Kimco Realty Corp (KIM) 2008 Q3 法說會逐字稿

Good day ladies and gentleman and welcome to Kimco's third quarter earnings conference call. Please be aware that today's conference is being recorded. (OPERATOR INSTRUCTIONS)

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

Thank you Michele, thank you all for joining the third 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 managements hopes, intentions, beliefs, expectations or projections of the future, which are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Information concerning factors which 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 reverence to certain non-GAAP financial measures that we believe help investors better understand Kimco's operating results. Examples include, but are not limited to, funds from operations and net operating income. Reconciliations of these non-GAAP financial measures are available on our web site.

And finally, during the Q&A portion of the call, we respect that you respect the limit -- we request that you respect the limit of one question 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 an additional questions. I'll now turn the call over to Mike Pappagallo.

Thank you, Barbara. Good morning. In what might be considered one the most dramatic and painful three months in the history of the financial markets it was all one could do to focus on the basic blocking and tackling of running a business. And once again, our actions were geared towards maintaining liquidity and a strong balance sheet and aggressively managing our shopping center assets. I'd like to comment on three items, the recent quarter results, liquidity and funding flexibility and the reduced 2008 earnings guidance. FFO per share for the quarter was $0.68 in line with consensus estimates and representing a 19% increase from the prior year's third quarter. The significant increase in quarterly results was primarily driven by certain transactions in our Kimco Capital Services unit. Nonetheless operating performance of our shopping center operations held up quite well in light of the economic environment. Occupancy was 95.4% which was only a 30 basis point decline from the prior quarter. Same story NOI was 2.6%. Rent spreads on leasing activity was solid, with over 17% up lifts on new leases for the quarter and almost 9% on renewals. These results were accomplished despite a difficult retail climate and lower consumer spending. In a few moments, David Lukes will provide some insight into our shopping center portfolio strategies and activity.

Similar to prior quarters, the market dislocation has limited new business activity, with the thrust of investment in Mexico shopping center development and internal spending. The notable transaction in the quarter, with the profits earned from our investment in Albertson's, which sold 49 stores to Publix, as well as disposing of a number of its fuel centers. The result to Kimco was an after-tax gain on the transaction of approximately $28.1 million. The incremental effect of the Albertson's contribution from last year was about $0.08 per share for the overall $0.11per share increase on the quarterly results. With respect to liquidity, our primary action in the third quarter was to raise $410 million via an 11.5 million share issuance of common equity. Luckily, in the week preceding the Lehman bankruptcy, the problems at AIG and various other investments. We used the capital to reduce balances on our credit facility. At September 30, we had a $100 million of cash and a total of 1.3 available capacity from the combination of our US and Canadian dollar facilities, and the bank group underlying the commitments is a strong one. We recognize, however, that the credit and transaction markets are still dicey and there's no assurance it will recover anytime soon. With that in mind, we looked at the total debt maturities on the balance sheet, which totalled $479 million in 2009 and $349 million in 2010, which in total, is actually less than the availability under the exist existing credit facility. I highlight this data point to illustrate the balance sheet flexibility we have, not to imply that we're going to fund everything from the credit facility. We certainly expect to tap the markets to refinance our maturing mortgages and construction loans and to satisfy our funding requirements for existing development projects. We have solid relationships with many of the stronger financial institutions and our high coverage ratios and a substantial number of high-quality free and clear property, will enable us to access financing at conservative loan-to-values, which continues to be available. But, I bring this point out simply to alleviate any concerns over balance sheet liquidity.

Now, let me turn your attention to maturing debt in our investment management programs and other joint ventures. Not withstanding the fact that these financings are usually individual non-recourse mortgages, the 2009 maturities after accounting for available extension options is about $800 million and 2010 maturities of about $1.1 billion. These are absolute amounts, not Kimco's share, which is less than 25% of the totals. All of the aggregate maturities, over the two years, the largest outstanding balance of the $650 million two-year term-loan facility against a portfolio of 30 former Pan Pacific assets being marked for sale. The loan will be repaid as the properties are sold, but more importantly, the loan is proportionally back stopped by the large Prudential funds that own the portfolio with us. The balance of the maturities, cut across about 60 individual properties, an average debt level of about $21 million per property. To evaluate the ability to refinance these properties, we stress-test the assets by haircutting in place NOI and applying conservative Cap rates. And as a result, we find that the LTV, to replace the existing debt levels over the next year, averages about 55%. The point is that the inherent nature of theses assets, the relatively low financing requirements per property and reasonable loan to values, will help facilitate refinancing. Take a recent example. Over the past four months in, a very difficult financing environment, we were able to address $190 million of debt coming due on properties in our Kimco income re-program. We refinanced nine of the properties with aggregate proceeds of $228 million and interest rates ranging between 6% and 6.5%, fully repaying the maturing debt and generating excess proceeds. We also obtained another $85 million worth of new debt for maturing mortgages and other joint ventures, and in one case extending a maturing loan for three years. In sum, we believe our debt maturities, both on the consolidated balance sheet and in the joint venture programs for 2009 and '10 are manageable and we will be successful in refinancing these obligations.

