Kimco Realty Corp (KIM) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the KIMCO's third quarter earnings conference call. Please be aware today's conference is being recorded. As a reminder, our lines are 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 today's speaker, Ms. Barbara Pooley. Please go ahead, ma'am.

Thank you, Daryl. Thank you all for joining the third quarter KIMCO earnings call. With me this morning are Milton Cooper, Chairman and CEO, Dave Henry, Chief Investment Officer, Mike Flynn, President, Mike Pappagallo, Chief Financial Officer, and David Lukes, Executive Vice President. 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 hope, intentions, beliefs, expectations or projections of the future which are forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained 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 also available on our website.

Finally, during the Q&A portion of the call, 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. It certainly has been an eventful three months in the market since our last earnings report. Perhaps we can hope that a few billion dollars worth of writedowns by financial institutions and an accommodating (inaudible) will clear the decks and bring a degree of business, as usual, back into the real estate sales and financing markets. But at this point, that probably is wishful thinking as there still appear to be more questions than answers, including those surrounding the health of the consumer. For KIMCO, there were three major themes for the past quarter.

First, building as much liquidity and capital availability as possible. Focusing on the blocking and tackling of leasing and portfolio management, and also tempering our acquisition pace in light of more opportunistic transactions that may be available in the future. The liquidity action took various forms, the most significant being the renewal of our credit facility to a new four-year term with a one-year extension option, and upsizing it from $850 million to $1.5 billion. Despite the turbulent markets, we were encouraged by the commitments provided by so many of our relationship banks such that we were able to obtain commitments of almost $2 billion before we reduced it to the desired level, and a reduction in the spread pricing to a level of 37.5 basis points over LIBOR, plus a 12.5 basis points facility fee, and increased covenant flexibility was also a positive in light of what is going on in the markets.

We also issued a new series of preferred stock for $460 million, which allowed us to race a more permanent form of capital to further increase balance sheet flexibility without issuing common shares. We also recashed our existing Canadian dollar credit facility to include a US dollar borrowing option, and in Mexico we're in the processing of increasing our peso facility and have begun to place U.S.-style non-recourse financing on our completed Mexico development project to help recycle capital. Overall, we continued to position the balance sheet to capture opportunities in changing markets.

With respect to the third quarter operating results, FFO per share of $0.57 was $0.02 higher than consensus, and $0.01 above last year's third quarter. As you are aware, we captured a significant portion of our transactional-related activity in the first half of the year, including a significant Albertson's distribution, as well as large profits earned from the monetization of our preferred equity positions in Canadian self-storage and our mixed-use assets in Lower Manhattan. This resulted in a relatively small quarter-over-quarter increase this go-around, but on a year-to-date basis, FFO per share is up 26% to $2.06.

We have also tightened the full-year guidance range to $2.56 to $2.59 which represents a fourth quarter range of between $0.50 to $0.53, and the factors in that range include timing on merchant building sales currently under contract, as well as a few other transactional items scheduled for the last couple of months. Looking past the quarterly variation, the portfolio metrics, once again, points a solid execution on asset management strategies. Portfolio fundamentals remain intact, as evidenced by another increase in occupancy to 96.2%, same-site net operating income growth of 4.2%, spreads on new leases of 17%, and an overall increase of 12% once factoring in options and renewals.

And while there is real concern about the health of the consumer from the stress in the housing market, we believe that our centers are well positioned to withstand these issues, particularly in California and Florida, the two states most closely associated with the subprime mortgage mess. While those states have experienced declines in the value of housing, the resiliency of our property type, primarily focused on consumer essentials, and the strong demographics of our locations will mitigate any potential issues on occupancy or rental rates.

As I noted earlier, we have not been as aggressive on pricing in the acquisition market, which has slowed the number of transactions closed into our investment vehicles. That said, our management business remains on solid footing, and Dave will highlight some of the initiatives to respond to the changing landscape. Despite the origination slowdown, the business plans of the existing asset base continue to move forward. Two properties were sold out of the GE venture, one of which was acquired by the KIMCO-SEB partnership. And those sales generated an additional $6.2 million of promote income to KIMCO.

We also continued the disposal of selected assets from the former Pan Pacific portfolio, with six assets sold in the quarter netting to about $110 million. KIMCO Developers sold a completed Phase 2 of a project in Texas, as well as a land plan in Arizona during the quarter, and is well on the way to delivering approximately $25 million in posttax gains for 2007.

