of $720 million. The overall FFO contribution from all of our Management programs and related equity positions, increased from $22.8 million to $49.2 million for the comparative first quarters. And as the profitability from our business strategies and our core portfolio and investment Manage programs continue to grow, so does the quality of what we own. We have marshalled our operating businesses under the generic banner of Kimco Capital Services, but you know them as Merchant Building Preferred Equity Retailer Services and Kimco Select investments.

Kimco developers sold a piece of one project for a $4 million pretax gain, but quickly sold another one for a $9 million pretax gain in the first week of April which will appear in the second quarter numbers. We did not sell any positions in our marketable securities portfolio during the quarter preferring to be a buyer. Preferred equity provided steady contributions increasing by $2.7 million from last year's first quarter to a level of $12.5 million. As mentioned earlier, the Albertson's transaction provided more than enough earnings to counter the land sales from Blue Ridge and receipt of Sears stock from the K-Mart bankruptcy settlement that were in last year's numbers. On the capital market's front, we issued a $300 million 10 year bond priced at 105 basis points over treasuries with a yield of 5.702%.

What was notable about this (inaudible) was the absence of the traditional financial covenants found in most bonds issued by REITs including all of our prior issuances. What I wanted to make clear is that this does not signal any change in our balance sheet management or our philosophy of a conservative capital structure. However, at this point in the evolution of our Company and of the REIT market, and more importantly in thinking ahead for the long term, we felt it was time to initiate a step that will ultimately provide us more financial flexibility and allow us to make more significant transactions and execute our business plan. We're comfortable that our behavior to maintain a high corporate credit standing and our access to unsecure debt capital will be appropriately regulated by our creditors through their demand and price point, and by the credit agencies through their ratings without the need for financial covenants.

Finally as to the balance of the year, we remain comfortable with our FFO guidance of $2.49 to $2.59, which as I mentioned earlier, was increased back in February with the range being influenced only by the timing of transactions in our opportunistic businesses between this year and next. And now I'll turn it over to Dave Henry.

Thanks, Mike. Good morning. I'm pleased to report that we had another strong quarter of new business activity across many fronts. Our operating businesses, our asset management activities and our international operations have all continued to perform well with excellent momentum. As examples and rather than listing individual transactions completed during the quarter, I'd like to highlight the following.

Number one, Mexico. During the quarter, we acquired an existing portfolio of 17 small neighborhood shopping centers totaling 488,000 square feet, largely anchored by Mexico's largest dollar store chain, Waldos. Properties are located in 12 cities across the Northern section of Mexico. Kimco also closed on two new development projects totaling 550,000 square feet in [Wiwitoka] a suburb of Mexico City in [Sudad Del Carman]. Our pipeline of additional acquisitions and development opportunities is strong. And Kimco's network of local operating partners is growing. Our U.S.-based anchor tenants in Mexico, such as Wal-Mart, Home Depot, and HEB all report strong sales in their Mexico stores and all have aggressive expansion plans.

In addition to our acquisition and development activity for the quarter in Mexico, Kimco successfully closed on it's first [comb angle] fund for the acquisition of Mexico retail land parcels. The new fund, Kimco Mexico Retail Land and Development fund, is a $300 million institutional fund which will acquire retail sites targeted for future expansion by large retail tenants in Mexico. These land sites which will be either developed within the fund or sold for third parties over a three to seven year period will be selected by Kimco's operating partners or anchor tenants in Mexico. Land which is planned for future development, rather than immediate development, is comparatively inexpensive in Mexico and we believe that Kimco and the fund investors will achieve attractive returns for this investment vehicle.

The fund is also noteworthy in that it is Kimco's first fully discretionary fund. Whereby Kimco will have full authority to make investments on behalf of the fund. We are gratified that the institutional investors have empowered Kimco to make the investment decisions on behalf of the fund investors. Many of the institutional investors are current joint venture partners or investors in other current Kimco sponsored funds. Overall, Kimco remains very excited about the long term value creation prospects for Mexico in both the retail and net leased industrial sectors. Mexico GDP growth in 2006 was 4.8% with falling interest rates and a 3.3% unemployment rate. The private consumption growth rate in Mexico of 5.1% is expected to continue driving strong retail sales.