Finally, let me cover the fourth quarter numbers. The 2008 guidance range previously offered through most of the year, has been reduced by a range of $0.25 to $0.50, resulting in a new estimate of between $2.20 to $2.45 per share. Yes, these are dramatically lower numbers than previous guidance levels, and there are two drivers. First, we have reduced our expected fourth quarter transactional income to virtually zero, reflecting the dramatic deterioration in credit availability for buyers of our development projects and absence from our Kimco capital services unit. We have been up front on the dollar levels of transaction gains embedded in our earnings guidance throughout the year as disclosed in prior earnings releases and caution that attainment of the full amounts would be dependent in part on outside forces. The deals are there, and assets (inaudible) or were under contract, but certainty of closures due to the lack of credit availability for buyers, has become the issue. One approach could have been for Kimco to provide the financing to complete transaction and book the gain. But we are not going to be reckless with our available liquidity just to meet quarterly earnings expectations. We sometimes provide such financing, but only in very safe and small doses. Although its frustrating that the continued disarray in the markets affects one part of our business, it's a fact, and we deal with it. The absence of transaction income represents about $0.25 cents of the reduction in the guidance range. The second component of the reduction relates to the range of possible accounting reserves associated with our portfolio of marketable securities and similar investments. The market meltdown that took place during the last 45 days has resulted in a significant increase in the level of unrealized losses in the securities portfolio. While we have the ability to hold these securities for the long term, there is great uncertainty as to whether the stock market can make a meaningful recovery in a reasonable period of time, and as a result, reserves may have to be established under the accounting rules to address the underwater position. Therefore, to be prudent and transparent as to the potential impact on earnings, the guidance range was adjusted further to take this possibility into account. As you might expect, I'm biased towards the low end of this new guidance estimate. Not withstanding the absence of transaction income and the potential of non-cash valuation reserves, our ability to fund our dividend from operating cash flow is intact. And in no way is our dividend at risk to be reduced or suspended. We recognize the importance of the dividend particularly to our retail shareholders. While there seems to be a growing sentiment that companies should look to their dividend as a source of capital for other requirements, we feel strongly that we have more than enough balance sheet capacity and liquidity to handle those other needs, and recurring cash flows from operations are more than sufficient to cover the dividend. I'm deferring any specific 2009 earnings guidance at this point. We simply want to wait to see if and when the credit markets reestablishes itself, to better assess the post-holiday impact on retail sales and tenant health and to gain more clarity on the scope of investment opportunities that may be available in the near term. However, from broad perspectives, it's reasonable to assume that should there be -- should there continue to be an absence of meaningful transaction activity, 2009 FFO levels will roughly line up with the low end of the new 2008 guidance range.

All that said, I'd like to make one final comment with respect to transactional profits that flow from our business units. There is no question that we have capitalized on the white hot real estate markets and robust financing environment from 2004 through early 2007. And have continued to enjoy the benefits of those opportunistic purchases through the first nine months of this year, such as this quarter's contribution from Albertson's. Transactional income aggregated almost $675 million over the past five years. That wasn't a bad thing. The opportunities were there, we took advantage of them, and as a result, our per share FFO growth exceeded the industry average, and more importantly, generated excess cash to reinvest in our portfolio and investment management programs and international expansion. As many of these transactions were in the TRS, it allowed us to build over $150 million in retained earnings in that time period. However, we recognize times are different, and with the capital and trading markets what they are, our priorities and investment approach must adapt as well. With, that I'll turn it over to Dave Henry to discuss this strategy.

Thanks, Mike. As referenced by Mike, the real-estate markets have changed and continue to change dramatically. Mortgage financing, acquisition, and disposition activity and development projects, have all been curtailed to an unprecedented degree. As a result and from a new business perspective, we have responded by adopting a more focused strategy across our operating businesses.

Given the need to carefully allocate new business capital in a difficult environment, we plan to concentrate on retail properties, which will align us with our core strength and expertise, neighborhood and community shopping centers. In KDI, our merchant building business, it started to become apparent in 2007 that very few development projects in the US could achieve our historical double digit target return on cost. Land and construction cost increased substantially, while at the same time, retailers were beginning to reduce expansion plans and negotiate lower rents. As a consequence, only two KDI development projects were approved and closed in 2007, and only one KDI project has been approved and closed in 2008.