The operating businesses of KIMCO Capital Services did not experience any large single transactional items in the quarter, although we did receive additional distributions from the Albertson's investment, as well as contributions from the recent investments in the extended-stay hotel portfolio and our structured financing of a net lease portfolio with U.S. realty advisors. Insofar as providing guidance for 2008 earnings per share or FFO per share, I would much prefer to wait a bit longer to flush out timing and extent of transaction volumes, as well as to account for any uncertainties surrounding the consumer, but if I didn't say anything, you might read too much into it. So for now, I'm providing an FFO range between $2.70 to $2.78. Just for perspective, I would like to point out that the midpoint of that range tracks ahead of the average annual 10% growth rate we rolled out during our investor day in 2006, with a target of $3.50 a share by 2011. With that, I'll turn it over the Dave.

Thanks, Mike. As you mentioned, I think all of us in the REIT world have had a very interesting third quarter. For KIMCO, despite the bumpy ride, we continued to make excellent investments in a wide variety of new business activities. For our listeners' consideration and review, I would like to highlight the following this morning. Number one, Brazil. I'm pleased to report that we have formally expanded our presence in South America by signing a joint venture agreement with real estate partner, [SA], a Brazilian shopping center developer based in Sao Paulo, Brazil. The company developed small neighborhood shopping centers in the Sao Paulo market. The company had a strong pipeline of neighborhood shopping centers, and we anticipate closing on our very first project together in December. The planned KIMCO [REP] shopping center is located in Valinhos, a city located 40 minutes north of Sao Paulo, and will contain a total of 135,000 square feet.

In Brazil, we plan to focus on acquiring and developing small neighborhood retail properties rather than developing or building large high-end enclosed malls. Brazil, with a population of 186 million people, is the world's tenth largest economy and is projected to become the fifth largest economy in the world by 2050. With a record trade surplus in 2006, the largest foreign direct investment in Latin America, 3% inflation rate, a stable currency, and a growing middle class, Brazil represents an attractive long-term investment opportunity for KIMCO. Wal-Mart, McDonald's and other American retailers are focusing on growing their presence in Brazil, and we hope to join many of our existing tenants as they expand into Brazil.

Number two, net lease portfolio. In a signature-structured participating loan transaction this quarter, KIMCO invested approximately $78 million, giving us a 50% residual position in a large portfolio of 403 net leased properties in 33 states. The portfolio is divided into 30 master leased pools of properties with each pool leased to a single corporate credit, collateralized by all of the assets in the pool. The properties represent a diverse collection of free-standing restaurants under 20 different brands and represent a very attractive long-term investment for KIMCO due to the low market rents, low investment per square foot, substantial amortization under the existing mortgage loans, and generally strong corporate guarantors. As the leases expire over time, we believe there will be substantial opportunity to create additional value in this very large portfolio of more than 400 net leased properties.

Number 3, KIMCO Mexico retail land and development fund. During the quarter we successfully closed and upsized twice our previously announced Mexico retail land and development fund. The fund represents a new product for KIMCO in that it is a fully discretionary commingled fund of $324 million. The fund will acquire retail sites in Mexico which are targeted for future expansion by large U.S. and Mexican retail tenants. These land parcels which will either be developed within the fund or sold to third parties over a three to seven-year period will be selected by KIMCO's operating partners or retail 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 through this investment vehicle. Institutional investors committed to our fund include [New York common], ABP, (inaudible), GE Real Estate, Northwestern Mutual and Wellington Management.

Building on the success of the Mexican fund, we are introducing a $250 million U.S. land fund which will be jointly sponsored by KIMCO and the Rockefeller Group. Combining forces, KIMCO and the Rockefeller Group will be able to acquire large mixed-use sites and leverage KIMCO's expertise in retail development, and the Rockefeller Group's experience in office and industrial properties. The fund will target land and specific selected markets where either KIMCO or the Rockefeller Group have a strong track record. These markets include Florida, California, Arizona, New Jersey and Texas. The Rockefeller Group has an 80-year history of developing commercial real estate and is wholly-owned by Mitsubishi Estate, one of the world's largest real estate companies. We are very pleased to be working with them on this new fund.

Overall, we believe the growth of our institutional asset management business will be based on delivery of new joint venture and commingled fund products to meet the real estate objectives of a growing list of institutional clients. In 2008, we plan to introduce a new fund for South America retail properties, and a New York urban investment and development fund. We have reached agreement with UBS Wealth Management, a valued existing institutional client, to form a $300 million joint venture to acquire core stabilized retail properties in Canada. All of these areas represent growing sources of investment opportunities for KIMCO with attractive yields for our clients and our partners. Now I would like to turn to Milton for his comments and thoughts.

Thanks, Dave. George Bernard Shaw once said, "When I was young and foolish, I thought that money was everything, and now that I'm older and wiser, I know it is." Two weeks ago, Mike Flynn, Dave Henry, Mike Pappagallo, David Lukes and I met in an off-site strategy session in a Westchester Hotel conference room, and we agreed with George Bernard Shaw. Our job is to deliver the money to our shareholders and our people, and since our shareholders do not receive large annual dividends, and since no one at KIMCO receives large cash salary, the money has to be in the form of a growing share price. Now the fact that since our IPO, we have doubled the price of our shares every five years is history. What do we do from here? Our company has never, never, ever accepted the status quo. Innovation is our mantra. So our focus is to chart the course for future double-digit growth over time, and here is our road map.