Number two, U.S. acquisition activity. Kimco continues to successfully acquire high quality retail properties on behalf of its institutional partners and in selected cases for its core portfolio. In the first quarter, we purchased 25 shopping centers totaling 4.4 million square feet at an aggregate cost of $1.04 billion. 21 of the 25 U.S. properties were acquired in connection with our institutional joint venture programs. The market for top quality retail properties continues to be very competitive. And Kimco relies on it's strong network of property owners, developers, brokers and institutions to achieve it's high acquisition levels. And increasing an important source of acquisitions for our institutional joint venture is our own preferred equity customers and KDI development partners. In the first quarter three properties were sold by preferred equity clients and one property was sold by a KDI venture partner, all through Kimco institutional joint ventures.

In all four cases, Kimco clients decided to sell their interest to a Kimco institutional joint venture, thereby avoiding intermediary costs and gaining certainty of execution. For our institutional partners, sourcing acquisitions directly with Kimco clients provides an excellent source of high quality properties. For Kimco, we retain an equity interest in the properties together with long term asset and property management revenues. All-in-all a win-win-win for Kimco clients, Kimco and our institutional partners.

Number three, Kimco Capital Services. Mike Pappagallo has aptly grouped our four operating services, Kimco Select, Retailer Services, Kimco Developers and Preferred Equity under the collective name of Kimco Capital Services. As we have mentioned before, these four businesses are growing and providing excellent incremental income to our existing property portfolio and asset management business. While most of the operating businesses revolve around our core expertise in retail properties, we continue to build relationships with operating partners in other property types and business disciplines. We believe strongly in the joint venture model, and try to follow our valued partners in a broad range of investment opportunities and property types. In general, these investments are not long term holdings, but opportunistic investments which will be sold in the near term.

As an example, many analysts noted our equity investment in a large use in office building in July 2005 with an experienced use and developer and property owner. The building was successfully sold in the first quarter of this year, 18 months after our initial investment and provided a 70% IRR on our investment. Another good example is our two self-storage preferred equity ventures. One in the U.S. and the other in Canada. The properties in the U.S. venture which acquired 18 facilities over a two year period were sold last year, all but one, with an IRR exceeded 33%. In Canada we will sell 11 of our 12 Apple storage assets tomorrow at another very substantial gain.

Under the Kimco capital services banner, we hope to continue to invest carefully and selectively with proven partners in these types of opportunities. Retail however will remain the heart of Kimco, and continue to represent well over 90% of our property portfolio. Now I'd like to turn it over to Milton for his comments.

Thanks, Dave. Once again I would like to review with you our long standing commitment to provide those share holders with desire income, a solid safe and growing dividend and deliver growth to those shareholders who desire capital appreciation. In other words, a safe, solid, income plus strategy. Now the ownership of our core portfolio and our institutional investor managements provides that safe, solid growing income stream. It is based on income from a diverse portfolio containing long term leases from good credits with below market rents. Please review the schedule of our 10 largest retailers in our supplemental information package. And I believe you will agree with the credit worthiness of the tenants, The core portfolio is steadily improving with its occupancy rate improving from under 85% in the year 2000 to close to 96% today.

Our Institutional Investor Management business has also grown dramatically from $350 million in 1999 to over $14 billion today. But we are committed to consistently, over time, deliver double-digit per share FF growth, and it isn't easy to get double-digit growth from a portfolio that has many long term leases while at the same time keeping our mandate to maintain very low debt levels. So we, like young Oliver and Dickens Oliver Twist want more sir, the more or the plus. Comes from seizing opportunities in a series of [arbor] business or buckets, and that's our plus. It's not as important as our core business, but it's a plus. Now the profit for the plus will oscillate and fluctuate and while we would love to have firm forecasting for those who model profits from the buckets, no one can model opportunities that arise from the perturbations of the marketplace. What we can do and what we have are the people, capital, and the relationships to seize opportunities and to think out of the box always measuring risk and reward.

In the first half of the year there will be substantial profits from these other activities including our participation in the Albertson transaction, our joint venture profit from a office building in Houston, and the sale of our self-storage preferred equity investment in Canada. The magnitude of the plus will vary, but there should be a consistent profit stream from our plus and at some point in time, the consistent harnessing and realization of these individual profit making opportunities should be viewed as recurring and part of the inherent value of our Company. Now I'd like to join Mike Pappagallo in confirming that our recent bond issue, which does not contain financial confidence, does not change the fundamental commitment to keep a very strong balance sheet with very low debt. And permit me to give you the genesis of our position.