Given the limited development activity expected for the foreseeable future, we decided in early September to significantly reduce our KDI business unit by merging it with our existing portfolio redevelopment staff. While we continue to aggressively pursue redevelopment projects within our existing portfolio and while there may be opportunities to help institutional clients with troubled development projects, we do not anticipate merchant building to be a material part of our new business activity. In our preferred equity business, we are beginning to see an increasing number of attractive opportunities as the capital markets pull back. Traditional mezzanine financing competitors have largely disappeared, although new distressed debt funds are emerging. On our side, recognizing that the heart of our business remains neighborhood and community shopping centers, we plan to largely limit our new business activity to retail investments, where we can obtain high preferred returns, together with a large we equity participation.

It is important to remember that our preferred we equity businesses has always been focused on equity participations in existing properties, which will provide recurring long-term income. Our preferred equity portfolio today of $460 million is widely diversified among 237 properties, with an average preferred equity coupon in excess of 8%, plus an we equity interest in both excess cash flow and residual value. We believe our preferred equity business continues to have substantial unrealized gains embedded in its portfolio. In retailer services our business focus on working directly with retailers on sale lease backs, bankruptcy financing, property dispositions and other opportunities. We think the current economic environment will provide selective opportunities to make profitable investments. We have long-standing relationships with many retailers, which may lead to opportunities to help them dispose of excess real-estate and recycle capital back into their core retailing business. On the international front, we remain committed to our substantial equity investments in both Canada and Mexico. We have been invested in both of these countries for many years and our properties are performing well. In Canada, we now have we equity investments in 152 properties, and our occupancy in our retail properties in Canada is currently 98%. Long-term, Canada remains very attractive given its strong economy, fiscal and [straight] surpluses, growing population, vast natural resources and a conservative banking system, which has limited speculative real-estate development activity. In Mexico despite recent currency turmoil, the country continues to have an active and growing housing market with a limited number of modern retail properties. While scaling back expansion plans in the US, retailers such as Wal-Mart, Costco, Home Depot, Best Buy, Lowe's and HEB, are increasing their growth plans in Mexico. Our retail anchor sales are holding up very well (inaudible) up 10% to 15% on average through September. Best, Buy, as an example recently opened their first store in Mexico, and hopes to open up to 80 more over the next three years. Kimco has an an excellent base of local operating partners, tenant relationships and experienced personnel, which will allow us to continue to create value for share shareholders by growing our retailer portfolio in Mexico. Our investment management business, which is exclusively oriented to retail properties, continues to be an important focus for our company. As the largest owner of neighborhood and community shopping centers in the US, we are uniquely positioned to acquire property, manage and operate large portfolios of shopping centers for institutional investors of all types. We are proud to be listed as one of the largest fund managers in the US with 21 institutional clients and partners. Many of these institutional clients are determined to limit acquisition activity until the credit markets stabilize, and as a result, we do not anticipate significant acquisition activity of core retail properties in the near term. Some large investors, however, do have substantial funds available for large opportunistic purchases if Cap rates continue to increase, and we will explore opportunities with these investors as they arise.

Overall it is an uncertain and disquieting time for all of us in the real estate business. With capital constrained in many ways, we believe it is prudent to plan as if the real real estate markets will continue to deteriorate. Accordingly, although we have made substantial profits in transaction activities outside of the retail sector it makes sense to "stick close to the vest," today and concentrate on retail opportunities where we have the best underwriting and operating capabilities. Not withstanding attractive short-term debt and securities investment opportunities, we plan to focus on long-term equity investments and retail properties which will provide growing and recurring income over time to our shareholders. If as many experts predict inflation comes comes back strongly after years of profound deficit spending quality retail real estate will remain a wonderful inflation hedge and excellent long-term investment. Now, I'd like to turn to David Lukes for an overview if our US shopping portfolio.

Thank you, Dave. There's been a lot of conversation lately about the state of the retail environment. The consumer is on center stage, and at Kimco, we feel like busy set designers. How we choreograph in this environment is the question at hand and I'd like to give you some insight to our vision and how we plan to get there. In a nutshell we're focused on two things, location and line-up. Our locations are (inaudible) in the soft markets, but in general, we're continuing to see that the consumer is staying close to their home and their work, and that convenience is king. It is a positive fact for us that over 90% of our GLA is located in inter-beltway communities, and 0.5 contain a grocery component. No small advantage, considering that over 40% of the employment in this country's top cities, is within five miles of the CBD. We are seeing the direct benefit of having a portfolio in a mature market. Location, though, is only half of the puzzle.

