Kimco Realty Corp (KIM) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to KIMCO's second quarter earnings conference call. Please be aware today's conference is being recorded. As a reminder, all lines have muted to prevent background noise. After the speakers' remarks, there will be a formal question-and-answer session. (OPERATOR INSTRUCTIONS).

At this time it is my pleasure, to introduce your speaker today, Barbara Pooley. Please go ahead, ma'am.

Thank you Audra. Good morning, everybody. Thank you all for joining KIMCO earnings call. Presenting this morning are Mike Pappagallo, Chief Financial Officer; Dave Henry, Chief Investment Officer; Milton Cooper, Chairman and CEO, and Mike Flynn, President and Vice Chairman. Several other key executives are also available to take your questions at the conclusion of our prepared remarks. As a reminder, statements made during the course of this call represent the company and management's hopes, intentions, beliefs, expectations, or projections or 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 in the company's SEC filings.

During this presentation, management may make reference to certain non-GAAP 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 non-GAAP financial measures are available on our Web site. Finally, during the Q&A portion of our call, 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'll now turn the call over to Mike Pappagallo.

Thank you, Barbara, and good morning. I'm going to limit my comments to a few observations on the numbers and operating performance, as hopefully the changes in the press release format and supplemental package information will help with the details that you need for your financial models and notes. The second quarter operating results can best be summarized by a combination of solid operating performance in our shopping center holdings, coupled with execution of many of the anticipated transactions that we planned for in our original full-year business plan.

As a result, the FFO per share for the quarter jumped significantly over the comparable quarter from last year by 31.5%. On a year-to-date basis, we stand at FFO of $1.49 per share, which is well over halfway to the high end of our guidance range for the year. We will always seek to execute on our targeted profit-taking opportunities when presented, even if it runs counter to quarterly earnings growth.

The full-year guidance range has been tightened from $2.54 to $2.59 per share representing about a 16% growth over 2006 at the midpoint. If you do the math, the third and fourth quarter will average about $0.55 per quarter, which will display as roughly flat quarters from the 2006 level. It's a fact to deal with, so I would once again ask you to consider our performance with the expected full-year result, which under any measure, will be outstanding. Earlier this week, we also announced the $0.04 increase to our common stock dividend to $0.40 per quarter, an 11.1% increase over the prior level. This action reinforces our long-term objective of continuing to increase earnings and dividends at an average annual rate of at least 10%. Obviously, this year the earnings growth rate is much further ahead than the rate of increase of the dividend, and that reflects primarily the relative contribution of this year's earnings from our taxable REIT subsidiaries.

Retaining earnings and redeploying them into other opportunities is a very cost effective way to create value for shareholders, and we're mindful that we have to employ the same degree of investment stewardship with the house money as we do with externally accessed capital. The marketplace certainly has not been kind to REITs since the last earnings season and a drop in our stock price of almost 30% over the past three months is admittedly is a pill that has been hard to swallow, considering the excellent health of the business, the strength of the balance sheet, and stellar financial results. But we're not going to dwell on the recent market activity and instead remain focused on the business and the most effective way to finance it.

We also recognize that such a precipitous decline in the stock price brings renewed focus on the virtues of a formal stock buyback program. We have considered it, but still believe that ultimately our shareholders will be better served if the company uses its liquidity and access to capital to invest in the expansion of our business platform, and to take advantage of opportunities that may arise in an extended period of stress from the capital market.

In reviewing the quarterly results, a few points are worth highlighting. First, the shopping center portfolio continues to deliver strong NOI growth, as evidenced by a 4% internal growth rate and consistently strong occupancy levels with a 20-basis point increase in the core holdings portfolio to 95.8%. Also, we continue to recycle investment capital through a focus on redevelopment and expansion projects in part with the proceeds from dispositions of marginal assets and nonstrategic markets and will benefit further as more ground-up development projects come online, particularly in Mexico. I sometimes wonder whether it still makes sense to give different labels to the portfolio shopping centers and what I call core versus those in our investment management programs, because from a real estate owner's perspective, the assets in these management programs are every bit as important in achieving the goal of operating the highest-quality profitable and valuable portfolio shopping centers.

We now have 362 properties in the U.S. in funds that we manage on behalf of 15 institutional partners, with a composite portfolio that's over 96% occupied. Add to that about 46 other properties we manage for other JV partners, and the assets we oversee for GE in Mexico and the result is a high-quality portfolio whose returns are enhanced by the establishment of a fee base that is primarily recurring in nature and supplemented by transaction fees and the realization of promotes or other incentive-based payments.