You may recall that we previously acquired the mid-Atlantic REIT. It was a $700 million transaction. The acquisition was funded by Kimco and over a period of a year, the acquired assets were placed in several institutional joint ventures. Now the acquisition was small enough that we could do this on our balance sheet without tripping the covenants that limited the total indebtedness as a percentage of our total assets. The Pan Pacific acquisition was closed last year and it was a $4 billion transaction. Our concern about the covenants was such that we concluded a joint venture with one institutional partner so it would close simultaneously with the Pan Pacific acquisition and not strain our balance sheet. I think we might have done better for our shareholders if we took a year to make several institutional joint ventures in the same manner as we did mid-Atlantic.

So our purpose of eliminating the covenants of the new bonds is to give the Company more flexibility to acquire the large portfolio deals without the inhibition of the covenant limitations. Rest assured that our fundamental and strong commitment to low debt remains intact. So now, back to our safe, solid, income plus strategy so you can answer any questions you may have. Thank you.

Augusta, we'll take your-- their questions now.

(OPERATOR INSTRUCTIONS) Our first question will come from Christine Kim with Deutsche Bank.

Hi good afternoon guys or good morning rather. The Mexico developments have became a much bigger part of your pipeline. Could you just remind us what the difference in yield is between Mexico and the U.S.?

Well in general Mexico development yields range from 13% to 14% today on cost. In the U.S., Jerry can correct me if I'm wrong, but it's closer to 10%. So I'd say it's a good 400 basis points difference in terms of unleveraged return on costs.

And as you look out at your pipeline, let's say three, five years from now, does the international development become a much bigger component versus U.S.? Or do you see the mix changing at all?

Well we continue to have good opportunities both in the U.S. through KDI, Kimco developers, and Mexico at this point. We also have several development opportunities in Canada and we'll just see what it takes overtime. We strongly are excited about Mexico because it is so under-retailed in our opinion and our retailers are doing well, the economy's doing well in Mexico. And it's just a-- it's a good place for us to invest. So while we have these opportunities, we're going to continue to try to take advantage of them. It's very difficult to predict the absolute volume of this development activity overtime though.

Great. Thank you.

Paul Morgan with FBR has our next question.

Morning. Just stay on the Mexico theme for a minute. It seems pretty dependent just looking at your new development schedule on a couple of anchor retailers, Wal-Mart, HEB, Home Depot maybe, you just talk about whether there's-- you-- in your conversations with other retailers, there are others who are considering moving in in a major way that would diversify the pipeline?

Yes, I think that's a good question. Both U.S. retailers are accelerating their plans to move into Mexico and we have expanded our Mexican anchor tenant activity as well. On the U.S. side, we have completed property tours with both Best Buy and another-- Best Buy has publicly announced that they've-- they're looking at Mexico. And several other retailers we've completed tours with in major Mexico cities, and we've introduced them to our operating partners. So we expect not only Best Buy but others to make public announcements about expanding into Mexico.

On the Mexican anchor tenant side, we've consummated new leases with two very large grocery store anchors in Mexico recently. One is [Chigowary], which is a West Coast grocery chain, and another is [Commercial Mexicana], which is I think the third largest grocery operator. So we expect to do more with those two anchor grocery tenants as well as our perennial favorites, HEB and Wal-Mart as we grow our grocery anchor shopping centers in Mexico. So for now it's all green lights down there. The tenant activity is expanding and we're very excited about it.

Okay thanks. And then the second question is on the-- just a little bit more clarification about what happened with the quarter and the guidance. When you put your Albertson's release out in late February, up, raising guidance by $0.10, that was -- nothing had changed since then in terms of the impact versus your expectations for the Albertson's deal regardless of all the different line items it fell into, is right?

That's correct, Paul.

Okay so it was just basically the street didn't throw enough into the first quarter to account for the upside versus everyone else's expectations?

That's essentially it, yes.

Okay, and--okay, great thanks.

We move next to Jonathan Litt with Citigroup.

