Kimco Realty Corp (KIM) 2008 Q4 法說會逐字稿

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

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

Thank you, Chris. Thank you all for joining us on the fourth quarter 2008 Kimco earnings call. With me on the call this morning are Milton Cooper, Chairman and CEO, Dave Henry, President and Chief Investment Officer, 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's and management's hopes, intentions, beliefs, expectations or projections of the future, which are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained in the company's SEC filings. During this presentation, management may make reference to certain 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 website. Finally, during the Q and A portion of the call 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 additional questions and if we have time at the end of the call, we will address those questions. I'll now turn the call over to Mike Pappagallo.

Thank you, Barbara. Good morning. Although the headline results were far from a typical quarter, in many ways, things turned out as we had suggested during our prior earnings call. The fourth quarter financial results were marked by relatively stable operating performance, non-cash impairment charges necessary to address a variety of valuation issues and the absence of transactional profits. FFO per share was $0.46 for the quarter if you exclude the impairment charges. For the most part, these results reflect straightforward operating earning from the consolidated portfolio and our investment management business, along with recurring earnings from the preferred equity, retailer services and the nonretail component of the portfolio.

On the operating side, portfolio metrics were affected to a degree by the bankruptcies of big box tenants, Linens 'N Things, Value City and Steve and Barry's. 1.5% of the 1.7% decline in occupancy was attributable to the loss of these three tenants, yet we addressed 1.3 million square feet of space through renewal of these signings and maintained positive same site NOI of 1.3% and positive leasing spreads of 10%-plus on new deals. No one is suggesting that things are going to be easy in 2009, but we continue to believe that the defensive nature of the portfolio due to low rents and value oriented tenant base will provide resiliency of cash flow through the economic downturn. David will elaborate on this in a few moments.

Let me now cover the impairment charges that we recorded in the fourth quarter. During this quarter, we have established non-cash valuation reserves and related impairment charges of $111.8 million net of tax benefits. These charges can be divided into three areas. The major reserves relate to marketable securities. Over the years, the company has invested in a series of financial assets, usually in the equity, securities and real estate companies when it believed there was a prospect of long term appreciation based on underlying real estate value. In one case, we accumulated a position in Sears from the receipt of stock of settlement of the bankruptcy claim of K-Mart. The value of many of the assets in this portfolio has been adversely affected by the substantial declines in the equity markets, which were deemed to be other than temporarily impaired in accounting with generally accepted accounting principles. The aggregate charge for these reserves was $83 million or $0.31 per share.

The second category of reserves relate to certain operating assets held in joint ventures. The vast majority of the company's shopping center interests, both in the form of direct holdings and interest and joint ventures were not subject to impairment charges. However, valuation reserves aggregating $15.5 million, $0.06 per share, was established against the carrying value of the investment in former Pan Pacific portfolio that is being held for the long term. In this case, the carrying value of the investment was determined to be less than the expected recovery value, assuming investment would be disposed of in the current market. The company and its investment partners are pursuing business strategies that will maximize value through these investments and generally have the ability to retain the assets until markets recover. However, accounting guidelines require an assessment of recovery value assuming a shorter time frame, in direct conflict with the more appropriate and rational long term strategy adopted by the partners.

The final area of reserves were established against the carrying value of assets that are either held for sale specifically that portion of the Pan Pacific portfolio that is being targeted for disposition. as well as reserves against development projects from the winddown of the merchants building business. These reserves aggregated about $13 million or $0.05 per share. The extent of these non-cash charges was greater than originally contemplated when we provided our earnings guidance this past November. We expected about $0.25 worth of charges. The primary difference resulted from the continued deterioration of the market value of securities throughout the fourth quarter as well as the change in the interpretation of the accounting guidance over the past month as it related to joint venture investments. We will refrain from trying to estimate valuation reserves in future earnings guidance and instead focus on operating and income flows.

Let me comment on the guidance now. Recognizing the state of the financial markets, the availability of credit for new investment, and the effect of reduced consumer spending on our tenants, we believe it's appropriate to limit earnings estimates to the in place portfolio without regard to new business opportunities and have established the range of funds from operations of between $1.70 and $1.90 per share. This in place FFO represents an estimate of earnings from the company's existing investments, primarily related to net operating income from its operating portfolio, development projects and similar recurring flows from its joint venture and other investments. The guidance range does not consider any acquisitions or other new business generation, the effects of new accounting standards related to acquisition-related expenses or the potential for further deterioration and values of equity securities and other financial assets that would result in impairment charges.