We sometimes ask, is the fee business worth it? And we think so. From the perspective of use of capital, only $700 million of our own capital has been used to acquire $10 billion of real estate for institutions, which certainly is worth much more today. From a returns perspective, the fees and promotes can substantially increase total returns over the on-balance sheet model. For the quarter, the total reported fees from these activities was $13.7 million, of which about 80% was recurring in the nature. For the six months, the fees were $30.8 million, of which about 70% was recurring.

For those of you doing analytical work on those numbers, please keep in mind that the actual fees charged for the programs is actually higher than it's shown on the income statement because for accounting presentation, we have to reclassify an amount out of the fee line and into the joint venture line to reflect our ownership percentage in the funds. For the second quarter, that adjustment is almost $2 million. In addition to fees, $31.7 million in promote income was earned so far this year, $21.3 million in the second quarter and $10.4 million in the first. We also recognize that running an effective management business requires people and a good part of the increase in our operating and administrative costs reflect these people.

I estimate that about a third of the total G&A costs in the second quarter are attributable to our management business. That net margin, about 50%, is more than acceptable when considering what the business does in terms of the incentive structures, the seniority and stability of the fee stream that serves to enhance the return, and the ability to build size and scale while minimizing the use of capital. So in broad terms, the shopping center base has had a good growth profile. NOI has and will continue to be driven by quality of the real estate and our ability to capitalize on releasing and redevelopment opportunity. Expansion outside the U.S., particularly the development in Mexico, will add to ongoing earnings growth. As I just mentioned, a big part of our management book of business is fees of a recovering nature. Fee-stable shopping center base flows are the most significant part of our earnings base. But in addition, we will continue to seek investment outside the shopping center space through our wide network of business partners.

Our investment program with Westmont Hospitality is one of the more visible relationships, as evidenced by our participation in their acquisition of the In-Town Suites business. This part of our business model can create short-term earnings variability when we or our operating or financial partners decide to monetize embedded value in our investments. As evidence of that, this quarter we captured large profits from our preferred equity position in a portfolio of self-storage assets in Canada with Apple Self-Storage. This portfolio was sold to a public company in Canada, which bid aggressively for the assets. Also, our opportunistic investment program focused on lower Manhattan yielded a significant upside on the disposition of a property. We also recognized some additional income from the Albertson's deal, which essentially was a truing up of a component of the large cash distribution received last quarter as income versus return on capital. We're pleased with the results and execution so far and hope that the market will feel at least a little better about things today.

With that, I'll turn it over to Dave.

Thanks, Mike. I am very happy to report that we had another strong quarter of new business activity. Our operating businesses, institutional asset management, and our international operations were all active during the quarter with great momentum, as we complete the first half of 2007.

For your consideration and review, I would like to highlight the following this morning: Number one, our Canadian portfolio. We are particularly proud of our portfolio of Canadian properties, preferred equity investments, and development projects that we have compiled over a six-year period. With the Canadian dollar, the Looney, almost at parity with the U.S. dollar, it is satisfying to note that KIMCO has benefited from both dramatically declining cap rates as well as property profits in Canadian dollars that are worth substantially more in U.S. dollar terms. In 2001, when we began purchasing properties with our partner, RioCan, the Canadian dollar stood at $0.63. Today, the Canadian dollar is $0.95. While our original investments were fully hedged with Canadian dollar mortgages and our unsecured Canadian dollar corporate debt, the increases in property values and property cash flow have been significantly boosted by the rise of the Canadian dollar.

Our Canadian portfolio itself is very high quality with a strong record of NOI performance. Our retail property portfolio with RioCan contains 35 shopping centers comprising 8.2 million square feet, with a current occupancy of 99%. Our RioCan partners have done a wonderful job of growing property net income and creating additional value through expansion activities. Our current FFO returns exceed 30%. Our Canadian preferred equity portfolio now contains 93 properties and 16 separate preferred equity investments with 11 joint venture partners. We are particularly proud of our preferred equity partners with multiple transactions, such as Sandalwood Properties, Sterling Center Corp., Anthem Properties, ABACUS, Plaza Corp., Westmont Hospitality, and Apple Self-Storage. Our Canadian office continues to grow our portfolio and expand our network of partners and customers.

On the development side in Canada, we have six significant development projects underway comprising 2.4 million square feet. Our signature transaction is Faubourg Boisbriand, a 1.4 million square foot lifestyle and power center nearing completion in Montreal and shadow anchored by a 140,000 square foot Costco. Development returns in Canada remain strong with excellent leasing activity in most major markets. Overall, Canada remains a very attractive long-term investment opportunity. A resource and energy-rich country, stable government, strong economy, growing population driven by immigration, 80,000 people per year in Toronto alone, and a limited number of competitors. We are pleased that KIMCO now has strong roots in this country.

