Kimco Realty Corp (KIM) 2008 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 that today's conference is being recorded.

(OPERATOR INSTRUCTIONS)

At this time is it my pleasure to introduce your speaker today, Barbara Pooley. Please proceed, Ms. Pooley.

Thank you, Dana. Thank for all for joining the second quarter 2008 Kimco earnings call.

With me on the call this morning are Milton Cooper, Chairman and CEO; Dave Henry, Chief Investment Officer; Mike Flynn, Vice Chairman and President; Mike Pappagallo, Chief Financial Officer; and David Lukes, Executive Vice President. 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 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 different materially from those forward-looking statements is contained in the Company's SEC filing.

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 operation and net operating income. Reconciliation of these non-GAAP financial measures are available on our website.

Finally, during the Q&A portion of the call, we request that you respect the limit of one question with one appropriate follow-up, so that all of the 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.

Thanks, Barbara, and good morning. Welcome to our second quarter conference call. For the next hour, you have the opportunity, if you so choose, to not watch your monitor and get seasick watching stock prices swinging wildly or to be told how billions of dollars in write-offs are a good thing because they are a few billion less than everyone thought.

The first order of business this week was the Board's decision to increase our quarterly dividend rate to $0.44, representing a 10% increase from current levels. The new rate will commence with the October dividend. Notwithstanding the fluctuations in annual earnings, we have been able to keep our dividend increases at a solid level of between 8% to 11% over the past four years, primarily as a consequence of long-standing practice of keeping FFO and AFFO payout ratios low and operating under a conservative debt policy. Additionally, investors should be comforted by the fact that the new dividend level is supported by our operating cash flows without regard to achievements of transactional income.

FFO per share this quarter was $0.66, which was $0.02 above the first quarter levels. Year-over-year FFO per share was $0.05 lower, which is exclusively due to the level of transactional activity in the comparable periods. Last year's second quarter included more significant gains from the Kimco Capital Services, or KCS, businesses, including the liquidation of a preferred equity position in self-storage in Canada and a New York mixed-use building. We also generated a significant promote last year from our Investment Management business in the disposition of properties in our joint venture with G.E.

On the other side of of the ledger, we experienced higher merchant building profits this quarter primarily from the sale in interest of our interest in the Woodlands Project in Houston, and more importantly an increase in operating cash flow from shopping centers holdings and recurring flows from those KCS business. While we're pleased that our merchant buildings earnings are up, I think it is once again important to emphasize that development gains are not a critical component of our earnings base, contrary to recently-published research. Since the advent of our program in 2001, these profits have ranged between 2.7% to 4.9% of reported FFO. The timing and extent of the transaction side of the business will always wreak havoc with quarterly comparisons and against the consensus numbers. We exceeded the most recent First Call numbers by $0.01, which is not surprising since our quarterly results have not matched First Call numbers in about two years. We continue to encourage the research community to focus less on these quarterly comparisons and more on the annual results and overall business strategy.

That said, the composition of our second quarter earnings statement was reflective of the underlying business trends. First, our US-based shopping center assets are holding up well despite the stress on retailers, as consumer wallets are being dramatically affected by gas and food prices, and as their confidence continues to wane. Occupancy dropped slightly from the March quarter-end, but declining only 30 basis points to a level 95.7%. Compared to the year ago June level, it was also a modest drop of 20 basis points. Same-store NOI did decelerate to a quarterly level of 2.4%. Recent spreads are holding up, with new leases at over 12% and renewals at almost 10%, but the internal growth numbers were impacted by the slightly lower occupancies and higher write-offs. There is no question that the current economic environment has and will continue to put some pressure on the portfolio metrics in the short term. But we are confident that our portfolio will be able to withstand the recessionary environment and sustain its cash flows, due to the strength of the portfolio and the lack of concentration in the tenant base.

The second trend is the absolute lower number of transactions, reflecting fewer buyers and Sellers and a continued difficult financing market. Cap rates yet have not moved sufficiently to entice core investors, yet the greatly anticipated avalanche of distress opportunities of hard assets, not paper, has yet to arise. As a consequence, the aggregate level of gains, promotes and other transactions was about half the level of 2007.

The third area, the appetite to invest outside the US, continues in earnest and our investment capital continues to flow into the Mexico development program. In addition, we were able to rekindle some acquisition activity in Canada with our old friends at RioCan, jointly acquiring a 10-property shopping center portfolio from H&R in June, and as well as our first transactions in Brazil and Peru. Dave will follow with more color on our investment strategies.