So, let's consider tenant mix. We're continuing to see higher tenant turnover than last year. As we look into the details behind these vacates, it's clear that those good and services that were supporting a growing housing market have hit a rough patch in the road. Flooring companies, design centers, mortgage offices, furniture retailers and housewares are clearly reducing in number. On the other hand, new lease production is at an all-time high for the company, an encouraging fact considering that rent spreads were a healthy 17%. Grocery personal service discount apparel and convenience categories continue to be active in taking space and are strong in most parts of the country, particularly in Texas, Puerto Rico, California and the northeast. With all this leasing activity and all of this work on the treadmill, the question is, how do we stay focused on on strategy? And the answer in part is to remember that unlike other asset classes such as multifamily or office, the tenants at our centers play a very important role in the long-term success if our properties. We are in a period of transition. The tenant mix is shifting with the economy and consumers' preferences on where and how they spend their dollars. Nothing is more important to us than carefully managing our assets, so that a combination of shops and anchors makes our centers the most desirable site in the trade area. Our goal is to insure that we remain dominant in a local market and we can achieve the highest rent growth and stable occupancy over the long haul. It is more important than quarter-by-quarter occupancy, more important than taking the highest rent payor and more important than providing incentives to weak retailers simply to stay in our centers. Because of this, we do expect occupancy to be under pressure while our properties shift tenancies, but more importantly, we expect these changes the yield opportunity. Consider the following facts, most of our properties are situated in older first [rink] suburbs. Our centers generally are mature and contain significant below market rent. Approximately 75% of our land is parking, and lastly, when large tenants vacate, they also release control of common areas. All of these gives us the ability to reposition our properties and create value in changing markets. With this in mind, as Dave mentioned, it's not surprising that we've chosen to bring experienced staff from our ground-up development team into our core operating divisions and we continue to shape, refine and position our properties with higher density, an improved tenant mix and higher overall sales volumes. The report card for us as managers. After all, if you were a tenant in today's market, there's great appeal in a proven property with low cost of entry and certainly the competition is unlikely to challenge you due to the high barriers of entry. Our properties are always changing and our enthusiasm to create value will make use of these changing markets. With that I'll turn it over to Milton.

Well, thank you, David. I'm very well aware that our revised guidance may disappoint many of our constituents. But I believe that its important to deal with the reality of the environment and be conservative. I think it's also appropriate to point out that the revised guidance does not affect cash. While there were no sales development properties to record profits, the value that was created by a development is still there to be husbanded when markets return to a more normal time. The markdown of securities is similarly not a cash item, and we believe the value will return over time. At this point in time, shopping centers are being hit with a double whammy. We have had the sharpest drop in consumer confidence since records of consumer confidence were first recorded in 1937. And this has been coupled with a severely strictured credit market.

For the first time in many years, we are hearing the "D" word, deflation. We will not be exempt from the consequences of this environment; but on a relative basis, we have five very positive defensive attributes in our portfolio. One, we have a substantial portion of our portfolio occupied by tenants with good credits under long-term leases. The value of this income stream with unlike characteristics, should increase in a deflationary environment. Two, supermarkets, drug stores and warehouse clubs, all sell items essential for the consumer, such as food and pharmacy items. Three, in times such as these, the consumer trades down and shops at discount stores, at off-priced retailer, both categories are among our largest tenants. Four, Kimco has been in business for close to 50 years, and leases ended in to more than 25 years ago have rentals that are lower than rents and leases, say 10 years ago. Low rates, rental rates are not only defensive, but are the basis for future cash flow growth.

Alright, in times of stress there will be a need by institutional owners of centers for a manager who with great skill in creating value, a manager expert with controlling costs, a manager with capital -- have skin in the game, a manager with integrity, in a work, Kimco. Our history shows that in times of difficulty we have found opportunities to create value. We have been through many cycles in our company history and you all know that creating value and maintaining our dividend, are in our DNA and with that we'd be delighted to answer any questions.

Thanks Michele, we can take some questions now please.

(OPERATOR INSTRUCTIONS) And we'll take our first question from Christy McElroy with Bank of America.

Hey, guys. This is Rob Salisbury here with Christy. Just had a question on the guidance. I was hoping you could walk us through some of the assumptions that are kind of underlined, the new 2008 guidance. I guess specifically we're trying to figure out what your expectation was for occupancy and promotes and Albertson's income and all those other moving parts, kind of in the fourth quarter.

Well, as indicated earlier, that we are expecting, from a transactional standpoint, virtually nothing. So, as it relates to promotes, development sales, Albertson's income, et cetera, you could just put a zero in your budget models. As to occupancy, again, it's very difficult for us to predict what a specific occupancy level will be, but as David had mentioned in his prepared remarks, that you know, we expect to see ongoing pressure on occupancies, but I don't think it's going to be a material reduction. I mean, I think the true test will really be after the holidays in first quarter to see where things shake out.

So, is it fair to say that you're probably a little bit more -- from an occupancy perspective, you're a little bit more conservative on 1Q than 4Q? Is that fair?

There's fair. But I think that's just kind of the natural cycle that occurs in the retail environment.

Okay. Thanks.