Number two, KIMCO Select. We have discussed KIMCO Select previously, but in light of several significant investments this quarter, it is worth noting again that KIMCO Select is an opportunistic investment business that provides excellent incremental income to our existing property portfolio. As an example, our InTown Suites transaction announced earlier this quarter and mentioned by Mike, represents a high yielding investment opportunity with a proven operating partner at Westmont Hospitality. InTown represents our fifth transaction with Westmont, one of the world's largest hospitality companies, and will produce high double digit returns on our investment right from the start.

As mentioned on our last call, KIMCO Select investments are generally short-term holdings and are usually joint ventures with proven operating partners. We have invested in a wide range of property types and opportunities, but we also liquidate these investments more frequently than our shopping center properties. For example, our U.S. and Canadian self-storage portfolios, which totaled 30 properties at one time, have been sold with one exception. We have also sold our large office building in Houston and we plan to sell our Hyatt hotel in Cancun this year to take advantage of the strong market for resort hotels.

KIMCO Select and its strong platform of experienced operating partners is an important operating business, but our shopping center portfolio in the U.S. and international markets remains the long-term heart of KIMCO and continues to represent well over 90% of our property portfolio. Number three, Mexico, our activity in Mexico continues to accelerate, and we are very proud to have the largest retail portfolio in Mexico with 32 existing shopping centers and 18 development projects. We now have 15 local operating partners and joint venture relationships. In the long KIMCO tradition of being a good partner, we have attracted and maintained relationships with an excellent network of local developers, anchor tenants, and financial intermediaries.

Our GE joint venture, which has grown to 12 properties containing 3.8 million square feet, is an excellent example of a synergistic partnership, benefiting both GE and KIMCO. GE, with more than 75 real estate professionals in Mexico, contributes its expertise and experience in asset management, tax, currency, and legal structures, demographic research, customer contacts, and background screening of potential tenants and developers. KIMCO provides retail development experience, partnership relationships, leasing and tenant expertise, and construction oversight. Together with GE, KIMCO has the strength and ability to undertake large retail projects in any geographic area or market in Mexico.

Competition in Mexico is heating up as new capital sources identify Mexico as an investment opportunity. However, we have a substantial head start with a terrific experienced team, and a large pipeline of attractive development and acquisition opportunities, all of which will enable us to continue to grow our portfolio and earnings in Mexico despite significant new competition. We are also trying to stay ahead in Latin America with our expansion activities in Chile, Brazil, and Peru.

Now I would like to turn to Milton for his comments.

Thanks, Dave. I would like to share with all of you a brief overview of our business. Approximately 80% of our EBITDA is generated from KIMCO's ownership and management of retail real estate. That number climbs to over 90% when you include EBITDA from other retail-related businesses and assets. Our occupancy is up to 95.8%, our same-store growth was 4% on a cash basis, without redevelopment, without straight line, and without termination fees. Over the last eight quarters, our same-store growth has averaged 4.6%.

By and large, our shopping centers are in growth areas and our rents are below market, and this is the foundation for additional same-store growth. By the way, we happen to own 32 properties which have substantial inherent growth in the five boroughs of the City of New York. We continue to wean our portfolio of those properties that have limited growth potential or properties where we perceive risk, particularly in the central U.S. We have wonderful growth prospects in our Canadian and Mexican portfolios. Dave Henry was so enthused after completing the review of the tour of our centers in the Vancouver market, a market that is just bursting with dynamic growth.

So our shopping center portfolio is a superb one. We continue to get toward our dream portfolio and candidly, we don't get enough credit for it. Owning and managing shopping centers is our core business. It's what we've done since we started this business over 45 years ago, and it's what we will continue to do. Add to that the profits we make with select opportunistic investments, and you've got a great income plus business. So our core business is strong, our other activities are additive, our payout ratio is low so that our retained cash flow is high. We like the menu.

Now in a final note, we at KIMCO have been through many cycles and we know there is truth in the adage that liquidity is a coward. It runs from trouble. This period of turbulence in the credit markets is one of the reasons we've kept our balance sheet very strong. Historically, we've done exceptionally well in periods such as we are now encountering. And none of us enjoy watching the pain that others have endured over recent periods, we do have certain business units that have already begun to see transactions that would not be available in a healthier debt market.

Our preferred equity in distressed businesses are made to order for this climate and this is a time where the combination of solid balance sheet, coupled with people who can assess risk and opportunity will produce stellar results. The challenge is to be both judicious and very fast in our foot work and my sense is that we'll harvest good results for our shareholders. Now we'd be delighted to take any questions.

(OPERATOR INSTRUCTIONS). We'll go first to Jay Habermann at Goldman Sachs.