One, our shopping center portfolio. We constantly review each asset with the following in mind. Where can we creatively add value? Is there growth in cash flow from the asset? Some of our centers have substantial built-in growth. Shopping centers that were built in the '60s and the '70s had then prevailing rents under leases that are to expire within 10 years. Permit me to illustrate. We own a 212,000-square-foot shopping center in Staten Island. A lease for 100,000 square feet was entered into in 1970 under which the tenant paid an annual rent of $3 per square foot, gross. That was the then-market.

New leases for smaller tenants are in the mid-40s per square foot. The 100,000-square-foot lease expires in 2011, and our estimate is that the rental value is at least $30 per square foot. Now, most of our income streams are generated from properties in urban areas, and those that were developed in the '60s, '70s, and '80s are in mature suburbs that do not have land for new housing and are not as vulnerable to the slowdown in new-home construction. It is my view that shopping centers with long-term leases with below-market grants are superb investments with bond-like characteristics that will attack investors worldwide who seek safety in hard assets. David Lukes refers to some of our centers as land banks that are carried by our tenants' rents until leases expire. Now, there are other centers whose growth is more appropriate for an investor with a lower cost of capital and a more patient time horizon. And these centers will be placed in a joint venture with such institutions. And we will sell any center that we feel may have risk.

Two, our global expansion. Our global expansion is designed to deliver higher yields and diversify our risks from being completely dependent on the U.S. dollar. Our first entry into the Canadian market was six years ago. We were and continue to be very optimistic about real estate in Canada. By the way, at the time of our initial investments, C$1 was equivalent to $0.66. We now have interest in over 145 properties in Canada.

Mexico. We began our acquisitions in Mexico in 2002, thanks to Dave, and we continue to believe that Mexico has good growth prospects. We have interests in 127 properties and anticipate continued substantial returns. We have interest in 21 developments that should come on stream by 2009. While we are pleased with what we own, we recognize that there now is very large demand to own real estate in Mexico, and as a result, we now are faced with substantial competition. Our timing in the past was good, but it will be more difficult to create more opportunities in the future. And in addition to Canada and Mexico, as you have heard, we are exploring and acting on additional investments in Chile and Brazil.

Three, our institutional investment management business. This is a growing business, and we are adding new institutional relationships and new products. Dave has mentioned our land fund in Mexico, and our new joint venture on a U.S. land fund.

Four, our development business. We have a solid development business that has been consistent in its earnings. The contribution from our development business is a little less than 5% of our EBITDA. We do have over 20 projects that should be completed between 2008 and 2010.

Five, KIMCO retail services. Retail services provides financing and other services for retailers. Some examples are Montgomery Ward designation rights transaction and our Venture Stores transaction. KIMCO Select is, in essence, an opportunity fund that takes into account the underlying value of real estate and leases. Some examples are the Albertson transaction and the Frank's Nursery transaction.

Six, preferred equity. Our preferred equity program currently is approximately $465 million invested in over 260 properties. We expect to realize approximately $200 million in residual profit participation out of this portfolio.

Seven, our New York City, Boston and Philadelphia urban projects. Patrick Flynn has headed up our effort to create value and profits with selected investments in New York City, Boston and Philadelphia. During the year, over $15 million of profits were generated out of the sale of two Manhattan properties. So, we believe that we can deliver the goods over time at a combination of these buckets and any new bucket and opportunities that we may be able to seize upon. Our view is that the times ahead will bring some pain to the consumer, and there will be turbulence in the markets. We have prepared for this cycle by keeping up balance sheet and liquidity very, very strong. We have been through cycles before and have always found that opportunities arise out of dislocation in the marketplace. And with that, we would be delighted to entertain any questions.

Once again, the question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) And we'll take our first question from Jonathan Litt with Citigroup. Please go ahead.

Hi, this is [Ambica] with John. Given the uncertainty on when transaction volume will pick up, how should we think about that being factored into 2008 guidance?

Ambica, this is Mike. I think historically we have looked at transactions, separating it between core shopping center acquisitions and then everything else. I think where we have a little struggle with visibility is what form and structure these transactions are going to take. In coming up with the preliminary guidance numbers that I have provided, I am expecting somewhere over $1 billion of investment activity, but that's not necessarily going to be all of the core shopping center-type assets that you have seen us acquire over the past couple of years. So that's a generic assumption, volume assumption, but the form and content of what business unit it falls in to, we have preferred equity, our opportunity fund, some of the other funds that Dave has talked about, that is to be determined.