A lot has happened since I gave you my preliminary thought on 2009 earnings three months ago. The midpoint of our published guidance is about $0.40 lower than my preliminary thoughts from that time. The most significant differences are due to a more substantial hair cut on transactions, which accounts for about one-third of the change. Another 25% is driven by lower estimates for capitalized interest and other costs, primarily by the move out of many development projects or phases of projects into operating status, and the balance of the change is due mostly to the combination of changes in foreign exchange, particularly the peso which has dropped 15% in the last three months, and much more conservative portfolio assumptions to reflect that has happened in the retail environment.

As was announced this morning, the board declared the first quarter dividend at current rate of $0.44 per share. There has been no shortage of debate over the advisability of cutting the dividend and/or the payment of dividends in the form of common stock. We continue to believe that our current dividend is a fundamental component of total return to shareholders. We would consider a change in dividend policy if we feel that either a material sustained reduction in cash flow is anticipated due to adverse economic conditions or the inability to access other forms of capital, primarily secure debt and asset sales, to satisfy our funding obligations. These conditions will be evaluated by management and the board as it considers the dividend level over the succeeding quarters of the year.

The access to capital to satisfy our funding obligations remains job one of the Kimco finance team. The company maintains solid liquidity position and is aggressively seeking capital from a variety of sources to address debt maturities and existing investment requirements. At December 31, unused capacity from the company's corporate credit facilities aggregated $1 billion. To enhance this liquidity position the company is pursuing the following strategies. For our consolidated balance sheet, which has $452 million coming due, nonrecourse US dollars secured debt of approximately $300 million against 15 of the company's 390 unencumbered properties is currently being sought. Targeted loan to value approximates 50 to 60%, with an average loan size of $20 million, term sheets from high quality lenders have been received on five of the properties so far with about $115 million in proceeds.

We are pursuing an unsecured term loan facility for up to $200 million have received a commitment from the financial institution to leave the syndicate and 15 additional banks are evaluating the program and we hope to secure the financing in first quarter. We're also actively pursuing extensions of certain of the outstanding construction loans on the balance sheet to further add to the flexibility of our capital raising. Additionally, Mexican peso denominated financing ranging from an equivalent 50 to $75 million is being sought. We were successful in closing a $38 million loan in the fourth quarter and peso debt is available. In addition to these debt actions, selected single tenant net lease assets with limited growth profile are currently in the marketplace with expected proceeds ranging from $75 million to $100 million.

With respect to joint venture programs the aggregate material used for 2009 are $756 million. The largest maturity is a $165 million related to the term facility underlying a group of properties being marketed for sale by the joint venture with various of Prudential real estate investment sponsored funds. To the extent that the sale of the properties do not extinguish the debt, Kimco and the Prudential funds are obligated to pay the outstanding balance. The Prudential funds have ample sources of liquidity and remain prepared to fund their proportionate share, 85%, of the debt maturity in both 2009 and 2010. For the balance of the maturities consisting of loans on 36 properties, we already have every property in the debt market regardless of the month of maturity, and like the consolidated secured loans, we're also pursuing extensions for existing loans to provide additional flexibility. We don't pretend to think that obtaining new mortgages or extending loans is going to be easy, but there is money in the marketplace. Despite the harsh view of retail right now, lenders are still allocating capital to relatively small loans on properties with long term leases from a good tenant roster, and with the average maturing loan in the joint ventures at about $15 million, there is good recept activity from insurance companies and regional banks.

Finally, not withstanding the current challenges that all REITs are facing, including Kimco, we are not losing sight of the business and what we must do to establish enterprise value for our shareholders. Kimco prides itself on finding opportunities to grow the business through its expertise in retail real estate and its broad relationships with retailers, institutions and other real estate operators. In light of the events in the economy, real estate and credit markets, and recognition that opportunities in the real estate space may be captured and financed in a dramatically different way, the company has refined its strategic business model to operate using the following criteria: Substantially all investments will be directed to the neighborhood and community shopping center segment. Investment capital will be sourced both on balance sheet and through joint ventures with institutional partners, the footprint will primarily be focused in North America and the nature of the investments will be direct ownership of real estate, either held solely by Kimco or through joint venture as opposed to debt or structured finance-type deals. The company's nonretail portfolio will continue to be actively supported, and continue to be managed to maximize value as market conditions allow. However, new opportunities outside the retail real estate sector will not be pursued.

And with that, I will turn it over to Dave Henry.