Hi, good morning. Just a question, Milton, to follow-up on that areas of distress. Can you comment specifically on the particular areas you might be seeing that and I guess the potential size of any such investment?

Well, there may be the stress in certain retail segments, which I wouldn't like to go into, and the size will vary. I'd hate to blueprint that, Jay.

Okay, can I ask one more question? Can you comment on cap rates in terms of, have they stabilized here, are you starting to see differentiation maybe by quality or location, as well as underlying credit? One follow-on, how much of the core acquisitions do you plan to keep 100% on balance sheet?

So far the -- let me -- what I've seen, it's too soon, but I would like to give you, Jay, my gut feeling. My gut feeling is that those acquisitions of properties that were normally financed to mortgages in the debt markets in properties of lesser quality, where there isn't institutional demand, cap rates may move up. For high-quality properties, institutions that demand to own real estate is still strong and allocations haven't been filled. So I would suspect that there'll be a bifurcation based on quality and high quality will remain vibrant and probably won't have a change in cap rates. Cap rates in the U.S. are still very low compared to the rest of the world.

Great. Thank you.

We'll go next to Paul Morgan at FBR.

Good morning. In terms of your redevelopment, I appreciate the added disclosure there. I just wanted to get a sense. You show roughly $400 million of active redevelopment pipeline. Whether you think that is sort of a stable number or is this -- the addition of that to your disclosure suggesting that you're more focused on it than you've been and that could grow as a component of your overall developed pipeline?

Paul, what I would say is I don't think it's been a new focus, I think in past quarters, we have talked about for a long period of time we were so focused on releasing the vacant K-Mart boxes that we were the first to admit that we were not as aggressive in redevelopment and expansion opportunities in our own portfolio. But I think the number of projects that you have seen that have come to bear and even though that we have completed has been a focus of the company over the past couple of years. We are constantly reevaluating the next series of potential redevelopments. Whereas today, we've got a series of ground up and redevelopments that are on the board and that are active, there are at least 20 to 30 other projects that are in the evaluation stage to determine whether it's feasible to undertake a broader scale redevelopment or expansion. So I would suspect that this is going to be a continuous process. The absolute level of predicting over the next two or three years is hard to tell, but as a general proposition and looking at returns, the yields are generally, at least for the projects on the board today run about 10 to 13%.

Okay. Second question on the lifestyle centers, it looks like you shifted one from merchant to development hold and I know you acquired Suburban Square. So you've got a pretty good-sized portfolio growing in that area. Are you considering forming a special specific joint venture for those properties, focused on lifestyle centers or are these generally going to be a new area where you're going to go after acquisitions?

Like many other things, it's a case-by-case basis. Suburban Square was just a unique opportunity for us to acquire. As our press release indicated, most likely we'll go into an institutional program, but it was just a piece of real estate with long-term prospects and redevelopment opportunities that we could not pass up. On the existing projects, yes, we did move one project into the hold category and that was with our partner we decided that the best strategy to actually finance the existing property and hold it and we captured the market at the right time in terms of financing it, so KIMCO was able to get all of its money out of the project and then we'll continue to hold it with our partners.

Thanks.

We'll move next to Jonathan Litt at Citigroup.

Hi, this is [Ann Bica] with Jon. Have you seen transaction activity in the market slow given the uncertainty of cap rates and how could that affect growth from the asset management business?

It's Tom Caputo. I think we still continue to see numerous opportunities in the market. Once again, as Milton mentioned, the Class A properties are selling at the same cap rates they were six months ago. I would say deals are taking a little bit longer to get done. But you have touched on something. There is some uncertainty in the market about cap rates, be in terms of the institutional property qualities, they continue to sell as the same cap rates.

And how is that affecting volume you're seeing in the marketplace?

I think if you look at the statistics for retail sales, and I saw some this morning, the first half of 2007 was record volume even over last year. So through the first half of the year, the volume continued to be strong. Hard to know what will happen the rest of the year.

In terms of the acquisition opportunities, we have in the short-term for the balance of this year, we have framed about $500 million more of acquisitions and at least half of that is based on deals that are in the pipeline ready to close. As you look out into the future, it is hard to predict whether there's going to be a material change in the appetite of institutional partners. If the marketplace continues to show the signs and the stress of the capital markets, but I do think it's important to go back to what Milton said earlier that this business model is very flexible in terms of capitalizing on the opportunity.

So whereas we do not think that the investment management business is going to slow down in any material way, if in fact we see during the course of 2008 and 9 that there is a slowdown in the acquisition market, and apathetic [per partners] goes away because of problems in the capital market and there's more distress, I think our business will react just fine and we might find more opportunities either for our core or from our other opportunistic businesses. So even though we look at each of our businesses in trying to develop a growth plan, we're very mindful and very reflective in terms of moving from one type of business [unit] to another. To go back to Jay's earlier question, almost all of our current acquisitions are targeted for our institutional programs. That continues to be our intent.