And we'll take our next question from Paul Morgan with FBR Investment.

Hi, good morning. You know, Milton, you -- as I recall you went down the investment management route back when Cap rates fell 9, 9.5 for shopping centers and you felt like you couldn't creatively buy for your core. I mean I guess I am interested in your thoughts going back that far about whether you think we'll get back the that 9 Cap and how that changes your view about acquiring for the core versus the JV route?

Well, fundamentally, if Cap rates increase to a point where they're in excess of our cost of capital, we'll buy for our own account. That's what we did in the early years of our public history, in '91, et cetera, '92, et cetera. What will happen, I'm not sure. Certainly what we'll do is look -- analyze where the Cap rates are, and if they're not adequate the on course for capital, we'll put these properties into a joint venture. Again, we'll have to see what the markets are and how strong the interest of the joint venture (inaudible) are.

You know, related to that, on the loan to value, 55% that you mentioned, you said that's based on stress tested NOI and Cap rates. Do you have any kind of color on what kind of levels of cap rates or in what NOI reduction you used to get to that 55%?

Yes. What we did, Paul, is we essentially took the in place NOI and cut it by 10% and then used an 8 or higher Cap rate on the asset to stress test that LTB. And the other point to recognize is that in looking at many of the assets in question, or the maturing debt, that many of these loans are the older loans that were in place when we had acquired the assets, whether it was the Pan Pacific portfolio or other joint venture assets. So, you certainly had the benefit of amortization over years. So, the hurdle, the dollar hurdle in refinancing is not significant relative to the dollar of the asset, even when you use more conservative under writing assumptions. That's why we feel more comfortable that we will be able the get through this credit crisis and find adequate mortgage financing to refinance those obligations.

Thanks.

And we'll take our next question from Michael Dillerman with Citi.

Hi, (inaudible) here, I'm with Michael. Just the fact that the (inaudible) running into the fourth quarter, I mean, if we look at it as you had [68%] in the third quarter, how much transactional earnings were in there?

We're having a little difficulty in hearing I you, but in terms of the transactional amounts in the third quarter, I think, is what you're asking for -- ?

Correct.

It was probably about -- about -- lets take a rough cut and say about $0.17 for this third quarter versus about $0.14 cents for the prior year's quarter.

Okay. So, there's none in the fourth quarter. So, to get to the new implied guidance for the fourth quarter, what are you assuming -- what's the assumption for the markdown on your securities?

In looking at that separately, from a cash charge perspective -- .

Yes.

Or non-cash charge perspective, it literally goes from $0.00 to $0.25 a share. As you'll recall, my prepared comments, I had indicated that the total range now is $0.25 to $0.50 lower than the $2.70 consensus number in the low end of our previous range. About half of that is due to the absolute absence of transaction. So, another way of saying we had planned about $0.25 worth of transactions in the fourth quarter. The balance -- that's the variable, in terms of where the mark-to-market will be on those securities, and it could be, in our view, up to $0.25. That's why we provided the wider range.

Okay. Got it. And just in terms of markdowns, I mean I just wanted to ask about your investments, your $200 million investment in Valad and given that their share price has gone from, I think, over $1.30, when you invested (inaudible). Can you just give us an (inaudible) in terms of what you're seeing there?

Yes. I'd like to take a minute and go back over the history of the law, because I personally am feeling a little dumb about that one. But I'd like to go back a year. The equity market Cap of Valad, had decreased after they had purchased a very large money manager in Europe called Scarborrow. The we equity market Cap had decreased from almost $4 billion to about $2 billion at the time we negotiated our convertible bond investment. At the time it looked like an opportunistic and safe way to invest in Australia, which had, at the time, a very strong economy, resource-rich, and lots of reasons to invest long-term in the country. The company itself had a strong money management business and a strong portfolio of Australian real estate. So, we felt good about the safety of our bond investment and the fact that it had a convertible feature to it gave us upside if the stock recovered to its former levels. So, there was -- there was a way for the company to make quite a bit of money if Valad returned to it former levels. Now fast-forward to today. Valad, like most Australia reets have been tremendously damaged in terms of their -- in terms of their stock price. Starting with the publicity surrounding Centro, rising Cap rates, the falling Australian dollar, and in Valad's case, a clear-market perception that they had over paid for the money management business and problems in some of their preferred equity development deals, all of that's combined to severely reduce their stock price. Now, in addition to our $200 million convertible bond, we purchased equity, straight stock we equity of about $45 million, as the stock was declining, and a large portion of the securities write-down or impairment that we may take in the fourth quarter is attributable to the stock investment we have in Valad and not particularly the bond. The bond we still feel is very secure after taking a harder look, we, together, like most analysts in the community, feel that the NAV or the liquidation value of the assets within Valad are substantially above the $0.08 to $0.10 cents the stock is trading at. So, at this point in time, we don't feel that the bond itself is at risk. We're not sure about the stock part if our investment.