Thanks, Mike. As usual, and despite many moving parts, Mike provided a comprehensive and detailed overview of our financial results in a well articulated high level picture of our 2009 objectives and business strategy. I would like to add a little color in general perspective. Collectively, all of us on the management team are very disappointed that several of our investment programs and new business initiatives which have helped provide strong FFO growth for many years have now resulted in impairment charges and investment losses. A rapidly deteriorating economy and a collapsing real estate transaction market have both caused losses in our real estate securities portfolio, several development projects, and our most recent large joint venture acquisition, the Pan Pacific portfolio. Fortunately, the heart of our business, our very large portfolio of equity interest in 906 existing neighborhood and community shopping centers, located broadly across the US, Canada and Mexico, remain approximately 94% leased on a combined basis with more than 13,000 individual leases and more than 7,000 individual tenants.

Despite the headlines of retailer woes, many categories of our retail tenants continue to do well. Grocery stores in general, thanks to growing sales of private label and prepared foods are performing strongly and many are looking for expansion opportunities. In addition, discounters such as Wal-Mart, TJX, Ross and dollar stores are faring well, together with other retail groups such as fast food restaurants and theaters. David will talk specifically about the leasing challenges we face in today's economy, but it is important to note that leasing activity both renewals and new leases remains active and that Kimco as a retail REIT landlord is in the retail real estate business, and is not a retailer itself.

As such, we have many protections built into our future projected cash flow. First, we have contractual leases with substantial remaining terms with many financially strong companies. Some of these firms, such as our largest tenant, Home Depot, are suffering declining sales due to the soft housing market, but they remain very well capitalized and are unlikely to default under their lease obligations. Second, we have numerous older leases with average rents significantly below today's market and substantially below the reduced rents projected due to the weak economy. As a 50-year-old company, we have the benefit of many very old leases which have upside, no matter what draconian market rents are assumed.

Third, we are concentrated in neighborhood and community shopping centers, which largely sell food and/or other fundamental goods and services. Grocery stores, branch banks, fast food restaurants, barber shops, dry cleaners, drugstores, pizza parlors, nail salons, et cetera are all ingrained in our communities and will generally survive this economic downturn as they have survived others. Fourth, we are wonderfully geographically diversified across North America. While southern California fights through a severe housing crisis, our shopping centers in Canada remain more than 97% leased. And Canada largely avoided the housing boom bust of the US. Interestingly, our properties in the Midwest historically demographically challenged, but with lower rents are holding up better on a relative basis compared to Florida, a high growth state with strong long term demographics. There is strength to our property and market diversity.

Granularity is a terrific word which I believe helps our shareholders and investors visualize the 13,000 leasing bricks embedded in the real estate foundation of our company. This foundation will provide sustained cash flows not withstanding a weak economy and a very rough commercial real estate market. As Mike mentioned, we are changing our business strategy to reflect the realities of today's market. Our strength, our expertise and our history all lie in retail real estate, and that will be our focus as we evaluate future new business opportunities and ways to take advantage of the current marketplace. We will avoid investing in real estate securities, debt instruments and nonretail properties. We will continue to use institutional joint venture capital to invest opportunistically, enhance our returns and grow our portfolio. Over time, we believe there will be attractive portfolio acquisitions and merger opportunities, given the weak capital markets and probable consolidation among smaller public and private companies.

Now I'd like to turn to David Lukes to give us more detail on our portfolio operations and performance.

Thank you, Dave. To provide some insights into our operating results for the quarter, I'd like to give you some thoughts about what we're seeing, what we have and what we're doing about it. For starters the tenant moveouts during the last quarter were high from a historical standpoint. As Mike mentioned, however, the vast majority of the space was the result of three chain bankruptcies which was about 70% of our pro rata share of the decline, and those were Linens 'N Things, Value Cities and Steve and Barry's. Outside of chain liquidations, the square footage vacated during the quarter was actually lower than the average for the past four years. The pace of shop closings, which escalated throughout last summer, slowed in every region in fourth quarter with the exception of southern California and only two tenants in excess of 10,000 square feet vacated by choice in the entire country. Comforting as this may be, we are preparing for a continued difficult time for our tenants and are forecasting continued weakness and uncertainty.

What we do know is that the ability of a tenant to prosper is partly due to their cost of occupying their real estate. I'd like to emphasize it's a very important Kimco advantage where we do believe we have some built-in security. Of our top 15 tenants, they reports sales on about half of their leases, which gives us a good view into their security. When we compare these top 15 tenants with the national average for the respective retail category, we show a 3.6% higher than average sales volume, and yet a 40% lower than average occupancy cost. When difficulties in chain fundamentals arise, below market leases and low occupancy costs provide a nice cushion that we believe will make our units more often keepers than closers. Occupancy costs, as you can imagine, is a major factor when considering a rent adjustment or a deferral for a tenant seeking help as sales decline in this environment.