Okay. Then on the releasing spreads in Mexico and Canada, they appear to be a little lower than what I expected and lower than in the U.S. Can you comment on that?

They're mostly driven by the Canadian spreads. In terms of the relative below market to market rents in Canada, it's a general matter there, they're a little closer. But also there aren't a lot of leases and we've broken out the disclosures just to separate it from the U.S., which is probably more of the focus of your attention, but we don't consider that any particular negative trend or anything problematic.

Okay. Thank you.

In Mexico, most of our portfolio is a development portfolio, so these are relatively new properties just coming on stream. So it's very difficult to compare same-store releasing spreads yet.

Great, thanks.

Next we'll move to Christeen Kim at Deutsche Bank.

Hey, good morning. Could we -- Mike, you talked about how share repurchase isn't very attractive right now, but at what price -- if your stock falls another 5%, 10% -- does it become more interesting?

It's always interesting but I don't have a -- there's no price in mind that we say at X dollars a share we're going to pull the trigger. As you've seen in the past, we've always been very aggressive investors in terms of utilizing capital to the best available opportunity, and we still feel that we can make more money investing in new business and in buying back the stock. The number would have to be extremely compelling and quite frankly I don't know it. I haven't ventured a guess to what that number might be. But I just don't think you will see us announcing the program in the short-term because of the very reasons I said. We would just prefer to invest our capital in the opportunities that may come up.

Okay, great. In terms of Mexico, Dave, you mentioned how it's attracting a lot more interest at this point. Are you seeing cap rates nudge down at all?

Definitely. Definitely. It's very interesting. The first properties we bought in 2002 were roughly 13 caps and now people fight at 10% or less if there is an existing high quality property. So cap rates have definitely compressed and competition is beginning to swarm over Mexico. Luckily, since it is mostly a development game down there, and it takes a long time to accumulate sites and partners and anchor tenants, we believe we've got a good head start and still a window of opportunity down there that we intend to take advantage of it.

Now that your first couple of properties are just coming online, can you share with us some of the things you've learned through the process?

Obviously, as we've mentioned before, who your partner is is probably the most important, and we have a range of partners with different strengths and weaknesses that we discovered over time. The anchor tenant relationships, for example, ours with Wal-Mart and Home Depot and HEB and others is a critical component. Because that anchor tenant sets the tone of the entire shopping center. So you need to have a great working relationship with that anchor tenant.

Because before they open, their needs may change, there may be change orders, the size of the stores have changed, the exact layout and configuration of the store has changed. So the relationship with that anchor tenant has proved to be a critical component. Local leasing is also an area, as you might expect, the local rents are far higher than the anchor rents. And the local stores in Mexico are far smaller and far more numerous than a typical project in the U.S. So having partners that are very good at leasing the small local shops and opening them on time, the anchor tenants have proved to be very important as well.

Great. Thank you.

We'll go next to Michael Mueller at JPMorgan.

Hi. Mike, a couple questions about the income statement. Can you walk us through the quarter and just touch on the geography in terms of where some of the gains are? It looks like crop is in equity and JV, but can you walk through Broadway, Apple, the Sears distribution, etc.?

I'll just focus on those, those are obviously the most material items in the quarter. You're right that the crop promote is sitting in the joint venture income line, which is supplemented by a detailed schedule you'll find in the supplemental package. That's simply because that promote does in fact represent a disproportionate equity interest on cash flow now that we've met the return hurdles.

The Apple self-storage deal is in the income from other real estate investments. That is a preferred equity deal, through and through, and that's where our preferred equity income lands. The Kmart stock in the other income expense line, it is somewhat clouded because there are other expenses like franchise taxes that kind of mute that line item but the Kmart stock is buried in there. The last item, the gain on the Manhattan property at 625 Broadway, interestingly enough, is sitting in discontinued operations under the line item income from discontinued operating property. The nuance there is that even though the structure of the deal is preferred in nature because we had the preponderance of the equity position, for GAAP accounting purposes we needed to consolidate it, and therefore when we sold the property, for GAAP accounting purposes, the geography demanded that it should go into this line item and that's where it fit.

And that's still in FFO, correct?

Yes because it did not (inaudible) the structure of the deal and the business strategy of the deal was, as Bill pointed out, is kind of an opportunistic program and we were buying and selling properties very different from the shopping center long term hold. From time to time, you're going to have to deal with that noise that is sitting in different places on our GAAP accounting statements.