Liquidity remains healthy, with about $1 billion available. But in this environment, we will continually look for every opportunity to increase it at a reasonable price. With limited debt maturities over the next 18 months, we can afford to be strategic in accessing the Capital Markets. I again affirm the full-year FFO guidance for the year at the range of between $2.70 and $2.78, but am biased towards the low end of the range. Hitting the numbers, as you would expect, is dependent on achieving the planned transactions in the Kimco Capital Services business, as well as continuing to bring our Mexico development pipeline online. The components of the guidance are once again included in the earnings press release.

Finally, there's no question that REIT land is in a different place. The real estate cycle still does exist, and it is not unreasonable to assume that the fundamentals will be negative, as the prospects for an extended recession with stagflation are real. How will the REIT model fare? I'm not going to generalize. But at Kimco, we recognize that we have to focus on riding through this rough patch upon us, and continue to cultivate a long-range strategy focused on shopping centers, investment management, non-US expansion and our opportunity business. Milton will give you his take on this approach in a few moments.

Now I'd like to turn it over to my esteemed colleague, Mr. Henry.

Thank you, Mike.

Using one of Milton's favorite words, the perturbations of the real estate market and the stormy economic seas continued unabated in the second quarter. Shopping center sales activity in the US has declined dramatically in 2008. Accordingly, our US new business transaction activity has been limited. Institutional investors and lenders of all types continue to largely sit the sidelines, as they wait for the marked to stabilize and cap rates to settle.

On the promising side we're happy to report the closing yesterday of our Kimco Income Fund II, KIF-II, with an initial set of institutional investors, including Zurich Insurance, Knights of Columbus and CNL. KIF-II is a $345 million leveraged portfolio of 14 existing retail properties purchased by Kimco over the past 18 months. The properties have long-term fixed rate debt averaging 65% of cost, and the projects were selected to achieve diversity, low leverage and strong, current cash yield to the investors. KIF-II helps us to continue to grow our funds under management and our relationships with high-quality domestic and international institutional inventors.

Also in the US, and as mentioned on the last call, we're planning to introduce a New York urban fund, which will target redevelopment and acquisition opportunities in the New York metro area, where Kimco has decades of experience and where retailers are still looking for expansion opportunities because of the region's density and lack of many national big box retailers.

Outside of the US, Kimco continues to grow its portfolio in Canada, Mexico, and South America. In Canada, we were very pleased to form our second joint venture with RioCan, Canada's largest REIT and a valued partner for the past six years. Our new venture, creatively called RioKim II, has been seeded with a large portfolio of 10 retail properties, comprising 1.1 million square feet purchased in June from another large Canadian REIT, H&R. The portfolio os seasoned properties is 98% leased, and 90% of the portfolio contains strong national and regional tenants such as Wal-Mart, Canadian Tire, Zellers, Metro, Shoppers Drug and Price Chopper. Kimco and RioCan hope to grow RioKim II in the future with additional opportunistic acquisitions.

Also in Canada, Kimco acquired additional stock in Plazacorp, a public regional shopping center owner and developer specializing in Quebec and the maritime provinces. Kimco now owning 14.3% of the company, and we also have a successful joint venture with Plazacorp on a 458,000 square foot shopping center in St. John's, Newfoundland. We very much look forward to exploring additional joint venture opportunities with Plazacorp.

Looking at Latin America, Kimco continues to expand in number of focused areas. In Mexico, we closed on three new development projects during the quarter and added two new land parcels to our Mexico retail land fund. The new projects and land sites are located in Mexico City, Cancun, Rio Bravo, Corleone and Mazatlan. In addition, we added one net leased industrial property, Monterey, Mexico, to our American Industries joint venture, which now contains 72 net leased industrial buildings.

During the quarter, we also sold the equity interest in G. Accion to AMB, the largest shareholder of G. Accion. In South America, we achieved two important milestones, closing our first transactions in both Peru and Brazil. In Peru, our local parter is Penta Realty, which is headquartered in Lima and controls a portfolio of 23 projects. In Brazil, our development partners are EP Real Estate Partners, a local firm based in Sao Paolo, specializing in small neighborhood and community shopping centers. We have a strong pipeline of pending development projects with both of these partners in their respective markets. In Chile, we continue to grow our portfolio and relationships by forming a new partnership with D&S, Chile's largest grocery store retailer, for the development of a new 250,000 square foot shopping center anchored by D&S's large LIDER format and home center Sodimac, a major home improvement store.

As an overview and to give you some perspective of our growing activities in Latin America as a whole, we've approved 23 new deals to date in 2008 totaling $308 million, 16 projects in Mexico and seven in South America. Our pipeline of transitions in various stages of underwriting is very strong, and totals approximately $900 million; 29 projects in Mexico and 16 in South America. All of this compares very favorably with 2007 totals at this point last year.