Okay, so you -- it doesn't look like you're going take a write down on the bond at this stage?

No, not at this point. We've done a thorough analysis, and we feel good about the realization of the bond at its face have.

Thanks a lot, guys.

And we'll take our next question from Jay Haberman with Goldman Sachs.

Good morning. You, know Dave, you mentioned some comments on Mexico. I'm just wondering if you can provide some updates on the leasing of the current development pipeline, and then also specifically on the capital markets there , you know, what in terms of Cap rates (inaudible) lending

I'll take a quick stab, and we also have Mike Nelson, who heads up our entire Latin America division here, who is prepared to jump in as well. From a high level on the property side, activity is still strong, although it has softened a bit, and Mexico will not be immune from a severe recession in the United States. As people had pointed out, remittances are down. So, there is some softening on consumer spending, but as many of our retailers point out, especially some of the food retailers, they're actually seeing increasing sales as Mexicans stay in the border shops of our centers and don't go across to the now higher priced stores in the US. So, some activity has benefited from the fact that the Peso has declined in value against the dollar. In addition, some -- some of our tenants, like HEB are seeing US residents drive across the the border and shop at their -- their shopping plaza's in Mexico. So, for now, it's holding up pretty good. Mike will tell you a little bit about sales. In terms of the capital markets, it remains an active place for investors. A lot of money has been raised to invest in Mexico. Some of our competitors have bought shopping centers as low as an 8 Cap, which represents quite a reduction in Cap rates. But I think over time, those cap rates will probably increase unless the US economy turns around in some substantial fashion. We still feel strongly that the long-term debt on Mexico retail makes a lot of seasons, because there's such a short supply of quality retail product down there. There is a growing middle class. There is growing demand for housing there and our tenants -- our tenants, like Home Depot and others, are increasing their investment and portfolio in Mexico. And maybe, Mike, you'd like to give a little more detail.

Certainly, Dave. No, our experience on the ground, you know, reveals that both our occupancy and our leasing efforts at our development properties remains very strong. In addition, as Dave mentioned in his remarks, the sales that we have reported back on our anchor spaces throughout the portfolio are still coming in at 10% to 15% year on year increases. We are cautious and expect some degree of slow down in the market. But we have not seen it yet. Mexico is forecast to continue growing this year. Although growth will slow, and then rebound in 2010.

And just a follow-up. Can you comment on the update in terms of the Latin America fund you were talking about before, the $500 million fund as a takeout vehicle?

Yes. We're still very optimistic, not withstanding most investors are very nervous today. There remains strong interest in Latin America. We have a, what I would call a large seed investor that Scott Onufrey who is sitting to the right of me and I just finished negotiating the final terms. So, we now have a negotiated final document that we can try to build around this seed investor and try to fill out the $500 million. We expect it will probably take another two to three months to get that done, but we're still optimistic about it. As an example, Brazil, which will be a large piece of the fund, given the size of the country, remains a strong area of interest toward not only investors, but for tenants. Wal-Mart has told us that's their number-one international target. We have an agreement to try to help them develop some of their smaller formats in Brazil. So, they're still, not withstanding the you turmoil of the Brazilian stock market and currency and so forth. There's still great long-term prospects for the country. The 10th largest economy in the world. It's got natural resources it, as well, has a growing middle class. I think the numbers are -- there's something like 27 cities, over 200,000 people without a single shopping center. So, that's a reason we feel good at it.

And just back to Milton on cost of capital, how much do you think your cost of capital has increased and, therefore, how much do you think Cap rates need to adjust I guess from current levels and then, ultimately, where do your joint venture partners, you know, where are they looking to see Cap rates move to, to come back into the market again?

I think it's about a hundred basis points. That's a rough guess, and I'm really not sure where the expectations of the joint ventures partners are as of today.

Yes. And I would just add, nobody wants to do -- what they call, "catch a falling knife." As long as cap rates keep rising, there's a great deal of nervousness. Nobody can can pick a bottom, and they'd rather invest on the way up than invest on the way down. And given changes in their securities portfolios and other things that are happening there, there's just a huge degree of caution on the fact that pension funds and insurance companies and others about investing today in a substantial way.

As we proceed, if we could ask you folks to just limit to one question, because we still have a substantial number of people in the queue, and we would really like to get everyone's question answered. So, if we could proceed with the next caller.

We'll take our next from [Elon C] with Credit Suisse.

Hi, thank you. What (inaudible) and LTVs are you getting in your most recent mortgage refinancings and where there any excess cash proceeds from the refinancing?

Yes. As I indicated earlier, we're generally at a 55% to 60% loan to value range on the new financing, and the most material of those, the Kimco income refinancing, we were able to extract about $30 million of excess proceeds from those refinancings.