So given that is below your historical acquisition volumes in the past couple of years, you would assume that that's more of a conservative target at this point that could be revised upwards if the market's transaction volume resumes.

Yes, that is true, and it has been pretty much the custom here at this point in the year or before the year, to take a relatively conservative view, because conditions do change, and you saw it over the past three or four months on how dramatic the credit markets were impacted. So we have a long-term business strategy. We have talked about it often. We have clear objectives that Milton articulated, and strategy. What we will continue to do is refine these assumptions set into those components as the year proceeds.

Okay. And could you give color on the marketable securities gains in the quarter?

$10 million is -- $10 million for the quarter.

Any breakdown on where that is coming from?

No, we generally don't give a list of specific securities.

Okay. Thank you.

And we'll take our next question with Jay Habermann from Goldman Sachs. Please go ahead.

Hey, good morning, everyone. Just, I guess, continuing on the '08 guidance front, can you just comment, are you assuming any impact there from Albertson's. And, I guess, Mike, as well, since you did open the subject, can you talk about same-store NOI growth assumptions?

With respect to Albertson's, I have more of a generic assumption as it relates to our group of businesses in KIMCO Capital Services, which is preferred equity, KIMCO Select, and Retailer Services and piecing those together. And in looking at those three businesses, if you tally up the 2007 contribution, or expected contribution, it's probably about $225 million worth of transaction and flow within those three components. And we're expecting $30 million or so increase in our original business plan for those three businesses together. So it's going to come from a variety of sources as it has traditionally, and some of it will be Albertson's, but at this point we don't have an exact number,because there are a series of financing and strategy at the Albertson's level that haven't been finalized and are subject to market conditions. So, Jay, that's how I look at the guidance in terms of taking the three businesses together, understanding their aggregate profitability, and then planning off of that larger base as we go into next year.

Great. Thanks. And just one follow-up, I guess, for Milton, in terms of the recent disruptions in the credit markets, can you just comment a bit on outlook for distressed store closings? Have you seen any growing signs that might make you more nervous than before?

Nothing could make me more nervous than before. No, we continue to worry about the consumer, and there are certain retailers that we believe may have issues in '08, but we really, David, couldn't identify them.

Jay, I just wanted to circle back. You also asked on the same-store, we're forecasting 4%, and that's based on our ground-up budget process that we just completed with respect to our core shopping centers.

Okay. Thank you.

And we'll take our next question with Christine McElroy with Banc of America Securities. Please go ahead.

Hi, good morning. If you look at over the next few years at your expectations for future supply growth for shopping centers, would you say it's coming at all in the new financing environment given that it has become more difficult for smaller developers to obtain financing? And does this have any impact at all on your expected yields for projects in your future pipeline if overall supply growth declines?

It's still early to tell, I think. The credit crunch is relatively short-lived at that point. If it continues, I would agree with your premise that smaller developers will have more difficulty. Plus if Jerry is on the line, he can comment, as well, but the projects themselves these days are much larger and take much longer to get through entitlements and the zoning process, so -- And as you know, retail in general is done on a preleased basis. Speck projects are not generally done to any large degree.

Dave, this is Jerry. I would agree with you. I would also state that if the credit crunch does continue, it gives greater opportunity for KIMCO to take over, at a later stage, those projects from smaller developers.

Okay. Great. And then just a follow-up on Ambica's question with regard to becoming more aggressive on acquisitions. What types of changes in the private market are you looking for? When we should expect you to become more aggressive whether it's pricing changes or more stability or different types of opportunities.

Well, I think we, like others, are being careful today. We're watching with interest. We're in the market every day. It's still competitive for Class A properties, which our investors want. The bid/ask has widened a bit, and there's been retrading going on, and the debt markets, as you know, have been a bit dicey. So our acquisitions people are in the market every day. We continue to lose deals on occasion, which indicate to us that the market is still competitive for the very best properties. Cap rates have moved around a little bit. But we're not exactly sure where they are settling. So, at this point, we're trying to be careful. But one way or another, it will settle out in due course, and KIMCO will continue to see opportunities, and we will continue to team with our institutional partners to grow our portfolio.

Great. Thank you so much.

And we'll take our next question with Jeff Donnelly with Wachovia Securities. Please go ahead.

Hi. Good morning, guys. Mike, maybe just another way of asking about your same-store NOI growth expectation for 2008, with your occupancy in an all-time high and retail, or appetite for your store opening, I guess, is relatively softer than it was perhaps a year ago, what leads you guys to be so confident that rate growth would be this robust now. You can argue that perhaps most aggressively seen is KIMCO being NOI growth in sometime.