Hi, this is [Anne Behickle] with Jon. Could you give some more color on the amounts in the different buckets for the Albertson's gain?

Sure. As I said the number was about $56 million net really broken out into four line items. Within the equity joint ventures line, you actually have a debit, a loss, a charge of about $17.5 million and that's the equity pick up from the operating activities at FD and [gross] levels. Your extraordinary gain which is right on the face of the operating statement is $41.6 million net. The net benefit on the income tax line, a benefit, a credit is about $31.5 and I'm rounding here. And then slightly under $1 million in the minority interest line item. So just in terms of rough order magnitude, those are the four line items that are impacted to get you to the net $56 million plus.

All right so the net benefit of the income tax in the quarter was solely related to the Albertson's gain?

Right, right, and in effect the benefit-- the line item provision benefit for income taxes was $30 million as a benefit, the effect to Albertson's et cetera was $31.5 million, so you've actually got a small tax expense, all other things being equal and then add to that the normal taxes that are attached to the KDI profit, this is on a separate line item.

Right. Okay and I've been reading about how the remittance checks back to Mexico have been slowing as a result of the U.S. home building slow downs. Are there any comment son how that could effect Kimco's plans in Mexico or do you see no effect?

Well we-- in anticipation of that question today, we talked to some of our major tenants in Mexico including HEB and Wal-Mart and both experienced very strong sales growth in the first quarter, so so far, it hasn't, it hasn't decreased their sales volume. Longer term, I suspect it may if the remittance is a slow down, but again, it's so underretailed in Mexico. Even if you adjust for income, they have one shopping center compared to five for the equal number of people adjusted for income. I always like to say that there's 48,000 shopping centers roughly in our type in the U.S., there's only close to 800 now in Mexico. So the demand is there, the retailers are doing well, the sites are scarce. So for now, even if the remittances continue to decline, I think we'll be fine.

Okay, thank you.

Our next question will come from Ross Nussbaum with Banc of America.

Good morning everyone. Was wondering if you can go over your acquisition yields in the first quarter split out between U.S., Mexico, and Chile?

Well, I'll let Tom lead in as well. I think in the U.S. you have to put it in the context that we are buying the very best properties. These are very high quality properties and Cap rates for those high quality properties are still hovering around 6%, I'd say. In some cases they dip below 6%. But I would say the average time is still 6--

Average is still 6.

In the U.S. And in Mexico, it depends a little bit on the percentage of income that's coming from dollar leases. The portfolio that we bought in the first quarter, the Cap rate was in the mid-10s, but you have to put it in the context that more than 60% of the income was from U.S. dollar leases which is a good thing. In general we think we're still able to buy in Mexico on Peso denominated leases around 11%, I would say would be a good average. Canada is very similar to the U.S. The difference in Cap rates has narrowed and I just don't think there's a big difference in Cap rates any more in Canada. The very best stuff is trading at fixed. What remains different in Canada is interest rates remain about 50 basis points lower in than the U.S., so there's a little bit more arbitrage in Canada. Chile, the first shopping centers we were able to acquire were at a 9.5% Cap rate.

Okay, and as a follow-up, is it fair to assume that you're going to take the lessons learned in Mexico and ramp up the rest of Latin America in the same manner over the next few years?

We are going to do it in a very disciplined, studied manner. Chile for us represented a logical next-step in South America, it's the strongest country down there, the investment grade rating is actually exceeds Mexico. The political situation, the economy, everything is very strong down there. Debt is available. We have several good operating partners in Chile. So we expect to continue to expand in Chile. We have approved our first, first small partnership in Brazil and that remains a very attractive opportunity with close to 200 million people in that market. There are several other countries we're studying, including Peru which has many similar characteristics. The city of Lima alone has 15 million people, so it's an intriguing place to look. But we're going to expand in South America but we're going to do it in a very careful, disciplined manner.

Thank you.

Thank you, we'll move next to Matt Ostrower with Morgan Stanley.

Morning, could you just review-- given the, given what you've booked for Albertson's already, can you just review in your own mind what-- is there anything left there and sort of how that stands on your balance sheet?