And we'll tack our next question from William Atchison with Benchmark.

Okay. Thank you very much. This one is for Dr. Cooper. In hindsight, it's not really clear that residential -- you know, built to a false sense of credit demand and is now going through a structural, in addition to a cyclical, correction. And, you know, in the sense that retail follows the rooftops and, you know, KDI being folded into Kimco proper not withstanding, to what extent does retail need to go through a structural correction as well, whether it be through continuing rise in Cap rates, or perhaps in releasing spreads?

Well, retail -- the actions of housing has dramatically curtailed new development. You've heard Dave's remarks. We really had one small development in '08, and that was it. And there's nothing new we're thinking about it for '09. That's you curtailing it. And so far as the retailers are concerned, their destiny will depend on the consumer, and the consumer is in pain and lacks confidence. Well, I think retailers will have a pretty tough 2009, unless there's a new zoom in our economy, and the housing market comes back when the supply is exhausted. That's the way I see it, Bill.

And our next question comes from Mark [Beifert] with Oppenheimer & Company.

Good morning. I'm curious as to what your view is in terms of development and more importantly redevelopment. You had mentioned that this is the time in the US that you had looked to reposition some of your properties as these retailers move out. And I'm wondering what kind of targeted yields you expect to get on both re-development and development in the US given that your cost of capital is rising?

Mark, the redevelopment yields historically for us have been, you know, low teens, which is so far above, you know, Cap rates a year ago, that Cap rates can rise pretty high and we still would see an accretive return on reinvesting in our own properties. I think what you have to remember is deferent about redevelopment than development ground up is that ground development is driven by the need for square footage. And a specific return on cost hurdle. The need for re-development, or the opportunity, is driven by whether you have a liquid site, because even if you'd like to redevelop, a site, if you've got 100% occupancy and the tenants have long-term leases, you really having in to do. And that's why it's a good time for us to focus our energies even more so on re-development, not because it's a new agenda for us. I mean, we've talk about it for years, but because you know, some of the junior anchor bankruptcies and move-outs provide liquidity and the liquidity that gives us the opportunity. So, therefore as long as we're still 200, 300 basis points above Cap rates, we're happy investing the capital. Primarily, the happiness to that investment is because you don't have a long period of no cash flow. Most of the time, the redevelopment are short natured. They're less than 12 months. And the downtime in rent from when you removed tenants and removed buildings, tend to be pretty short. Because you go in for entitlement and you come up with a plan and you pre-lease while you still have the existing site and the same configurations. So, it's not as big of a worry about investing capital at 13% and not knowing where Cap rates will go in 24 months because the period is much shorter.

And we'll take our next question from Jeff Donnelly with Wachovia Securities.

Good morning, guys. Just a question on -- I guess a follow-up on Westmont, In Town portfolio. I saw in your supplemental you adjusted the cap rate you're using to determine the book value of the asset. But you're still employing about a $70 million NOI estimate, which hasn't changed from Q1. Has there really been no determination there, or are you -- were you conservative originally earlier in the year? And, I guess as a follow-up, can you share with us the details of the capital structure of that JV, specifically your we equity split and leverage thats in place there?

Yes, the performance of In Town, has remained relatively consistent, so, we've been pleased with the performance of the underlying rental flows. He changed the cap rate on that particular schedule, because we are attempting to be more conservative in providing financial information and valuation assessments to you folks. There's no magic about that number. But we recognize that there's been pressure in the environment in the credit markets, so it was prudent for us to change the Cap rates from the standpoint of the valuation, estimates that we put in there and the up-side potential. It really was as simple as that, Jeff. With respect to the capital structure, we are about 75% of the equity in that joint venture. I don't have the loan to value ahead of me, but it's about, it's probably in the 70% range.

And to answer the other part of your question, Jeff, so far it has held up very well. Occupancy and rents have held up, maybe because it's the lower end of the extended stay market, and it represents a nice alternative for very inexpensive housing the same way Wal-Mart is doing well now. In Town suites is doing okay.

Thank you.

And we'll talk our next question from Michael Mueller with JP Morgan.

Hi, my question about your comment on '09 guidance, the rough estimate, I mean, does that have any transactional income in it, and then to that point as well, you were talking about the range of $0.25 to $0.50 being down, but I think you said you were more comfortable with the low end. Was that the low end of the revised guidance or the low end of that?