As previously announced, we continue to market a new $500 million co-mingle fund for South America, which will be seeded with all of our existing investments and pipeline for South America. Similar to the our existing Mexico retail land fund, our South America real estate fund will be our exclusive vehicle to invest in retail acquisitions and development opportunities in South America. Investor interest has been strong, and we hope to close the fund late this year.

Overall, we continue to be very optimistic about retail development in Latin America, particularly in the countries we're concentrating on, Mexico, Chile, Peru and Brazil. All of these countries have strong economies, rich natural resources, a growing middle class, expanding trade and excellent demographics. As the US wrestles with its significant housing and economic issues, we believe that both Canada and Latin America offer excellent investment opportunities.

Now I'd like to turn to Milton for his thoughts.

Thank you, Dave.

We've been through many cycles in our five-decade history and each time there's a downturn, we can never be sure how prolonged or how severe it will be. All indications are that this downturn will punish the consumer, which, in turn, will hurt most retailers and has to negatively affect shopping center occupancy. There are, however, four constants that are essential for a company during a difficult period, and they all start with the letter L. Low leverage. Low payout ratios. Lots of liquidity. And, finally, level-headed talent. Loan leverage a safety net, and a combination of low leverage and a low payout ratio ensures that our dividend is sacrosanct. We always maintained a strong balance sheet and we have committed to continue to do so.

Invariably, downturns bring opportunities for companies with liquidity, and a talented team that can evaluate and seize the opportunities. In times of stress, institutional investors should have their retail property investments managed by companies experienced in working through problems and in close relationships with retailers, and having cash to be a co-investor. A skillful manager with skin in the game becomes paramount in importance.

Now, we have always had a long history of specializing in situations involving the distressed retailers and distressed properties. The income of this business should increase with the growing turmoil in the retail sector. Nonetheless, we should not kid ourselves. Notwithstanding our relative strength and some shock absorbers we will not be exempt from retail problems and occupancy issues. But well-located shopping centers are a wonderful long-term investment, and while there will be periods when cash flows may decrease because of tenant bankruptcies, those periods pass, and over time, the rental streams increase.

With hints of inflation and emphasis on quality real estate, we are confident that our portfolio will perform well for our shareholders over the coming years. Our business model is a good one. We have the liquidity and the level-headed talent, and we will continue to deliver the goods for all of our constituencies.

With that, all of us would be delighted to answer any questions you may have.

Okay. Dana, thanks, we're ready to take questions.

(OPERATOR INSTRUCTIONS)

We'll go first to Paul Morgan with FBR.

Good morning. Just a couple things on the transactional side. First on the Woodlands, you listed in your supplemental has having sold for $17.8 million. That doesn't seem, I think, to be right? Maybe you could just give a little bit of detail on that sale, and maybe the cap rate? Then, looking ahead, you know, I assume there's some number in the second half guidance for for Albertsons' transactions and could you give any sense what you think that number might be right now, given the deals that took place in the second quarter?

Well, with respect to Woodlands, we sold our equity interest in Woodlands. We have a 50% interest in Woodlands, net of the existing debt on the property. So the number you're looking at is the value of our 50% equity interest.

So, is that true -- that's true for all of the dispositions you list there? None of them are sort of aggregate values?

No, Paul. If you cover that with me later, we'll go through that. I'll go through the detail with you.

Okay.

With respect to your question for the second half of the year, as the guidance indicated, Paul, that we're expecting between $100 million and $125 million of various transactional activities. We've identified, currently, about 80% of that number, and are pursuing a series of other transactions as well. Albertsons certainly is a transaction and sale of certain assets of [Publix] in the marketplace, and is being considered as one of the elements of that aggregate [OE], but at this point it is too premature to give a specific estimate for that particular transaction.

Paul, and I didn't mean to ignore your other question about Cap rate. It is effectively low six's.

Okay. And the 80%, so that does include your estimate of the gains from Albertsons and Publix?

Yes. Okay, thanks.

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

Good morning. Mike, in guiding toward the low end of your FFO guidance ranges, is your more conservative stance from three months ago primarily the result of slower core growth? How should we expect occupancy to trend in the back half of the year?

I would say that the primary reason for my bias toward the low end is more geared toward the transactions than it is core growth activity; although with respect to the guidance ranges, we did trend down the ranges for same-store growth. Really that's a consequence of the second quarter results, and just a more conservative perspective. But I think in the aggregate, that is not going to have as much a driver effect in terms of going from a 270 to a 278 level.