In terms of-- there's nothing left on the balance sheet other than the $15 million commitment as a reserve or liability as I mentioned. It's-- I think it's too premature to say what the kind of future profile of Albertson's might be. They continue-- the Albertson's operating team continues to make very good progress at the store level in improving margins and really focusing on remaining open to stores to focus on quality. But at this point, I think we're status quo for a while and let the Albertson's team continue their operating plan and than the consortium will determine in the future which management, where else we should go. But at this point, Matt, the numbers and particularly on my guidance range for the balance of '07 at this point is status quo.

And I was less asking about '07 earnings impact and more just how is this business progressing, as an example, [Vernado] talked in a lot more detail about how Toys "R" Us was doing. Can you sort of give us a sense for how this business is performing versus your expectations when you first went into it. Is this looking to you like a home run at this point? Regardless of what those earnings impact might be, or is it looking more like basically right down the middle in terms of what you were expecting?

It's a double home run. We're very excited about future of it, we're very excited about the deal. We really feel confident there'll be more profits to come, when they will be realized I'm not sure, but Matt, it exceeded our expectations dramatically.

And can you just give-- I appreciate that conclusion, can you give us some color in terms of what's driving that conclusion? Is it that they're expanding margins, are sales doing a lot better than you thought? What's the--?

It's a fabulous operating team headed up by a person who was at Albertson's 23 years and came back and knows the business and it's just a great, great management team.

Okay so you're basically saying it's just operations in general, not revenues or margins per se, just it's just a good team?

It's all of those items.

Okay. Okay, great and then, Mike, should I read anything into your comment about investing in securities as a net buyer this past quarter? Is that a statement about securities pressing in general or is it just sort of a happens stance conclusion?

I think, Matt, we're continuously looking at acquiring securities. And we've continued to do it over the past three years. I think what the difference is this quarter is that we elected not to dispose of any, as you can see from our financial accounts that we've over the last couple of years also sold, substantial amount for securities in addition to buying. This quarter we didn't see-- we didn't have the need or the desire to dispose of any. So that was really what I was just trying to isolate because in reviewing the financial statements, people will note that the line item that relates to interest, dividends, and other investment income dropped substantially quarter-over-quarter, and I just wanted to make that point that we didn't sell anything.

Great, thank you.

(OPERATOR INSTRUCTIONS) We'll go next to Jeff Spector with UBS.

Good morning. I had a question about the land acquisition environment in Mexico. Have the standards become closer to U.S. standards and are you seeing any trend in other countries in Central or South America?

Well I'm not exactly sure what you mean by standards. Our disciplines in terms of what we look for when we buy land is similar to the U.S. We look at environmental considerations and legal and title and zoning entitlement process. So we have a similar underwriting discipline as we look for land to purchase in Mexico. I think the exciting premise of the fund is, is we've noticed a huge difference in the price for land that's ready to go, where Wal-Mart is willing to sign a lease and everything's all ready to go. And something that Wal-Mart may want to build on two years from now. And we can buy that land, it's not quite ready to go, at a very cheap price and then within that two year period, either flip it to another developer, at a substantial gain, or develop it ourselves within the fund. And as a REIT it would be very difficult for us to land bank hundreds of millions of dollars of land in Mexico.

By teaming up with institutions, we can take advantage of this opportunity. And it gives us a tremendous product to offer to our retailers and our operating partners in Mexico. It rounds out the products we can do with these people. Places like Chile and Peru, it's possible that we could evolve into something similar, but we have no immediate plans to do that.

Okay and are you seeing any differences in fund expectations between U.S. and foreign JV?

Sure in general, fund investors are looking for a higher return as they go international and one of the attractive things about our Mexican land fund is the IRRs are very attractively, at least the targeted IRRs are very attractive compared to the comparable U.S. fund.

Could you quantify the spreads?

Well I mean, we can certainly disclose our targeted IRR in the land fund is 20% net to the investors after fees.

Great, thank you.

You're welcome.

Thank you. We'll go next to Merrill Lynch with Craig Schmidt.

Thank you. Given your increased Mexican activity including these land sites, I'm wondering how many Kimco employees actually live in Mexico?

Well, let's see, we service Mexico primarily out of San Antonio and Dallas, and we're up to about 20 people today. Two or three of them are Mexican residents that will eventually repatriate back to a Mexico office for us. But right now all of them are either in San Antonia and Dallas.

Okay thank you.