Yes, what I was trying to get at, Mike, is recognizing that -- we don't have the specifics and sort of the ground-up financial analysis to give you a clear 2009 guidance framework, really what I was trying to get at is taking a look at that low end of the new guidance range -- this year's guidance range of 220. When I look into next year and you say, if there's a continuation of the environment where we're not going to get really any transactional volume or significant amount of new business activity, in rough order of justice, where do you do you think you're going be? And that's why that low-end range, that 220 is probably going to be a reasonable amount, a steady state activity, with some level of new activity, but certainly not substantial, not a substantial level of transactional activity of what you have seen over the past 3.5, 4 years. So, I was just trying to put almost a line in the sand to kind of say what the future might look like if transaction volume continues to be very muted and how that would play out in terms of a broad scope of earnings.

Okay. So, you think it's a reasonable statement to say that the level of transactional income -- is -- there is some in there, but relative to what you're going to book in 2008, it's significantly lower?

I would say it's dramatically lower.

Okay.

Dramatically.

Okay. Thank you.

And we'll take our next question from Jeff Spector with UBS.

Good morning. I had a similar question on the '09 comments. Mike, can you then say that, I guess, the core shopping center portfolio, does that make up most of that steady state that you're talking about?

Yes. What I would -- what I would say, Jeff, is that when you think about the recurring flows from our business, the substantial component of which is our neighborhood and community shopping centers, that really represents the lion's share of what that steady state low-end number is.

Okay. And then just one follow-up on detail. The reserves you said you're taking against some assets, are those assets current in terms of income?

Yes. To the extent that those securities do pay a dividend and certain of our securities do not, but to the extent that they do, they are all current. This is clearly a market valuation question.

Thank you.

And we'll take our next question from Nathan [Isby] with Stifel Nicolaus.

Hi. It's Dave Fick here with Nate. Can you talk about -- I guess this is for David -- how much of the current preferred we equity business was written over the last few years, and how do you look at LTVs as well as rollovers in that business in terms of getting taken out?

Well, the nice thing about a preferred equity business is, a lot of the existing business was originated beginning in 2001, 2002, 2003. So, I don't have the exact numbers for you. But I'd say a minority of our 460 portfolio has been originated over the last 2.5, 3 years, and it -- as I tried to say in the talks, it's very granular, very diversified, small bets. There's substantial first loss equity behind us on these deals, and they were originated generated at much higher Cap rates. And there's room for those Cap rates to ride. And as we go through these deals one-by-one-by-one, there looks like there's still quite a bit of we equity upside in these. So, that's not an area of concern, at least today.

Great. Thank you.

And our next question comes from RJ Milligan with Raymond James.

Good afternoon. Good morning, guys. I had a couple questions, just in terms of the portfolio where you goes are going to take some unrealized losses next year, can you give a view from 30,0000 feet exactly what's in that portfolio?

Well, there are a variety of stock positions in different -- in different public companies. One, which, you know, you're familiar with, because we've talked about it in different quarters is Sears holdings. But the largest position that Dave Henry had mention mentioned earlier is our we equity - our common stock we equity investments in Valad. And then you are thinking about the potential range of reserves that may need to be established in this upcoming fourth quarter. Really the Valad security is really the majority of the potential reserve adjustment. So, there are a whole series of stock items, but that's really the key driver.

And there isn't a large focus on any other particular securities?

Not particular. Not to the extent of the Valad adjustment.

Okay. I appreciate it. Thank you, guys.

And we'll take our next question from Rich Moore with RBC Capital Markets.

Hi. Good morning, guys. Maybe this is for Mr. Lukes. Is there any optimism out there among the retailers; and if there is any optimism, who might be the retailers that are thinking of opening stores in the near term?

Rich, there -- I guess I'm not sure if I would call it optimism or just steady as she goes. But if you look at -- if you look at the amount of leasing that we did last quarter, and we've got some visibility that -- we've got an awful lot in the pipeline currently, that we're working on today, there's still a lot of activity, and the activity is kind of split in half. If you look at the amount of new leases, half of the square footages were for spaces larger than 10,000 square feet, and half is less than 10,000 square feet, and it really its what I mentioned earlier, that the retailers that focus on certain categories, like, for instance, grocery anchor centers in Southern California are seeing a lot of beauty supplies, you know, a lot of drugstores. The northeast, we're seeing a lot of, you know, apparel transactions taking place, especially in certain parts of the stronger northeast market. So, I would say there's definitely some encourage signs, and, you know, to mention names, I think it's probably the ones that have a lot to do with demographics. Ross and TJ Maxx still seems to be doing very well. Both of them are trying the regain cash during market share. The pet supply stores, Petco and pet smart are still active and banging on long-term demographics. So, we are seeing some positive effects, and I think it's consistent with the amount of leasing that've been doing.

O kay. Great. Thanks, Dave.

And we have in more questions in the queue. I'd like to turn the call back over to our presenters for any additional and closing remarks. .

Thanks, everybody. As a reminder our supplemental is on our Web site at www.kimcorealty.com. Thanks, everybody for participating today.

This concludes today's conference. We thank you for your participation and have a great day.