I think it's consequence, Jeff, of many of the rollovers that we're seeing in terms of our projects, the ongoing programs and redevelopment projects that David and his team have underway. Because it's not -- your point is valid. It's really not going to be driven by occupancy. It's going to be driven more by active management, rent bumps, step-ups and the programs we have got underway. That really is the short answer. When we think about the same-store growth, part of that analysis is that there are a -- continues to be a group of properties that are targeted for disposition in that base portfolio that are the slower-growth assets. And it's incumbent upon us as a strategy to move those out directly or into funds that they are solid properties but just slow growth. So that's really part of what makes up the number.

I think we're particularly excited about some of the redevelopment efforts, and the added resources that we have focused on the redevelopment within our portfolio. With such a large portfolio, as you might imagine, we have got some nice opportunities to create value in some of our existing shopping centers. And that's a great program, and that should help us drive some nice value.

Do you have a sense of what your NOI growth would be if you excluded those assets that are benefiting from redevelopment capital?

I would pencil that -- and every one -- any one quarter, there's a different answer in terms of the relative impact, but as a general matter, I would say it's lifting the base rate from a 2.5% to 3% level up to the 4%-plus level.

One last question. Mike, I think you mentioned at the very beginning of the call, that you guys were tempering your acquisition activity to wait for larger, and I guess, implicitly, better deals that may come down the road. Are you seeing those opportunities now, or do you think they are still a few quarters away? And who drives the decision within the funds business to decide to buy assets or not? Is it KIMCO or its partners?

Well, there's -- we team with our partners in looking at opportunities, especially large portfolios, either public or private. If you recall over the last five or six years, KIMCO has bought five other public companies, which has driven our assets under management very nicely. I personally think there will be some more M&A activity coming up with smaller companies, either public or private. Those type of opportunities do appeal to our institutional partners, because in one fell swoop, they can get a large portfolio of properties. That's very difficult for Mike to factor into his numbers when we'll buy a small public company or something like that. So we also have a one-off business that's more predictable and Tom Caputo and his team have done a nice job. And we do have a pipeline of acquisition activities, but it's tougher to predict in this market which ones will win at which kind of cap rates, and which investors have an aggressive appetite for that. But we're confident we'll deliver Mike's base case.

Okay. Thanks, guys.

We'll go next to Craig Schmidt with Merrill Lynch. Please go ahead, sir.

Good morning. I was looking at your portfolio statistics by country page, and the United States has the lowest average rent per square foot relative to Canada, Mexico and Chile. I wondered if that was because of the age of the centers, or is something else driving that statistic?

That's the age of the centers. One of the sad realities is that we have been around for such a long time. We've been in business for 50 years, so that it distinguishes us -- Many of the properties I mentioned were built in the '60s, '70s, '80s, and acquisitions, so that it's a factor of the age of the center, and that they're encumbered with long-term leases at lower rents.

And as we've mentioned previously, in Mexico, it's mostly a development game. These are new shopping centers coming on stream. The existing inventory of shopping centers to buy in Mexico is very limited.

So if I'm thinking about this correctly, it would seem to suggest that the United States has the best opportunity for growth relative to the four countries you primarily do business in.

I would argue the opposite. If you look at the U.S. leases for new properties, you are talking about very flat leases. For instance, when we sign a Home Depot lease today, it is flat for 20 years, and sometimes flat for the option period. When we sign a Home Depot lease in Mexico, we have possible increases every single year, and in some cases we have percentage rent. So it depends on the country and the lease structures.

I think your point is that on the older properties, there is more room for growth because those rents are lower. Dave is right on the newer acquisitions. On the old properties, we do have below-market rents.

Thank you. That's helpful understanding that Home Depot signs different types of leases by country.

Yes, it depends on where they are trying to grow. For instance, we get very different leases from Wal-Mart in Mexico than we do in the U.S. In the U.S., they like to own their own property. That's very difficult to lease a Wal-Mart in the U.S. Whereas in Mexico, where they are tripling the number of stores they want to open, by definition, they are forced to lease in many cases.

Thank you.

And we'll take our next question with [Matt Oswor] with Morgan Stanley. Please go ahead.

Good morning. Could you talk about why you chose to use the preferred market instead of the unsecured market, and specifically was it an issue with rate or covenants there? And secondarily, at a 7.75% rate on the preferred, isn't that really signalling that you guys have an expectation that [cap rates] are going to move up very significantly, given the kind of going-in yield you need to get to make that accretive?

We elected to go into the preferred market, because we wanted to put a form of longer term or permanent equity on the balance sheet, in that we felt that for an additional 100 basis points or so relative to what we could do at the tenure at the time that it was well worth it, and that it would build capacity in the future for further expansion on the debt side. And along with our preferred equity offering as I mentioned, we have done a variety of other things to expand the debt capacity. So in very basic terms, we viewed the preferred as one element of a global capital structure,and liquidity enhancement, and did not look at it in the view of -- issued this in lieu of unsecured debt and the like. As to your other point, that assumption or that theory is just simply not the case.