They have the Aero/Mexico frequent flyer miles to prove it, everything is flying around. And then we have, as we've mentioned before, 14 different local operating partners and they're all based in different geographic regions in Mexico and they have their own staff of employees. And we have a very sizeable joint venture with GE which has 60 people headquartered in Mexico City and a satellite office I believe in Tijuana. So we think we've got the coverage and the presence in Mexico. Longer term, we will put probably an office in Mexico City, but right now it seems to work fine out of San Antonio and Dallas.

Yes I was noticing your pronunciation of the retailers is getting more authentic.

I don't think so at all. We got a ways to go Craig. I'm thinking of Spanish immersion classes soon.

Okay and I just had one other question on the Management Business. You broke it out into three different buckets. I was just wondering what the run rate might be if-- or if any of the run rates might be significantly less as we look forward?

Yes, one of the things, Craig, that we at least-- one reason for breaking it out is-- and then if you take those numbers and marry it up against the earnings guidance information that we gave towards the end of the press release, basically on a run rate for the in place programs, on the Management fee side of somewhere, kind of put a mid point of about $40 million. The variable components, which is why we broke things out, is going to be the level of acquisition fees and other one time sort of fees which are tougher to model. So we figured we would isolate on the things that we were comfortable modelling out based on existing programs and normal turnovers. So it's 40 and then you add to that, whatever assumptions that you have in your model for acquisitions and the like.

Okay, thank you.

Thank you. Jeff Donnelly, Wachovia has our next question.

Yes, Dave, can you talk about where you intend to find the incremental $1 billion or so in acquisitions that you talked about in your '07 outlook? Between now and year end is it portfolio transactions, large one off assets or even entity level deals?

So again, based on our run rate of $1 billion this past quarter, we have every confidence in (inaudible) and, our Chief Marketing Officer, Milton Cooper in finding these large, these large transactions. Really, honestly, they come about in all shapes and sizes. We have a good one off business where we're buying individual properties from property owners that we know and brokers that we've done business with for years, as well as institutions that are disposing of property that we have relationships with. As well as the portfolio transactions. These can come in either public or private forms and we have confidence that over the next three quarters, we'll be able to achieve those targets. Tom, do you have anything to add?

We have a very active pipeline and we're working on multiple transactions that exceed the amount of money that we talked about for next year. So over $1 billion we have actively working. Whether they close or not, it's difficult to say. But with our pipeline it's very, very active.

How many of those transactions are say in excess of like $0.5 billion?

None. These are all--

These are all smaller portfolios. They range in size from $20 million to as much as $100 million.

Okay, and Dave the follow-up, just looking out one to two years, is it fair to say that the incremental investment activity of Kimco will sku heavily towards nonretail uses perhaps beginning as soon as this year?

No, honestly, and that's why we wanted to address it in the comment. 95% of our property types and our business is really going to stay with retail. That's where our core expertise is, that's where our 50 years of relationships are and so forth. We do reserve the right to follow very good operating partners into all kinds of opportunities. And you will raise your eyebrows at some of these opportunities. But when you look at the magnitude of Kimco and the size of Kimco, it's really not that significant. And we don't want to scare people thinking we're going far off field but we do have good partners that bring us these opportunities. And it will provide wonderful incremental income for the Company over the years.

And just last question and-- Milton, I guess for Milton and Dave, do you guys both share the same long term outlook for capitalization rates and what is that view?

My view is that long term capitalization rates will probably decline. I've based upon -- in fact A historically real estate really much too cheap. I think I covered this in my letter to shareholders. And the allocation by pension trust and others to real estate is such that the demand for the product will be such that I think Cap rates will decline. And on a risk adjusted basis, you may see Cap rates that start with a four. If a 30 year treasury is 4.66 and you get your money back with less purchasing power, good real estate may have Cap rates that begin with a four.

We've certainly seen no slow down in the competitive buying frenzy for class A properties. But Tom will tell you it's very tough out there, and it's very competitive and if anything, the pressure on the very best stuff is still downwards.

Thanks, guys.

Thank you. We'll go next to David Fick with Stifel Nicolaus.