On occupancy, you know, it's pretty much our custom, we're not going to go out and predict a specific level, but I think - you know, you've heard in the various comments that we are very sensitive to increasing stress on some of our retailers, and that it would be not unreasonable to expect a continued downward trend in occupancy. We don't see anything draconian at this point. That's simply a consequence of a very diverse tenant concentration - tenant base and no reliance significantly on any one particular tenant, but we do indicate that there will be continued pressure on occupancies.

Okay, and then my follow-up is, I guess, if you're thinking about how you envision your FFO growth looking like over the next few years, can you kind of walk us through how much of that growth you expect to come from kind of core property level income from development and acquisitions, and from your more kind of opportunistic investments and transaction income?

I think certainly too premature to talk about the component into 2009 and beyond. I think we've always - if you look at the framework of our business, though, that our core business, be it US and now increasingly in Latin America, has always been a mid to high single-digit return, and then what generally has brought us to 10%-plus level has been the range of transactional activity that's available in the marketplace.

To Milton's point earlier about as the stress continues and that we may find ourselves with more opportunity on the distressed retailer and bankruptcy side, the weight and degree of transactional activities may move from, say, development and merchant development and promoted interest on portfolios, to more of the opportunistic plays on the distressed. So longer-term, the composition that you've seen in the last few years will be probably the same, but it will have different stripes.

Thank you.

We'll go Mike to Michael Mueller with JPMorgan.

Yes. Hi. This is kind of a follow-up to the prior question, but when you look across the different buckets, how do you think about capital allocation when you go from preferred equity and retailer services to development today? I guess where are you seeing the most opportunities and where are you seeing the better returns?

Well, I think every Monday we take a look at potential transactions at our investment committee. It is all about risk reward. In today's times, it is fair to say we're looking for higher returns. Given our cost of capital, in general, we're looking for things that will return mid-teens or better IRRs on our shareholders' capital over time. Now, as the risk of the transactions goes up, for instance, merchant development, building opportunities, we're looking for higher returns, or in Brazil, we're looking for higher returns than we would, perhaps, a seasoned stabilized portfolio of shopping centers in Canada, which we just acquired with RioCan, which would be a lower IRR.

But it's all about risk reward these days. It's about liquidity issues out there. It is about us trying to take advantage of things. We have not seen property prices fall dramatically yet. And as a result, we haven't been aggressively buying either for ourselves or our investors. What we are beginning to see is a pickup in preferred equity opportunities, we're continuing to grow internationally, and we'll just see how it comes. Retailer services, we also expect to pick up some activity as retailers have other struggles. 84 Lumber is a transaction that was right in our strike zone because it was a very well-secured loan on a real estate basis, and if more opportunities like that come along, we're going to jump on them.

Okay. And a follow-up, what's the range of the cap rates for what you bought and are looking at in Brazil?

Well, this is my excellent opportunity to introduce Mike Milton, who is the General Manager and Managing Director of all of Latin America efforts, and somebody who I feel tremendous envy for, because he speaks both Spanish and Portuguese as well as English. So Mike, with that introduction, why don't you jump on the cap rates?

Thanks, Dave. I'll respond in English. Most of our investments in Brazil will be development deals. The acquisition market has gotten a bit frothy, we think. So I think we will focus on developments. And we see yields there of between 13 and 16% on our investment.

Okay. Thank you.

Those are unleveraged returns on cost. Mike, you might comment on what type of cap rates you're seeing on existing properties there? They've gotten very low?

They have. Some recent large transitions have been done at, you know, sub-8% cap rates. Again, those acquirers are betting on, you know, significant growth in NOI, and in some cases an expansion of the assets going forward.

We'll go next to Jeff Donnelly with Wachovia Securities. We'll go to Steve Sakwa with Merrill Lynch.

Good morning. Milton, I guess over the last several years, you've been very successful in taking advantage of these distressed retail businesses, weather it was the Montgomery Ward or Kmart bankruptcy. But clearly that was done in a different retail environment. I'm just wondering, you've talked about distressed opportunities potentially coming up, but certainly the appetite from other retailers is not as great. How do you think about those opportunities today? How would think about underwriting them? How would you think about return hurdles today versus, say, the returns that you got over the last five to seven years?

Yes. Steve, I couldn't agree more with, really, the indications that - how it will be tougher. First of all, Steve, we have much more competition of funds who really want to be in it, so that it -- we didn't have that competition early on. Secondly, there aren't that many uses. So, the distressed business that we see will be creative uses and creative seizing on an awful lot in the debt - on mezzanine debt and other instruments. But I have to tell you, I think it will be tougher. I do think we're going to get our share, and we'll be able to pick because of long-term relationships with some of the other players who play with us in the distressed field. But I am fairly optimistic we'll get our share, and the returns will be juicy.