Okay. For the guidance for the balance of the year, the 60 to $65 million for the bucket of items that you talk about in guidance, if you kind of back out I don't want to say the one-times, but the promotes, the proceeds, the gains, et cetera, what's the recurring run rate? Is it primarily coming from the private equity, and that's what, 8 or $10 million a quarter? Is there anything above that?

I presume you're looking at the (multiple speakers) --

Yes, the KIMCO Select.

-- talked about the [preferred] retailer services, the KIMCO Select with 60 to 65 for the balance. Is that what you're referring to?

Yep.

I would say as a general statement, because the nature of those businesses have more arbitrage opportunity, there's more gains -- there's more gains, there's more buying and selling within them and certainly there's a higher proportion of that estimated amount as gain as opposed to recurring flow. I don't particularly have an exact breakout in front of me, but you're probably -- I'm going to speculate probably in the $20+ million range. That number is more transactional in nature than flow in nature. But that's just an offhand guess. I would have to look at it a little bit closer. It's impossible to speculate how it falls out on the earnings statement, because again depending on which transaction goes off, it may have different profiles on the income statement to my point about Apple was a gain that fell into a preferred equity line and 625 Broadway fell into a discontinued operations line. So I'll never be able to predict where it's going to land, but when you look at the absolute number, certainly it's got a pretty healthy mix of recurring flow and arbitrage gain opportunity.

Okay, great. Just a quick second question. The 4% same-store, that was a cash number. Is that correct?

Yeah. It always is cash number. Guys yell at me, I'm too lazy to figure out the GAAP number, but the GAAP number isn't meaningful to me the cash number is. So that is a pure cash 4% growth.

Okay, thanks.

We'll go next to Christy McElroy of Banc of America.

The assets that you've sold to date in the Prudential JV, I'm assuming those are part of the billion total that you had earmarked for sale among the pan-Pacific portfolio?

That is correct.

How has demand been in the private market for those assets and can you disclose roughly what the cap rates have been on average?

The demand has been quite strong. There have been a lot of 1031 buyers that have been interested in this portfolio. So the demand has been strong, it's been active. We've had multiple bidders on all the properties that we sold. We still have some in the market. And the cap rates have ranged from a low of 6 up into probably the mid-7 range depending on where it is and what it is and what's going on in terms of the tenant base. But I would say, if you wanted to categorize moat of the sales, they've probably been in the 6.25 to 6.75 range.

In terms of your international investments, can you give us some sense for what percentage of your development activity going forward, say call it over the next 3 to 5 years, should we expect to see international versus domestic given the opportunities that you're seeing in places like Mexico?

I'd say if you look at Mexico and Canada together versus what we're doing in KDI, it's probably going to be half or more, international.

Okay, great. Thank you.

We'll go next to Matt Ostrower at Morgan Stanley.

Morning. On the promote side, can you give us any more clarity on what's sitting there, embedded in your economics in terms of accumulated promotes? You've booked some this quarter. Does that give you any additional visibility that would sort of help us understand, for those of us trying to value the stock. How much to be giving you credit for?

I would suspect that in the crop portfolio alone between now and the future, probably somewhere in the neighborhood of $20 plus million promote less, and that's just kind of a thumb nail approach. On most of the other transactions, I can't give you a specific number. Most of the projects -- most of the activity in bulk is more recent. We have upsides in the KIMCO income fund and a couple of the other funds as well but I'm not going to venture a guess right now.

As a follow-up, on the preferred, on Select -- well, I guess on preferred specifically, I know you talked about what you could do the rest of this year, but in terms of the residual participations, is there any way of ballparking what might also be embedded economically there?

Yeah. We've a couple of different forms. We've taken a look at the total portfolio of preferred equity investment and we figured that there's somewhere between 150 to $200 million of upside based on a quick market valuation of those assets and our participation interest. When they ultimately will be realized, timing is certainly going to be dependent on both what we and our partners, our preferred equity partners want to do in terms of financing out or selling the property. But it does give us comfort that in the foreseeable future, there will continue to be an ongoing contribution from the preferred equity portfolio, not only in terms of its recurring flow, but in the monetization of these residual positions, and we can continue to put new investments on the board.

Milton alluded to earlier that there may be times of stress. In times of stress that you may find new opportunities. I think one of the areas that we might find some more opportunities in the preferred equity portfolio as our existing customers searching for financing and where the financing market is in the short-term may turn to us to help assist them in buying or recapitalizing their properties. So we feel good about the preferred equity both in terms of the flow and the ability to harvest the embedded upsides over a period of time.

Thanks very much.