If that's the case Milton, and I think the market indicated you just bought Flagler on a low five, you may want to comment on whether that's correct or not, but how do you [equitize] that? How do you-- how does it make sense, and I understand how your fund structures work, but aren't we marginally now at the point where you can only rationalize your growth through the acquisition of these assets through IRR calculations as opposed to current cash flow?

You, for us, A the investor weighs carefully where they invest their money and I assume that on a risk adjusted basis these properties are in demand. The-- by the way, the IRR on Flagler is going to be nine plus with starting Cap rate lower. And we'll have no problem with having many institutional investors wanting to participate. But our business, between the combination of the Manager's fees and the return, will give us a return in excess of our course of capital. And that's what we're in business for. You can't-- it really is where is the property going? You can't always start with going in Cap rates.

And if you look at the property, the market rents are substantially higher than the in place rents and it's an unusual situation in that we get three of the anchor tenants back during our 10 year holding period, that rarely happens. Sales are very high. The supermarket which is (inaudible) is doing almost $900 a foot. And the barriers to entry are very, very tight, there's no place to build. So it's a combination of a lot of things.

You're not challenging the going in Cap rate being in the low fives?

No.

One small portfolio that did trade the Nottingham portfolio, did you guys bid on that? (inaudible)

We could not because of a possible conflict with one of our directors. We did not.

Oh yes, I'm aware. Okay great, thank you.

Thank you. Louis Taylor, Deutsche Bank has our next question.

Thanks, good morning. Mike, can you just go back to the Investment Management fees for the quarter just to understand some of the pieces. The acquisition fee of around $7 million was that primarily coming from the promote and the GE real estate venture or was there anything from the Crow Holdings, I guess contribution or JV formation?

Actually the majority of the acquisitions fee was related to Pan Pacific. And I know that that transaction closed in the fourth quarter of last year, but the acquisition fee was structured such that it was not earned until this quarter because we had to deal with our 5% bad income basket in terms of fees that we could bring. So we structured a transaction-- this transaction with Prudential that in effect resulted in our fee being earned for the first quarter.

Okay, I mean, should we expect or are you expect a fee for Crow Holdings in Q2 or-- and then where did the GE promote flow through?

The Crow acquisition fee--

Crow, because there's a history of that transaction, both Prudential and Kimco were bidding on that transaction together and near the end we teamed up and Kimco actually committed to buy it and Prudential closed simultaneously with us. Since we were both bidding on it together, we did not charge them an acquisition fee.

On the Crow promote, in our supplemental you'll see in our operating joint ventures page we outline the promote dollars. Those numbers are actually included in the joint venture income line. Because as promotes they represent excess participations in our ownership structure. So we disclose in the supplemental the promote income that came from the Crow portfolio in the first quarter, which is $6.7 million, and then there was also another smaller promote on that page regarding the Fremont hub property. So in effect those promoted interests are not sitting on the Management fee line, they're on a separate line on the financial statements.

Great, thank you

Mike Mueller with JPMorgan, please go ahead.

Hi. In terms of the funds, you've seen a number of other reads kind of move toward open end fund structures, maybe larger funds bringing in multiple investors, can you talk about that sort of structure in your business versus the way your JVs are set up now?

Well generally as we increase the products that we're offering, I think like the Mexican land fund, it is much easier to do that on a closed end basis than open end, because these are relatively pioneering products to offer. In addition, we have had no problems as institutions want to sell out or sell down bringing in other investors. So the benefits of the open end haven't been as readily apparent to us as perhaps others. Our formula's been working fine. Our business is growing and the investors are relatively happy with the structure that we have with them.

Okay and secondly, in terms of the acquisition pace, when you look beyond '07, what do you need to do to sustain the double-digit growth? Obviously '07 is a very big year. Does that set the bar that much higher moving into '08 and beyond?

Well in terms of acquisitions and growing our assets under Management and our whole Asset Management Business, that's just one of the many pieces that we have that provide the double-digit earnings. The core portfolio, our redevelopment programs, our Asset Management business, Mexico, Canada, Preferred Equity, KDI, et cetera. All of those pieces combined together for what we think is going to be growth per share above what comparable REITs will do.

Okay, so basically when we look forward to '08 and when you roll out initial guidance, chances are the acquisition number will be a little bit more normalized back to say the $1 billion range where it's been?