Okay. Just as a follow-up, I don't know who wants to handle this, it relates to development. When you compare the development schedule this quarter to last quarter, a number of projects have either slipped out of the merchant building bucket and some have gone back into land. A number of dates have been pushed out, which isn't terribly surprising. Some of the committed space figures have come down. Can you just maybe talk about the developments, what you're seeing from the retailers, and how you think about those returns, and kind of KDI gains going forward?

Steve, I'll answer the specific questions about what is on the page. Then, I'll let one of the other -- someone else answer the specific -- or general aspects of development. We took a fresh look at the development page and noticed a couple of things. First, there were a few smaller projects on that list which are really what you'd call our Kimco Capital Services assets, more arbitrage plays on smaller tracks of land. You can see the variety of urban-based projects that were in the 30,000 to 40,000 square foot mode, and those were really almost single tenant arbitrage plays. So we just simply took them off the list, because they really weren't reflective of the longer-term shopping center development on that page.

In a couple of other instances we did take a look, and the original underwriting, there's a couple of specific examples where there was an LOI for a Super Target, and working with a preferred developer, the targeted opening was 2010, 2011. So we had circled the land, but from a realistic point of view the development, even in the base-case underwriting, really wasn't going to start for a few years. So we thought it prudent to separate the development - active development program with those assets that were really more akin to land holdings that had more outside dates from the standpoint of when the development would start, or alternatively a thought process of just selling the land as we whittle down our development exposure.

So those are the specifics. I don't know if anyone wanted to make a comment about general development trends?

I'll let Jerry give you some more specifics, but in general we, like most of our peers, are seeing a lot fewer, buyable, new development transactions. As retailers have cut back on their explanation plans, as rents have softened, as costs have increased, as debt has gotten more difficult to achieve, our joint venture partners in the development business have found many fewer potential transitions that seem to be viable. Jerry, you may want to comment from what you see as well?

Okay. Yes. Basically, Dave, we're being very conservative in looking at the basic elements of development as we've done in the past, and trying to scrutinize and be realistic. We have not really done - only one new development that we're proposing in the last - recent period, and we're going to continue to look. We expect to see a break in -- as retailers will need sites, the big box retailers in the coming years, but for the foreseeable future, it will be a tough haul.

Okay. Could you just comment on the yield expectations?

Steve, let me just say this. If, really - to be as realistic - developments in retailers when they want sites, they got to see rooftops. They got to see growth. You don't have any housing growth in so many markets; consequently, the development isn't going to make sense in most of America. Now, there will be pockets that are exceptions. Houston is like Dubai now. Other than that, I think it is unrealistic to think it will be a strong developing market when you don't have a strong housing market. That is the reason why there's such an appetite in Mexico, because Mexico has a housing boom. e And we have retailers who say, no, no, no, in the United States, but please, please, please, in Mexico. So I guess the heart of it is, there won't be development, there won't be demand, until there will is a resurgence of housing. I suspect that's a long, long way off.

Right. Well, I guess that's fine, in terms of the new starts. But you've still got, maybe, 20 projects here in the US in various -- or 20 projects in various stages. I just wonder to what extent are those returns coming down?

We actually took a hard look of the whole inventory about a week ago. Luckily, most of our existing projects on the list are near the tail end in terms of construction completion and lease up. One of reasons we recharacterized a few - a few of other projects where we have closed on the land, we've not broken ground yet. It will probably be several years before the entitlements are all achieved and so forth. So, at least with respect to our inventory of projects, they largely fall into the tail end of their construction completion cycle. As Jerry pointed out, we really haven't started anything new in the past year or so. So we have very few projects that are in the very initial stages of going forward. So, we feel pretty good. Yes, the tail end leasing is getting a little tougher in terms of some of the local spaces and filling out these projects. But in general, we think the portfolio is in reasonable shape.

Okay. Thanks a lot.

We'll go next to Jeff Donnelly with Wachovia Securities.

Hi guys. Milton, I'd like to put a finer point on your outlook for the retail real estate business, just given your experience and what you're hearing from retailers. Would it, for instance, surprise you if the business sees negative absorption of space through, say, 2010 before we a return of retailer demand? Put differently, at what point do you think retailers will begin to warm to boosting the square footage growth?

I think -- I think it is hard to generalize. Let me just say this about retailer demand and absorption. Two general rules. One, retailers need inflation. They have to have it. Where there's inflation in the retailer products, you're going to see growth and more growth. Where do you see that? Food. Supermarkets. Supermarkets are doing quite well today because of inflation of food.