We have a detailed concession request package that we've developed that's required for all such requests, and are using basically occupancy costs, financial help and sales history to separate the tenants that truly need help from those that are merely following the saying, you don't get it if you don't ask. To date the number of requests we have granted are minimal compared to the number of requests that we've gotten, primarily because of this cushion in occupancy costs that I mentioned earlier. On the new leasing front, the fourth quarter was a period of change. While demand started the quarter at a reasonable level, the dismal sales forecast of the holiday shopping season had a direct impact on the growth appetite for new space and we witnessed a decline in demand as we neared the end of the year.

With this weakening demand on the national front, we're continuing our priority of focusing on tenant renewals. A long standing tenant is the most stable part of our portfolio. They have a proven sales history, low operating risk, and a collection of existing customers. We continue to see strong results in renewals, executing 250 renewals in the fourth quarter and an 8% rent increase. We are very proactive and aggressive on our renewal program and we're starting our tenant conversations much earlier than in prior years, and reminding existing small shop tenants of the low risks of a renewal. No additional capital needs, no down time, no startup costs, and no risk that your patrons won't follow you to another location.

Other pockets of demand are somewhat offsetting the national weakness in new store openings. Grocery for one is still a category as Dave mentioned that's driving traffic to our centers and some regional chains are making use of the vacant opportunities such as in Downer's Grove, Illinois, where we executed a new 43,000 square foot grocery lease in a former Dominic's to a strong regional operator. The stability of a daily customer to the grocery oriented sites is also keeping the service and daily necessities categories in business. Interestingly, we've also been seeing a higher demand over the past few months in those sites with an above average ethnic population. In those sites where the Hispanic population, for example, is more than 50% of the trade area we're noting that the average occupancy of the portfolio is still well over 95% leased. Also in areas where Asian population is more than 20% of the trade area, the occupancy is also standing in the 95% range. We know from experience in markets such as south Florida, the California coast and Seattle that some of this demand is due to local preferences for goods and services that cater to specific ethnic or immigrant groups, and in order to support this leasing effort, we've maintained several leasing agents in our company that are bilingual and in certain market have obtained our own exclusive brokers that are fluent in Spanish, Mandarin, Cantonese, and Korean.

We're continuing to implement alternative ways to source new tenants for our sites and have been increasingly active in the ancillary income and temporary leasing programs. Some temporary tenants have grown their businesses and are ready to sign long term leases. Other ones are moving from a kiosk to an inline space. Both of these programs are very small by portfolio standards, but represent a desire and a diligence on our part to pursue all avenues for increased production during a period where demand for space is grouped into very small niches and needs active pursuit. Throughout the year, you can expect Kimco to be very open eyed about the state of the markets but proactive to produce. And with that I'll turn it over to Milton.

Thank you, David. 2008 was a year of dramatic change. Consumers decided to reduce spending and the financial conditions of the banks reduced the bank lending. The consumers started to do something that it had not done for some time, and that is save. Gone are the days of spend without end and shop till you drop. Now no one can be sure how long this malaise will last.

Consumers understandingly tighten their belt when they review the market value of their stock holdings, their 401(k) and their equity in their home. There are some statistics that claim that 25% of homeowners have either no equity or negative equity in their home. Now the consumer is cutting down on nondiscretionary purchases. The department store executive as reported and chatted with some of his customers and asked where they were shopping and they replied, we're shopping in our closets. The consumer is also trading down and visiting discount stores, warehouse clubs and off price retailers rather than department stores and department stores continue to lose share of market. Fortunately, the large percentage of our shopping centers are tenanted by warehouse clubs, discount stores, food retailers and drugstores, and these are among the few categories that have shown year-to-year sales growth.

Now Kimco has positioned itself to weather this storm. We have a strong balance sheet and relatively low debt. The company is back to basics and focusing exclusively on North American shopping centers. Our shopping centers have a very large land component and over time, that land will mushroom in value for our shareholders. Now despite the current slowdown and the tough times, America should increase its population by three million people a year. That's 30 million people at the end of 10 years, and that 30 million in growth is greater than the entire population of Canada or the entire population of Australia.

Now, real estate and our portfolio shopping centers are an excellent long term inflation hedge. In the days of $1 trillion deficits, high quality real estate will turn out to be a long term wise investment. Of course real estate has always been cyclical and I've been through a number of both business and real estate cycles and we have always been able to take advantage of these periodic downturns seizing opportunities as part of our DNA, with a fabulous best in class team who are skilled, savvy and sensible, and with the they can help us thrive in good times and bad.

And now we'd be pleased to take any questions.

(Operator Instructions). We'll pause for one moment to assemble the queue.