There's also an element of recycling of capital going on in our preferred equity portfolio. It's very satisfying to see a number of our customers refinance the properties, pay us our entire investment back, and we retain our 30 to 50% interest in the property long-term with no investment in the property and no risk. We like that element of the business very much.

Thank you.

We'll go next to Craig Schmidt at Merrill Lynch.

Thank you. In terms of leasing spreads, what are your expectations for the second half of the year relative to the first?

If you look on a same-side basis, I think over the past four quarters we've probably been -- probably in the 12, 12 to 15% range and I would suspect that that would remain pretty much intact. This quarter was slightly lower run rate than we've had in the past and sometimes quarterly numbers can magnify small changes and there was one location that we turned over a couple of spaces in Nashville that the rents actually grow pretty flat and that's because prior tenants had a lot of TI [built into the] rent and we elected to go on an address basis. So for this quarter, the spread was a little lower than our run rate spend, but if you think of it over a trailing four or think into the future the 12 to 15 is probably the right framework, Craig.

Okay. Then in terms of limiting your exposure to the central portion of the nation, is that more of a case of just having a lot of activity surrounding it, or will you be more active in dispositions in that part of the country?

Generally, we will be more active in dispositions in the central part of the country. The demographics just aren't as favorable as other areas of the country. So people talk about the smile in terms of investing on the coast and the Sunbelt and that's where the retailers are expanding, that's where they're introducing new concepts, and that's where the growth is.

Okay, thank you.

(OPERATOR INSTRUCTIONS). We'll go next to David Fick at Stifel Nicolaus.

Good morning. I know this has been brought up a couple times, but I'm still confused. Mike, you say that you have more attractive investment alternatives, but with your stock off 30%, are you implying that you can invest in ROE above 20%?

Yes, can be. Can be deals. But more important -- I didn't mean to jump in, I apologize, Mike.

No, that's okay.

It's so important to keep your balance sheet strong. It's so important to always, always have access to capital. That's the overriding theme. Not business day by day, watching the stock price day by day, watch our business and the theme that we've had over a very long time is access to capital, taking advantage, and looking at your business long range, not short range. Mike, I'll turn it back to you.

Sorry, David. I don't think I could --

I hear the argument, but you guys invest in real estate. And if you can invest in your own real estate -- let me ask the question a different way. Can you think without stating what you think your NAV is, do you think you're trading at a discount to value?

Yes.

Well, then how --

We're able to buy at a discount to value. And we're able to do create deals. I think that the InTown Suites deal was just very sweet, as an example. The yields -- it's more of a business philosophy. You have to always watch your -- especially when there's turbulence in the debt markets. You've got to keep your equity very strong.

Okay, I'll let it go. Last question, your topline revenue was up $12 million quarter over quarter. That doesn't seem to be implied in the asset growth. What was that?

I'm sorry, David. When you say it's not implied in the asset growth?

Topline revenue. Rent revenue was up more than what was implied in the asset growth.

It has to be from same-store?

Well, the growth is a combination of same-store as well as a host of acquisition activity when you look at the year-over-year period. So --

You're going to have a lot of moving pieces where stuff comes in, sits for a while before it gets put out into the ventures, so...

That's true. And generally you'll find that on the discontinued line, if it's sold, but if it's transferred, it stays in the numbers on the top line. So there is -- there is a little bit of a challenge in terms of pure comparability in looking at revenue lines period over period versus looking at balance sheets at a period of time, because of the significant movement as we inventory the property back out to the joint ventures.

Great. Thank you.

Our next question comes from David Harris at Lehman Brothers.

Good morning. Dave, could I just go back to an observation you made with regard to the overseas cap fees. I hope picked up what you're saying that you're actually experience -- seeing or you're believing that cap rates are compressing still in Mexico. As you look out, does it concern you that there is a systemic repricing of risk that will actually put upward pressure on cap rates overtime and your overseas investments may turn out to be very good because you get terrific income appreciation, but it probably won't be as a result of cap rate compression.

Well, I don't know. Cap rates are still substantially higher in these international markets like Mexico than they are in the U.S. Part of the reason you're seeing all this new capital flooding to Mexico real estate is the bet that cap rates will continue to compress and I'm -- I share that view that first class real estate in Mexico will continue to decline in cap rates. There'll still be a difference between U.S. and Mexico to take into account the country risk.

But there certainly is room for cap rates to decline, especially when you remember that the top line potential of, for instance, shopping centers in Mexico, is far higher than the U.S.. With cost of living increases in every lease with percentage rents in many major leases that will drive higher NOI growth of shopping centers in Mexico than in the U.S. where income is relatively flat. Our Home Depot leases in the U.S. are flat for 20 years. In Mexico, they increase by cost of living each and every year. And their (multiple speakers).