B, this trading down, they're doing very well, they're not buying Heinz ketchup but they're buying private labels and their margins are higher. They're selling prepared food. You're going to see the expansion of supermarkets. You're going to see the desire to expand where tenants cater to trading down. Wal-Mart, the warehouse clubs are doing well. T. J. Maxx is doing well, Ross and catering. Outside of that, it will be very difficult. I suspect when you get it all done, I think it will be a wash. I don't it will be negative, but I'm not sure. But that's the trend that's happening within it.

Okay. The second question is for you, Dave. You know, fundraising activity out there is certainly scarce, as institutions seem to be sitting the sidelines, and you guys are out there looking at the New York City fund. Can you use that to talk about what sort of returns, unlevered or levered, investors are seeking from investments maybe versus a year ago? How's the C structure for partners such as yourself changed, now we're not in such a hot market?

Well, two things. A trend is definitely continuing where funds or programmatic joint ventures that emphasize core properties with core returns are simply not very marketable today. Our Kimco Income Fund II, which is a wonderful portfolio of 14 seasoned properties, is giving a day one leverage deal to the investors in the 7's is a tough sell today, because people are afraid of where cap rates will go for something that is existing.

By the same token, when we offer an international product like our Mexico land fund or our new South American fund, or this new urban redevelopment fund, all of which are targeting net returns to the investors of 15 to 20%, depending on the fund, there is strong demand on the investors, and I suspect it is because most of these continue to have money allocated for real estate and they are simply saying, if I'm going to stay in the real estate business in these uncertain times, I want to have a higher return, and I'm willing to invest with a wonderful operator like Kimco, but I want higher returns. And that is what is going on.

Even the international investors, who you would say, boy, America is a very wonderful time to buy a stabilized property because our currency is so weak and theirs is so strong, even those guys are saying but what if the currency keeps going down, and what if the cap rate goes up? So, it is an interesting -- it is an interesting time. But we continue to grow the relationships with our inventor base and meet new, wonderful investors, like Zurich, who just joined our Kimco Income fund. So we believe our future is tied to the money management business, and we will grow it and we will introduce products that the investors want. It will be a while before the cap rates settle and investors come back into the existing stable properties. But we think we've got the products that will meet the need, and we'll keep growing.

We'll go next to Lou Taylor with Deutsche Bank.

Thanks, good morning. Milton, can you make a comment with regarded to the new bankruptcy rules that retailers will operate under this year? Do you think it will change either the pace or the timing of retailer bankruptcies?

Well, the new retailers rules take away some of the clout, the new bankruptcy rules with the time to extend or reject. What has happened as a practical matter, in some cases the retailers are saying, fellows, if you don't give us the time, we're just going to reject. So they get it indirectly. It makes the designation rights a little less valuable in the bankruptcy proceeding. So that -- but on balance, retailers will take advantage of bankruptcy when they have no other choice, and I think that business will continue. It's changed a little, but not that much.

Okay. And then second question, just for Dave, in terms of South American fund, are you going to seed that with some of those recent acquisitions/developments that you referenced earlier today?

Are we going to see debt?

Are you going to seed the fund?

Yes. South America, for instance, everything we've done, and we started closing transactions, probably, 12 months ago, with an existing portfolio for a shopping center in Santiago, everything we've done and our whole pipeline will go into the South American fund at cost. We will not mark these things up, and that will be our vehicle for South America. That's different than Mexico. Mexico, we have a fund for land, but then Kimco together occasionally with partners like GE, does the development itself.

Great, thank you.

Next we'll go to Michael Bilerman with Citi.

Good morning. Ambika Goel is here with me as well. I'm not sure if it was Dave or Mike, where you talked about you weren't expecting a draconian scenario on occupancy. But maybe you could just delve into it a little more with becoming more conservative on your same-store guidance occupancy ticking down in the quarter. What is -- what are you sort of seeing? What's surprising you out there? And you know, clearly with Steve & Barry's, Goody's, Mervyn's and Linens, I'm not sure if your exposure is more or less relative to others? Sort of do you think things will fall out?

Michael, I'm going to let David Lukes answer that. He probably has the best perspective in terms of the portfolio and trends. David?

Michael, it is probably not a lot of change from what we said last quarter. But to give you a little bit of insight, you know, to date, there's been a lot of churn. If you look at the vacates and new leases in the last two quarters, there's been a lot of vacates and there's been a lot of new leasing. In fact, the second quarter this year was a very high - very high numbers for new leasing. So, it is not -- it is hard to draw immediate conclusions.