Operator?

Yes, ma'am.

Do we have questions in the queue?

And we'll take our first question from Jehan Mahmood from Goldman Sachs. Please go ahead.

We are not hearing the question.

Caller disconnected. We'll move on to Michael Mueller with JPMorgan. Your line is open.

Great. Can you hear me?

Yes, we can, Mike.

Okay. Great. I guess two questions. One, first on the strategic man, the shift to just focusing on North American real estate, can you talk about I guess the impact of that when you look at the preferred equity business, retailer services, mortgage investments, you have income that is obviously in the guidance of this year. Can you talk about how that burns off, number one, and maybe keep the dividend coverage as a back drop to that and then what it could also mean for G&A?

Well, embedded in your question are about 15 different questions, so we'll --

Pretty efficient.

Yes. So I think Barbara is glaring at you from away, but at a very high level, strategically as we've all mentioned, we've decided to pull back to our core strengths which is retail and so you will be seeing us from a new business perspective, invest equity in retail real estate. Now it may be preferred equity. It may be joint venture equity. It may be consolidated equity, but it's in retail real estate and that's going to be our primary focus, and as Milton and others pointed out, it will be primarily North America. That's where our platform is. So that's where our new business focus will be.

We continue to have existing nonretail investment in our portfolio that provides substantial cash flow. As always, that has been more of a trading platform and portfolio for us. So you will see us trade out of these investments over time as appropriate, and we will probably not replace those investments as we stick to retail real estate. Now, Mike, maybe you can respond to some of that more general questions about the financial impacts.

Yeah. But as it relates to preferred equity and retailer services and the like, I think you can use the same lens that Dave made from a strategic perspective in that, to the extent that the position in those businesses are primarily retail related and retailer services it's the baseline of that business is retail, we'll continue to hold them, and if they're not, as you know, there's a portion of our preferred equity portfolio that's not retail oriented, to Dave's point, we will continue to seek away exit at the appropriate time at the maximum value. We have no compulsion to do so and we need to be smart about it. As it relates to things like overhead, we are continuing to look and rationalize the organization. You saw that in our press release that we did have some impact for a moderate reduction in force in about 5% of the census of the Kimco census, and we will continue to evaluate the effects of that as we move out of these other businesses, but the bulk of our people and the bulk of our infrastructure is still supporting the shopping center business, be it for our own account or for our institutional partners. Hopefully that covers your questions, Mike.

Yeah. I think so. And did you guys mention what the same store guidance and the occupancy outlook was for '09 embedded in your guidance?

We did not, but the way we're looking at it right now built into our projections at our same store NOI will be flat to minus 2%. Occupancies will be in the 92% range and rent spreads will probably be in the mid-single digits. In fact, partially lower -- somewhat lower due to junior anchor vacates and, of course, we factored in higher credit loss estimates and the like to deal with the economy. So we think we've been prudent in our assessment in our underwriting for thinking about 2009 as it relates to the portfolio.

Great. Thank you.

The next question comes from Vincent Chow with Deutsche Bank. Please go ahead.

Hi, guys. Just a quick question, just going back to the marketable securities. A big impairment there. Can you talk about the mix of those securities that's remaining, what's left in that $258 million?

The bulk of the remaining assets in that portfolio in addition to the written down securities that we mentioned is the Valad property, convertible loans which we originated early last year, and that is the lion's share of the total, about 100 -- on a 100 basis about $159 million or so. I don't have the exact number but somewhere in that vicinity. That's the loan portion of it. There's another component which is the convert which is treated in a different part of the balance sheet and then the rest of it again are a series of smaller investments again primarily real estate that make up the bulk of the portfolio as well as some debt securities as well, but there aren't any significant investments at least to the scope that you saw this past quarter and what we had to write down.

Okay. And then just in a preferred equity capital I guess can you talk about what the process looks like there for impairments? I guess I didn't see anything taken out of that.

Yeah. We didn't need to take any impairments in the preferred equity. Essentially it is treated in a similar manner as any other joint venture, but the benefit and the difference is you need to look through the waterfall and determine whether your investment is impaired under a variety of scenarios of recoverability and I think this is where the preferred structure has benefited us, because we're first to the table even if you do sensitivities on current market values versus historical. So that's -- so we continue to evaluate that as every other asset in the portfolio, but we feel we're well protected in the preferred equity portfolio as a whole.

Okay. Thank you.

Next we'll go to David Fick with Stifel Nicolaus. Your line is open.

Thank you. I was wondering if Milton or Mike might want to comment on a the more depth on the trend to dividends in stock and where you project your taxable income for this year as well as for, you know, where you were last year and how it's impacted by one time items but more importantly just generally how you view this trend for the industry and how it might impact you.