Could you give us a bit of color around what you're seeing in Canada? I was in the U.K. earlier this week where there's every sign that property values across the quality spectrum are declining or about to decline. So Canada's economy is obviously in capital market structures and much more akin to those we see in the developed economies. Are you seeing any cap rate pressure there?

Well, cap rates have reached pretty much parity with the U.S. in Canada. First class shopping centers are selling in the fixed cap rate and occasionally under 6 in Canada. So the wonderful arbitrage we had in 2001 and 2002 when the average cap rate was just under 10%, that has vanished and KIMCO as a company, we're not buying stabilized properties in Canada today. We have morphed into more of a development program and preferred equity opportunities in Canada. Because there doesn't seem to be an opportunity to buy at good prices in Canada anymore. They've really followed the U.S. Whether those cap rates start to climb, I don't know.

As I mentioned before, Canada seems like such a good long-term bet. The retailers are doing very well there, the occupancies are very much higher in Canada than they are in the U.S. There is potential for rent growth there. It's very difficult to build in Canada, there's barriers to entry. I think cap rates are going to remain low in Canada.

Okay. Mike, I've got a somewhat associated question for you, if I may. On the asset management side, are you having any conversations yet with any of your joint venture partners about changing their return expectations or do you anticipate having those on a go-forward basis?

I'll let Tom talk to that, because he has broader relationships.

I do not see any change in return expectations on the part of our partners. They continue to be selective, as we do in what we buy and what we partner on, but so far we have not seen any change.

Are there any joint venture where you traditionally adopted, where one might call aggressive leverage ratios, which are now coming under question?

The only partner that really supported aggressive leverage was GE Capital, and that is the crop portfolio that we have been liquidating with enormous profits most of our other joint ventures have pretty conservative leverage. 60 to 70%. GE used some as high as 80%. In general, the leverage ratios of the institutional joint ventures that we have that are long-term holds are conservative leverage.

Okay, great. Thanks and thanks for giving me so much time.

We'll go next to Jim Sullivan at Green Street Advisors.

Thank you. Good morning. Milton, if I heard you correctly, I think you said that your expectation is that cap rates for lower quality assets in the U.S. are rising or will rise, but you don't believe that cap rates are changing or will change for a higher quality assets. With the turmoil in the CNBS market and the repricing of risk throughout the broader submarkets, why is your expectation that we won't see higher cap rates, lower values even for higher quality retail real estate?

It's a good question. On the higher quality properties, many of the buyers are buyers that may not have leverage at all and they do have unallocated requirements, allocations that have not been satisfied. And the worldwide demand to own real estate throughout the world, including the United States is increasing, so on a supply and demand, on high-quality properties, it's my view, Jim, that there will not be an increase in cap rates despite an increase in interest rates. Time will tell whether we're right, but that's my view. Different on lower quality.

It's also interesting to note that our foreign institutional partners look at the decline of the dollar as an opportunity so they can get more for their money, if you will, as they invest in United States real estate.

Thank you.

We'll take follow-up from Michael Mueller at JPMorgan.

Hi. Mike, excuse me, in response to Matt's question, you talked about visibility for crop motes and also you gave a little peak into the private equity harvesting. Can you extend that to talk about Sears, Albertson's, Kmart, in terms of what's left there?

Well, in terms of the Sears or Kmart stock distribution, that's -- we get it when we get it and I do believe we still have another distribution that is due us. That's ultimately when the final settlement of all the claims is wrapped up. So how many shares that's going to be is impossible to predict because it's completely outside of our control. On Albertson's, Milton, I think you should weigh in here, but --

I would suspect there would be substantial additional income to be harvested within the next two years.

Right. We have realized in an excess of $[15] million on that investment to date and to Milton's point, there's still a substantial amount of assets and activity to deal with and to resolve. So it's certainly -- we feel very comfortable that there's going to be continued significant receipt of funds and recoveries over the next couple of years. Timing again very difficult. I can tell you that in this third -- as we sit in the third quarter that we did receive an additional distribution from Albertson's, so there is more accounting profit in the third quarter from that distribution somewhere in the neighborhood, I believe, of 6 to $7 million. That's part of the third quarter numbers as we think through them. But again there's going to be some periodic distributions from asset sales and other activities and then we'll see where the ultimate strategy of that business and financing of that business goes.

Do you think you've recognized half of it so far, more than half, less than half?

I won't speculate.

Good try.

And that does conclude our question-and-answer session. Ms. Pooley, I'll turn the conference back over to you for closing remarks.

Thank you, Audra. Thank you, everyone, for participating today. Just a reminder, our supplemental is on our Web site at www.KIMCORealty.com. Have a good day.

And that does conclude today's conference. Thank you for your participation.