I can give you some anecdotes that can probably help justify what we said last quarter, which is the housing markets that seem to be doing worse are correlating fairly well with the retail markets that are having a lot of vacates. Of all the vacates in the second quarter, almost half of them were in the Western region. Ironically, of all the new leasing in the second quarter, half of them were in the Western region. So you end up with a lot of tenants leaving and a lot of tenants coming in, which doesn't necessarily coincide with the general newspaper trend that retailers are going bankrupt and leaving. There seems to be still a healthy demand. When I look at the same-store leasing spreads of that Western region, which is half of the [drive] of this quarter, you're still looking at a 7 to 8 to 9% increase in same-store rent.

So I think that the trend that we can draw, as we drill in to look to exactly who vacated and who signed new leases, the trend that we are drawing is that some types of tenants like movie rentals, cellphone operators, their franchisees, small beauty supply chains, those that are discretionary items are tending to be the ones vacating at a higher percentage. And the tenants that are coming in tend to be more consumer staples. So, you know, that's not inconsistent when a change in the economy happens and it just changes consumer spending habits; it will reflect itself on which tenants are coming in and going out. The markets just like last quarter that don't have the same, you know, 50 leave or 50 come in, are, probably, still, you know, the Phoenix markets, Florida, and certainly Las Vegas, with a little bit more leakage. The Midwest tends to be very strong right now, we're up there, we're up in the Northeast. So it is hard to draw a national conclusions.

With respect to your question about our risk level and tenant bankruptcies, the going-forward occupancy I don't think is going to be impacted heavily by the shops, because we're seeing a lot of movement out and in. I think that the real question will be what happens to the major categories with the larger retailers? We do have a very diversified portfolio both in terms of square footage and annualized base rent, but certain tenants have higher average rents than others, and a lot of the future simply will depend on how those junior actors do.

And --

And -

Go ahead, sorry?

I was just going to say, and Michael, the consequence of all of those thoughts from David, and then translating into financial numbers, because of that churn, and the fact that some of that churn comes the increased pressure on write-offs, non-collectible accounts, that's why I tempered the same-store growth when you look at it over a 3-month period of time, and why we pulled back those numbers a little bit.

Does your pace of leasing going into 2009, has that shifted relative to where you were at this point last year for '08?

Say that, again, Michael?

I was wondering, if you think about your 2009 expiries, which you are, obviously, in negotiations already on, has that -- has the tone changed? And has -- are you further ahead? Are you behind, relative to where you were leasing for 2008?

When you are looking at -- part of the vacates is the contractual end of a lease term, and the other part of the vacates is just tenants that walk out. If you look at the number of vacates, it's fairly steady every year in terms of the percentage of the portfolio that rolls. Generally, a year in advance is a good time to start having discussions with the retailer, but you're really not getting to deal terms until you're within six months of the end of that base term. So it's a little bit early to probably be able to answer that with honesty.

I can say that in the markets where the supply is higher than what it was maybe a couple of years ago, the question comes down to, you know, will you renew me at the same rent? The markets that don't really have a supply issue, like you know, a lot of the higher-density markets, you really are still looking at the market rent. And then you're looking at whether the tenant will get TIs out of renewal. If you look at the numbers to date, you'll know that we're pretty conservative on TIs, almost non-existent on renewals. That's one indicator that things will change, if we start to see a higher request for TIs for your new deals or renewals. But if I look ahead at the next quarter and the year ahead as to how it's going with conversations with retailers, we still feel pretty good about the general tone of the conversation. I would say it is more even than it is one-sided. But like I said, what will change that, really, is whether we see some larger-scaled tenants go away, because that will put pressure on how many different categories are looking at the same box.

Right. Just one follow-up on the marketable securities and the preferred. You include your marketable securities, almost 400 million, in your sort of capital availability. Maybe Mike, if can just review, you know, the concentration of any large positions? How liquid those marketable securities are? Then on the preferred side, again I know it's pretty diverse in terms of number of investments, but is there any risk as some of those investments mature that given the refinancing, the financing market, that there may be risk to some of your principal?

On the market - marketables, as you know, Mike, we generally do not disclose all of our positions. But all of the instruments there are liquid and actively traded. So for us to recycle those assets is not a problem. Dave, on preferred equity?

The preferred equity portfolio, it is a wonderful, diversified portfolio of relatively small investments, many of which or most of which were originated over a long period of time. The debt is reasonably conservative, and in many cases has amortized down. The values of those properties have grown significantly. So, at this point, after a pretty thorough portfolio review, we really don't see any significant problems in that portfolio from either an occupancy or NOI basis, or maturing debt. The portfolio is in very, very good shape.

We'll go next to Jay Haberman with Goldman Sachs.

Good morning, here with Tom as well. Just following up on the last question, on page 36 of supplemental, with Kimco capital services and obviously the details, and the preferred equity, retailers services, can give us some a sense for the timing of the harvesting of those embedded gains? Should we see more of that, you think, in 2009, given that the core business continues to hold up well and you been able to realize transactional income this year?