Well, I will start on comparing dividends in cash to dividends in stock and give you my own view. If a stock dividend is really raising equity and I believe if a company wants to raise equity, they should raise equity rather than impose it on their shareholders, and those shareholders can decide whether they want to participate in the equity offering or not. So that's my broad view on stock dividends and, Mike? Yes. David, I would suggest that as you look at our preliminary guidance for FFO and earnings, if you scale that to what is our estimate of taxable income, it's probably take a rough cut in about the $1.10 range. So clearly from a minimum tax compliance perspective we have room, and as we'll continue to evaluate the dividend in any avenue we take, we feel we'll be in good shape from a tax perspective and therefore, the stock component is not necessarily going to be a driver in any decision.

Thank you.

We'll move on to [David Wiggington] with Macquarie Capital.

Good morning. Just had a question. How are the assets, or I should say the operating performance of assets in Mexico and South America faring at this point?

In general and remembering that almost all of our assets are in Mexico, I'll address Mexico first. Mexico did not have the housing boom bust that triggered most of the problems that we currently have in the US, so until recently, Mexico has been holding up very, very well, and there's a reason that Wal-Mart and Home Depot and Best Buy and others continue their expansion activities in Mexico. The growing middle class, the shortage of first class retail in Mexico has continued to perform on a relative basis very well. We are seeing the beginnings of a slowdown in leasing in Mexico, not to the extent that we've seen it in the US by any stretch, but we have to tell you that there is some softening in Mexico and it is tied to the US. I remember Jack Welch telling us it's the 51st state, and in some ways it really is, the trade ties and so forth are very strong. Remittances, as everybody knows are way down going back to Mexico, so that is going to show up in retail sales at some point, but on a relative basis, Mexico is holding up. Retail is still growing and as we pointed out before, 400 shopping centers in Mexico compared to 50,000 in the United States leaves a lot of room for continued growth. In terms of South America, just a quick response, we have a limited portfolio there. but countries like Chile, Peru and Brazil where our investments are. are actually doing quite well right now, but we have very few there. We do not plan to expand that to any significant degree.

Okay. So is the decline in the development yields in Mexico just a reflection of the softening environment there or is it more a reflection of the currency?

Well, remember the development deals we have under way now, the development yields are lower than when we first started in Mexico because we have competition and the retailers have gotten a little more leverage over time. What we expect to happen is with leasing softening a little bit, the lease-up period and perhaps the eventual NOI will be a little softer than we originally projected, but on the good side, we have a fair number of properties that are going to come onstream in '09. These were development assets that were nonincome producing in '08 that will be coming onstream. As an example, we have a very large Wal-Mart that opened up last week in Guadalajara and the rent on that individual store alone is close to $900,000 a year. So we have some good news in terms of income coming in Mexico. The bad news as Mike referred to, is the peso exchange rate is down substantially.

So just to be clear, then, the decline from yields from the third quarter supplemental to the fourth quarter is purely a product of increased competition.

Yes.

Okay. Thank you.

We'll proceed to Rich Moore with RBC Capital Markets.

Hi. Good morning, guys. I'm curious where you're finding on the debt side the most success in A, getting new loans and also, B, in maybe a loosening of loan officer thoughts or the lending relationship thoughts, is anything getting better there? I guess basically what are your thoughts on the debt side of things?

Well, we have the benefit of starting over a new year in terms of some traditional sources of mortgage financing such as life insurance companies. They have new allocations and they are moving aggressively to take advantage of a market where they can get much higher rates, much safer loans, much higher quality real estate and much better sponsorship and they're all seeking that. So the mortgage world has opened up a bit in '09. We have a number of loans in the process of being closed. We were actually quite successful last year at closing homes, 35 or so? And we continue to expect to be successful in terms of closing mortgage loans in the first half of this year. Companies like Northwestern Mutual, New York Life, Guardian Life and others have been active with us and are a great source of business for us.

I would just add, Rich, the average loan is about $25 million, which is a sweet spot, and there are more lenders for $25 million loans than they are for $50 million loans.

Okay, all right. Good. Thank you, guys. I'm curious just as a follow-up are the banks getting any easier? I mean not the insurance companies so much. I mean are the banks getting any easier to work with, anything positive there?

The middle size banks and some regional banks are still active and we continue to be pleasantly surprised that some of the smaller banks that will provide mortgage financing for us, especially for shopping centers in their local markets. The big commercial banks in general, very limited activity.

Okay, great. Thank you, guys.

Our next question comes from Jehan Mahmood with Goldman Sachs.