As we pointed out before, Matt, where we are investing most of our own capital is places like Mexico and preferred equity in development, where we do get higher returns, and it is accretive to our shareholders. When we buy existing shopping centers, we are teaming up with institutional partner who is putting up the lion's share of the equity, and we make very good returns because in addition to our share of the cash flow from the property, we are getting management fees, and asset management fees, and acquisition fees, and construction management fees, and leasing conversions, and a promote -- and so forth. So it's actually a very profitable piece of business for us.

And if I could just follow-up real quick on the unsecured, were you able -- I know a little while back, you switched to sort of a covenant-light structure on a whole bunch of your unsecured debt. And I guess the question I have is, would you be able to get that today if you did go into the unsecured market today? And if the answer to that is no, what does it mean for the money that you spent or the cost you incurred to get the covenant-light structure on your existing debt?

We feel that if we wanted to go into the unsecured markets today, we feel we could execute a bond with a similar characteristic as we raised in April.

Great. Thank you.

And we'll take our next question with Mike Gorman with Credit Suisse. Please go ahead.

Good morning. Milton, if you could just go back to the distressed side of things again but more looking at the opportunities, can you sort of quantify what kind of pipeline of deals you're looking at on the alternative investment front?

What we're looking at is -- it's really very large. What we'll get is so speculative, it wouldn't be fair for me to answer it. It might be misleading. So I don't know. We're looking at an awful lot. What will happen, I don't know.

If you look back at the history, then what is your typical conversion rate of what you look at versus what you get?

I'm going to guess, maybe, 1/3 or less.

Okay.

And it varies.

And, Dave, just a question on the Prudential joint venture, going back to the questions about cap rates and institutional demand, it looks like the sales volume in the third quarter slowed down. Can you just give us a sense for what the pricing was like on those deals, and also any number of deals that may have fallen through during the quarter?

Well it's -- I think we have mentioned before, the Pan Pacific acquisition with Peru was really divided in two portfolios. A whole portfolio and a self portfolio. On the self portfolio, Tom, correct me if I'm wrong, was about $1 billion. We are about halfway through that self portfolio, and we continue to sell those properties, which by definition, are properties that we have decided not to hold long- term. The markets have been turbulent, I would say, and the cap rates have been a little higher than we had hoped, but we continue to feel that we will dispose of that, the rest of that portfolio, over this next 12-month period. On the other side of the coin, the whole portfolio, the other $3 billion, has outperformed what we thought, and the rent growth has been outstanding in these A-plus properties in California. So we have been very happy with the whole buckets, and the sell bucket is going perhaps a little slower than we had hoped.

If I could just push a little bit there, last quarter you characterized it as 6.25% -- that's 6.75% on the sale. Are you still in that range with your third quarter sales, or are we talking north of that?

I think we're still in the -- probably still in the 6.5% to 7% range. It just depends on the property and the location and where it might be. And one of the other things that we have been doing with the sale bucket is some of the properties we actually held off the market while we released them. If we had big anchors, we just held them off, and we're bringing them to the market now.

And it's no surprise the best ones of the sell bucket go first. So we fully expect that for the last batch of these assets that the cap rates are going to be higher. I mean, in effect the blended cap rate, when we underwrote this portfolio, was a little north of 6.5%. And I think when the dust settles, we'll be roughly to that number. But certainly, as it relates to the time table of doing that, the best assets on that sale bucket have gone first, and the tougher ones are going to bring up the rear. So that will certainly -- There will certainly be different cap rates as you go through these individual sales.

Thanks, guys.

We'll take our next question with Michael Mueller with JPMorgan. Please go ahead.

Couple of questions. First, Mike, in terms of guidance, should we think of the preliminary '08 number as kind of just a levered core growth rate with, I think you said, maybe a $30 million year-over-year increase in capital services. So not a lot of external-driven spread in the numbers at that point.

Mike, I think -- Just rephrase the question for me. Because I understand one of the points you are making was with respect to the basket of our operating businesses, but maybe if you could just rephrase your question, so that I could give you a coherent answer.

Yes. I guess, first, you said -- just confirming what you said. KIMCO Capital Services, about $30 million, you were thinking, higher than the '07 level. So, if we are taking your core growth and levering that up, and just tacking that on, that kind of gets you around to where the midpoint of '07 to midpoint of '08 is. So is that the right way we should be thinking about the '08 implied guidance at this point?