Hard to say. Hard to say, Mike. And that's-- if you go back to the investor day that we had late last year and not only did we talk about kind of average growth of 10% plus, and there are going to be some higher some lower, we also talked about kind of the shifting, relative contributions between the core holdings and Investment Management programs and our Kimco Capital Services group. Now we-- certainly when we pro forma and think out two, three, four years, every-- each one of those three categories will grow and provide increasing earnings. I think on a relative basis though, at least for the foreseeable future and based on demand and what we see for the continuing thirst for real estate, the Institutional Management programs will continue to become a proportionately higher percentage of the total. That implies that there's going to be increased acquisition activity as long as the investor demand is there.

Should things start to turn around. Should there be a different economic environment or for whatever reason money starts to disappear, that's when we think the combination of some of the more opportunistic things we could buy in the core and that plus bucket, the Kimco Capital Services, we will begin to capitalize more on distress or other opportunities that may be beyond the traditional investment profile. Add to that an increasing international strategy and all of those pieces together is what gives us confidence that we're going to be able to grow at the average 10% rate over the next few years. So a long winded answer, but for us, it's more than just a binary item as to our acquisitions going to scale up or not.

Okay, thanks

Thank you, our final question today will come from Rich Moore with RBC Capital Markets.

Hi good morning guys. How would you characterize construction costs for us? What they're doing at this point?

Jerry, would you like to comment? You're probably on the front lines of that.

Okay,I would probably say all over the field. Depending on what region you're in, but they rapidly increase as everyone knows, especially steel and concrete. Those costs I think will continue to rise, not as dramatically, but will continue to rise. I do see some stabilization, we'll say in some of the subcontractors in the labor force and the demand for work due to the housing slow down. So there might be a slow down in the rise of labor costs in the construction area.

Okay, and does that hold internationally as well? I mean, obviously some of these are commodity type products, but labor of course isn't. I mean does this work in Mexico? I mean same sort of the dynamics that you're seeing in the U.S.?

It is interesting to look at in Canada, particularly Western Canada, construction costs are way up. People that are trying to develop in Calgary and Vancouver will tell that they missed their estimates by a lot. And some of our operating partners have complained about that. It's difficult to get labor for instance in Calgary. When you switch to Mexico, it hasn't-- we haven't seen a big impact yet at all. Labor remains relatively inexpensive. I like to tell the story, one of our shopping centers had 800 laborers on the site at one time. It's a different construct in Mexico in terms of labor. So we haven't seen it yet in Mexico and don't anticipate seeing it for the short term. The other thing to remember about Mexico, alliance share of the cost, almost 50% of the cost is the land. The construction cost is a much lower number in general in Mexico than it is in the U.S.

Okay, very good. Thank you guys.

Thank you. And we will take one more question that will come from Dennis Maloney with Goldman Sachs.

Hi good morning, thank you. Just wondering in terms of the incremental assets under Management that you expect to garner over the next say three to five years, how much of that do you think will come from the international bucket?

It's very difficult to predict, but I would think in increasing amount, we have been literally deluged with investors that would like to invest with us in Mexico and South America. Right now it's hard for us to justify it because the returns are so high. We'd like our shareholders to benefit from those higher returns so we're not looking at large investor joint ventures in Mexico and South America. Overtime as Cap rates decline and the yields are more modest, than I think we would look to continue to grow but use some of our more traditional sources of funds.

And then just a real quick follow up. I mean could you comment just real briefly on the ownership characteristics of real estate in Latin America? How fragmented are the markets and are there any large portfolios up for sale?

Well it's interesting in Mexico a portfolio of two very large malls in Monterey was brought to market by JPMorgan. And it was extensive, very competitive bidding for those two malls. So they're beginning to appear, but there's such a shortage of traditional income retail properties in Mexico. There's really just not a lot to buy. That's why we were so pleased to find this portfolio of 17, a smaller little neighborhood centers to purchase. The activity in Mexico will primarily continue to be development of first class U.S. style income properties.

Thank you

We have no other questions at this time. I'd like to turn it to Barbara Pooley for closing remarks. Thanks, Augusta. Just a reminder that our supplemental can be found on our website, www.kimcorealty.com. Thanks everyone for participating today. Thank you. That does conclude our call today. We'd like to thank everyone for their participation. Have a great day.