Hi. I apologize. This is my question. Responded to earlier we got cut off in the queue, but we just heard from another landlord that they're seeing fairly attractive opportunities on the distress side. Pretty recently we've heard of yields on costs as high as 25% and I guess curious as to what you've seen on this front lately and at what point you consider the deployment of capital and that fund attractive enough for you to step in and deploy capital.

Are you talking about distressed debt or are you talking about --

Distressed investment, just distressed real estate investments.

well, we have not seen 25% cap rates. That's for sure. In terms of the property market cap rates are generally moving up and cap rates I would say are somewhere in the 8 to 9% range today, depending on the quality of the property, but transaction activity is way down. There's just not a lot of trade. In terms of distressed debt on shopping centers, that is not something we would look at today.

Okay. Thanks. I guess it was just yields on costs versus returns on investment, but thank you.

The next question comes from Michael Bilerman with Citigroup.

Good morning. It's Quentin Velleley. I'm here with Michael. I've just got a question in relation to your I guess your 2009 guidance, but also beyond. Just can you explain what your different expectations are for your grocery anchored assets versus your big box anchored assets?

Well, Quentin, we haven't broken it down from a numbers perspective to that level of detail, but as a general matter what David and Dave were both talking about it there's a substantial component of food or food oriented retailers in our portfolio both that we own in whole and in part and we expect relative stability in performance of those retailers. As I mentioned before, we looked at it on an overall basis and we do expect some continued deterioration in occupancy but not significant. We expect flat net operating income growth because of the interplay between those anchors and some of the small stores. So unfortunately I can't give you a quantitative perspective of those two, but qualitative perhaps one of the other gentlemen could.

Well, fundamentally our lease terms with grocery stores and the power center anchor stores are long term. So the issue of change in income would really depend whether a bankruptcy or a failure and I don't see that happening with the food tenants. They have a robust business. Their margin is good because as the customer is trading down, their margins are higher and store brands, prepared foods, supermarkets are doing well, and so far as the major tenants, the power tenants, those that have had their problems probably have had them already, and so many others seem to have relatively low debt, and while they may have a tough time, I don't know how many bankruptcies there will be. Bankruptcy is no longer as attractive an option because of the difficulty of getting good financing and how short a period they can remain in bankruptcy.

Also I think it's worth noting embedded in our numbers are detailed budgets on each and every single one of our properties and we use the very best information and the very latest information we have from our leasing people and others and we put the assumption into those numbers. So we don't want to make it sound like we are not looking carefully at each and every property.

I just wanted to ask Michael, I wanted to come back to the dividend and Milton, I appreciate your comment in terms of paying in stock versus paying in cash but I guess as you think about your current 170 to 190 guidance and take off all the non-cash income, CapEx, at the current dividend level you're effectively overfunding it and so you're drawing down debt while not a huge number, drawing down debt to pay that cash out to shareholders. And, Mike, I think you mentioned taxables of a dollar, so clearly a lot of room to reduce the current down. I'm just thinking how you're thinking overall about the level of the dividend in this environment.

Okay. Well, a couple of points to consider, Mike. The first, yes, the full guidance is preliminary as you know and has a limited impact on transaction and really no new business activity. More importantly, when we think about the dividend level versus FFO or other similar type measures we're looking beyond a short point in time. For many years our dividend was substantially less than our FFO and we didn't automatically increase dividends to match single year earnings levels and we figure we're not going to apply the logic the other way either. So what we are going to do is monitor the portfolio cash flow very closely as I stated earlier, and if we believe that a more sustained reduction in that cash flow is developing due to the economy or if the ability to execute the capital raising is adversely affected by the market to the point where we would absorb too much of our line capacity, then we'll change the dividend policy, but you know, Mike, that we've and the value we've always placed on providing the shareholders to cash return because they bargain for that when investing in Kimco. So we're not going to take lightly any action to reduce the amount or the character unless we exhausted every other means and really looking beyond just a short term view of FFO versus dividend.

And I'm just adding in from Milton and my perspective and others, from day one, from the first time that the company went public, we have regarded paying the dividends as a very top priority and even in these tough times, we look at cutting the dividend as one of the last places we want to look for to raise capital. That said, we are looking carefully each quarter, and we will make a determination each quarter based on our best guess as to the numbers and the success of our other capital raising initiatives.

Just last, just on the guidance, Mike, you have the page where you sort of lay out all the pieces. What may be helpful at some point -- I don't know if you can provide this in a subsequent disclosure or maybe you can discuss it at end of the call -- just sort of where these number were in '08 and sort of tie it out relative to the income statement because it's not -- it's very hard to take the income statement and put it into these buckets and so just try to give a flavor of where those declines are coming from '08 to '09 and how it lines up with the income.