We'll probably assume a bit more KDI gains than the current year's $25 million. There will be more projects that are in their completion phase or going to be completed in early '08, so I think there will be a little bit more activity there. And then you will certainly have to factor in that estimation of volume for some level in some business lines, but also increase the earnings. So I think it's really a combination of that increase in the operating business that I talked to you about, an increase in the development profits, some volume activity, as well as the leveraged internal growth of 54%, so that's, in broad terms, the four components that drive the numbers for next year, midpoint to midpoint.

Okay. Maybe switching gears to the preferred equity business, can you talk about recent trends in pricing since -- given what has been happening with the debt markets over the past quarter or so as pricing moved back up? And second part of that question, if you are looking at the $200 million of equity kickers that I think you mentioned on the call, how much of that is split between stuff driven just by pure cap rate compression versus stuff that wasn't necessarily reliant upon cap compression? It really just comes from the value creation from taking a project from development to stabilization.

Sure. On the pricing side today, it's definitely a much better time for us. Some of our traditional mess, composition, I would call it straight mess. We're charging an interest rate without an equity kicker. Those guys have all gone away for the moment, and so our team is starting to see more opportunities with better pricing and more conservative underwriting on our part. So we're actually pretty optimistic about our preferred equity business going into next year, and we think we'll benefit from the turmoil that's happened in the credit market. Some of the crazy risk-reward pricing has gone away. So we think we'll do better in terms of volume in preferred equity both in Canada and the U.S., which are both good markets for us. In terms of the equity kicker estimates, we have taken a look at some of them. I don't statistics on the whole portfolio for you, but if I were to guess, it would be half is cap rate compression and half is growth in net income.

Okay. Okay. Great. Thank you.

We'll take our next question with David Harris with Lehman Brothers. Please go ahead.

Hey, good morning. Sorry if I missed this. Dave, as you were picking up your air miles traveling north and south, down the Americas, I wonder if you could just give any comment as to any change in the investment attitude of folks in the marketplace in Canada or down in Mexico in South America? Are people concerned in those markets about changing cap rates and financing? And secondarily, somewhat associated with that, is there today a more of a reserve and a caution about tenants signing up for space than there would have been, say, three, six months ago?

Let me take them in three parts. Looking at Latin America first -- and I'm very proud, because American Airlines did give me a little certificate saying I have hit three million miles with them. So I'm very proud of that.

(inaudible) of the plane, doesn't it?

The investor appetite to invest in Mexico and South America is actually escalating and increasing. Real estate investors are looking for higher returns, given the turmoil of today and the apprehension about where the real estate markets in the U.S. are going. So the investor appetite, to look at markets like Mexico and South America, is escalating, and you can see that in the number of new funds that are being offered. Everybody from JE Roberts to O'Connor to ING to Prudential, they are all offering Latin America funds of one type or another nd increasingly oriented towards retail, which is [hard]. And as Milton mentioned in his remarks, we're seeing more competition in Mexico, and more competition for our operating partners, and so forth. We have such a great lead in Mexico, and we have such established deal flow that we think we'll do rather well, but if anything, I would say it has escalated in terms of investor activity.

Canada is a different matter. Canada, the debt turmoil has definitely impacted. CMBS is out of business, for sure, in Canada, and historically Canadian banks have always been rather conservative. So I would say there is a little more apprehension about what is going to happen in Canada than perhaps the Latin America. Your last part of your question in terms of the tenants. Again, if anything, the Home Depots and the Wal-Marts, and the Costcos of the world are increasingly looking at Mexico and South America as opportunities for growth. Best Buy and Lowe's have both announced going to Mexico recently. So, if anything, that also is accelerating.

If you just think about the discussions you're having today with potential joint venture -- or around new joint ventures and funds, is there any change in the fee structure promotes that you have been traditionally putting in place over the last couple of years? And I guess that is probably more focused domestically than overseas.

Well, again, the fee structure today is very different than it was five years ago, and much more attractive for the operator for our side of the equation. We really haven't had a lot of pushback on fee structures, especially things like our Mexican land and retail fund. The investors are really looking at that wonderful opportunity to drive double-digit IRRs for themselves. So, promote structures are really not that controversial, and our fees are -- we keep them on the modest end. We're not a hedge fund. We're not even an opportunity fund in many cases in terms of our fee structure. So as you look at our funds, our fee structures are very reasonable, and we don't get a lot of pushback.

Is the typical threshold 9 or 10?

Yes, I would say that's fair. In the U.S., in some cases it's lower, and in Mexico and Latin America, it may be higher.

Okay. Great. Thank you.

We'll take our next question with Lou Taylor with Deutsche Bank. Please go ahead.

Thanks, Dave, can you just go back to the acquisition activity --

Lou, you are going to have to speak up little bit.

Yes. Can you just go back to the acquisition commentary earlier, and just talk a little bit about your return expectations? Have your IRRs risen at all?