Clearly the preferred equity does have substantial upside. And as we continually evaluate the opportunities to harvest them with the partners, there's a variety of assets that we will consider moving forward in harvesting in both 2009 and 2010. Clearly, the financing markets have an implication on the absolute ability to sell product - property at any one point in time, but we're very focused in working with those operating partners in the preferred equity space to methodically harvest them as the market conditions exist and as the opportunities exist.

We try to err on the side, though, of doing what our partners want to do. So in many cases, our partners want to hold these assets longer-term, and we try to work with them on that. In some cases, they are able to refinance, both the underlying first and our position, and we sit together for a long period of time. So in genera, we try not to push value customers to selling the properties or somehow liquidating.

To Mike's point, we also work with them as best we can to harvest these positions which, in many cases, have substantial embedded value in them. And we work together with Joanne Carpenter that runs this business, and Mike and the rest of us, and we set a target for each year, sometimes on a quarterly target, of things to try to make happen. But generally, we do try to listen to our customers and what they want to do on these things.

Okay. Then, on the transactions market, I know you mentioned institutional capital is still on the sidelines, but have your views changed at all with regard to how much cap rates need to adjust in order to see a greater pace of transaction volumes?

Speaking for myself, it's not a question of adjustment. It needs to stabilize, it needs to settle in at a number. It either needs to return to the old cap rates in low 6s if you will, or stabilize at 7 or 7.5. It just needs a period of time when it's more or less settled. The most scary thing to institutional investors is turmoil and change. One way or the other - I mean, it makes them very nervous. And nobody wants to buy something today and then have to explain to his boss or his Board a month later that he's under water, or have to take a mark to market loss because it's moved so quickly on. So, in many cases, they just don't want to run that risk, and they'll sit the sidelines. Or they'll invest or - for higher return opportunities in a fund-type investment vehicle. That takes -- it's going to be a long period of time before the final verdict is in.

We'll go next to Rich Moore with RBC Capital Markets.

Hi, good morning, guys. Clearly the US has got some tenant issues. I noticed that the occupancy in Mexico dipped a little bit. I'm wondering, is the US the only place with the tenant issues, and the rest of the world is sort of a panacea, or are there other places where you're seeing possibly some tenant problems as well around the world?

It is interesting. If you look at the markets where we are, I mean, Canada is still exceptionally strong. If you read RioCan's press release, I think, from yesterday's quarterly announcement, virtually no delinquencies in their portfolio or our portfolio together. And most of our top partners in Canada see no signs of slowdown or weakness.

In Mexico, I think it is fair to say that there's a beginning of some softening. I think you've all read that remittances are way down from Mexicans living in the United States. So I think most of retailers that are 100% honest with us are beginning to see a little bit of softening. Not to be confused at all with what's going on in the US. It's still night and day down there. People like Home Depot and Wal-Mart are as aggressive as they've ever been in terms of expanding in Mexico, as opposed to pulling back their horns in the US. So these retailers still feel very confident about Mexico.

And then looking at Brazil, Wal-Mart has, I think - Mike, correct me if I'm wrong, 14 different formats they want to expand. And Brazil is one of their very highest priorities, to take advantage of that country being the 10th largest economy in the world. So there is a night and day difference in these markets. But in fairness, I think that there's just the whiff of some softening at least in Mexico.

And, Rich, I think I shot myself on the foot on the occupancy, because one of the projects that we had acquired which had a high occupancy, we initiated the Phase II of the project, I don't remember the exact project name, and we have good preleasing going on. But because there's only X percent occupied, we just incorporated both phases. So it appeared as if we had dropped both of them. But in effect, it actually -- there was no occupancy issue in terms of existing tenants recycling - cycling out.

He throws the curve balls every so often with the different schedules!

I think we're up to 25,000 pieces of data in the supplementals. You have to give me a break.

We are very comfortable with the leasing and the rents, and our retailers in Mexico, and we continue to run at this window of opportunity as fast as we can.

The other comment we would make, starting to see actually a lot of interest from our US tenant base. As they seek expansion, they're coming to us asking, how can we grow into Mexico? So we still do see very strong demand for all of our Mexico assets.

Okay. Very good, thanks, guys.

At this time, there's no further questions in the queue. I'd like to turn the conference back over to Barbara Pooley for additional or closing remarks.

Everybody, as a reminder, our supplemental's on our website at www.kimcorealty.com. Thanks, everybody, for participating today.

That does conclude today's presentation. We thank you for the participation. You may now disconnect.