You mean on our side of the equation?

Yes.

On our side of the equation, remember, we're investing 15% to 20% of the equity on a co-investment basis with our institutional partners. So, in addition to the levered or unlevered return from the property, which may be 6%, 7%, 8%-ish, we are getting property management fees, we're getting acquisition fees, we're getting asset management fees, and so forth, which drives those returns somewhere between 15% and 20% over time.

I meant on your consolidated on-balance sheet acquisitions that you do on your (inaudible).

As general, matter, Lou, we're generally not acquiring for our own balance sheet anymore for those very reasons. Now, that said, the growth in the balance sheet at any one point in time will generally be due to two things. One, that we do continue to take on inventory in anticipation of the placement into those programs, and there certainly is that phenomena in our current balance sheet. And secondly, there are assets on what is called the opportunities side, where we're going direct because we see an arbitrage opportunity. Of course, the example is some of the things we've done in Lower Manhattan, as well as some of the most recent investments in the Philadelphia metro markets. And those assets are on the books. There's a high IRR, 15%, 20%, and beyond if we can execute on our strategy, and those assets are on our balance sheet ,as well. At this point you think about on-balance sheet, that's primarily what we're focused on.

As a follow-up, in terms of your merchant development pipeline in terms of cap rates on those dispositions, if you will, have you seen any movement in those cap rates?

Jerry, I'll let you answer, but we only have a few properties that are in the market today. There is a good list of people bidding on these properties, and I would say that the bid/ask is a bit wider than it has been in the past. But we have sold properties and continue to sell properties in the 6s that we developed in the 10% to 11% on leverage return on cost. So the profit margin is still pretty wide in development, and we like that business. It's a got room, if necessary, for cap rates to move up a bit.

Dave, you are correct. We have -- All of our properties have been selling in the 6s in the cap rates, the ones we have marketed. And there is aggressive -- several bidders for all of the properties.

Okay. Thank you.

And at this time, we are running short on time, so can you please limit yourself to one question and one follow-up so everyone can get a chance to ask their question? And we'll go next with David Fick with Stifel Nicolaus. Please go ahead.

Yes, good morning. Can you talk a little bit about your external partner relationships, and what you are seeing in terms of them approving deals, where we're hearing from some of your peers that there's more pushback on proposed transactions?

I think it's fair to say that core investors have taken a hard look at the markets today, and are being careful about what they are going after. They are taking a look at the credit markets. They are trying to carefully price transactions. They are working with us. They want to know what we think is going to happen with pricing. They want to understand carefully the upside of properties as we work with them in looking at opportunities. The same way we are. We're not exactly sure where these markets are going to shake out. So we're both being very careful as we look at opportunities. I think that's fair. But whether it shakes out with cap rates being a little higher, or it settles back down to where it was, we'll just have to see. But we do have great relationships and a great roster of partners that we continue to work with looking at all kinds of opportunities, whether they are large portfolios or one-off transaction.

How big a factor is that external appetite in your external acquisition guidance which is obviously pretty conservative?

Yes, Mike has made a very conservative number, so it's our job, Tom and mine and others, to beat that number.

Okay. Thank you.

Sorry for giving them such a low bar, David. I'm going to rethink it.

We'll take our next question with Scott O'Donnell with MetLife. Please go ahead.

Good morning. A question for Milton, please. Milton, you have been around a long time, you have seen many financial crises in the past, and whatever the flavor of financial crisis, you can always point to the root of it being poor underwriting. And I guess in that context, whether you are looking at the financial sector or the REIT sector, they do share several characteristics over the last few years. It seems that people are paying too much for assets, they're financing more and more of these risks off-balance sheets, and they are trying to generate returns that may not be sustainable in the long run. So with that as a background, can you comment on the appropriateness of -- and also in the context of Mike's earlier comments that more and more of KIMCO's balance sheet will be represented by joint venture investments, can you comment on the appropriateness of being an unsecured lender to a company like KIMCO from an underwriting perspective?

Well, let's analyze that for a moment. One, the ratio of debt to total debt and equity is very, very small, and we have kept it that way. Two, the portfolio is a portfolio that has pretty solid income streams. And three, you have a very conservative management, who have their lifeblood, estates and wealth in KIMCO. So the combination of all of that factors, diversified sources of income, since so many sources and geographic sources, it makes it as good a bed as I know. And if I'm comfortable with the equity, I would imagine that unsecured lenders should be very comfortable with the debt.

Thanks. Okay.

Daryl?

And there are no further questions. This does conclude our question-and-answer session. I like to turn it back over to management for any additional or closing remarks.

Thanks, everybody, for participating today. Just a remind, a supplemental is on our website at www.kimcorealty.com. Thanks.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.