Sure. Of course, Michael, you can work with Barbara and I in term of getting that analysis, particularly in terms of how things relate to last year. You did make a mention about the income statement and you always know my story on the income statement. God bless you if you can figure out that income statement in accordance with the accounting rules but nevertheless we will help provide you with that guidance.

Michael, our projections for paying the dividends do not include using the line or increasing the line for that purpose. There is no increase in the line in those projections.

And, Mike, I'd make one other point, too, that as we go forward, you know, consistent with the comments that Dave and I made about changing the business model, we're going to try as best we can to simplify where the numbers are coming from, which pockets, whether it's the core and joint ventures and so on. So how the exact symmetry to where we are might be a little tough and our hope is that if we can provide a more sensible and visible analysis for you to see where the recurring flows, where my transactions come from, at the end of the day, notwithstanding the comparisons to prior years it will help you folks to think better about where we're getting it and the relative value of the company.

Right.

Thanks a lot.

Thanks.

Next we'll go to Alex Barron with Agency Trading Group.

Yeah, thanks. Good morning. I wanted to ask you guys when you talk about your occupancy rates how are you defining that? Is that like a financial based metric or is that physical and at what point after a tenant moves out, you know, does it start to affect the occupancy rate?

We compute our occupancy based on a leased occupancy because the difference is between leased occupancy and physical occupancy are not significant. What you also have to keep in mind, though is, that we don't include in occupancy any retail positions which are not tenants of Kimco. So one might actually see a shopping center which there's adjacent parcels which are not owned by Kimco that may be vacant, but they are not part of the Kimco occupancy because Kimco doesn't own them, but we do things on a leased occupancy basis.

I mean does it only include properties that have occupancy above a certain rate that are --

No, no. The entire occupancy of the company, the occupied square feet divided by the owned square feet of the company, but my emphasis is on owned. Thank you. Can we go on to the next question?

We'll take our next question from Mark Biffert with Oppenheimer.

Good morning, guys. Mike, I was wondering if you could provide a little more color. I've been hearing from some life insurers about the allocations that they're going to be putting out this year. Some of it's going to be redirected to just doing refinancings, and I'm wondering what you're hearing from some of your partners in your joint ventures on how they plan to contribute their share, and what types of financing they're suing using as well as whether you think there will be enough supply out there to address the maturities that are coming out.

Okay. First part of the question I'll let Glen Cowen, our treasurer and who is really responsible for all the financing work that we do to tell you what the life companies and the like are saying about allocation. Glen?

We've met with over half a dozen in the last few weeks and some of the larger insurance companies, they have between $1.5 billion and $2 billion that they're still looking to put out. Now they have said that a portion of that is going to go towards renewals or extensions, but there's clearly money that's out there. I think Mike had pointed out, we've already signed five term sheets in the last two weeks on deals that we're going towards, and the size of our properties are really the sweet spot for what these guys are after. We're looking to do 50 to 60% loans at reasonable level of cap rates and under more stringent underwriting but the loan size is really for the most part between $15 million and $30 million. So we're not looking to put on $80 million, $100 million loans where you need many participants. These really fit their sweet spot, and they like grocery anchored, everyday necessity-type shopping centers. So our product type really fits what these guys are really after today.

And so to that point, then, as we look at it they are to give us new money in addition with what they need to do in terms of refinancings or extensions, so for them, it's a mixed balance, and as we deal with our joint venture partners, we're on the same page and most of our joint venture partners are looking from a perspective of let's get the assets and the mortgages refinanced at the current levels would be fine. No one is really looking to try and pull money out, notwithstanding the fact that many of our joint venture programs had those loans valued and suggested in the 40 to 50% range. So the strategy is just get through the refinancing. Don't look for excess proceeds. Go to the insurance companies that do have the allocations as well as the regional banks that Dave had mentioned were getting some pretty good traction there, and that's why at this point in February with all of our 2009 commitments in the marketplace and some -- and getting back term sheets with some commitments we think we're in a reasonably good position, but I always say that caveat and who knows where the market's going to go.

And it's also worth mentioning that long standing relationships are becoming more and more important to these life insurance companies. As they have their choice of new loans, it's much easier for them to underwrite a company like ours that they've been doing business with for a long period of time than try to underwrite a brand-new customer.

We'll have to go on to the next question because we want to make sure we get of one in.

As a reminder, please limit yourself to one question, and we'll move on to David Cohen with Athena Capital Management.

Good morning, guys. I'm assuming that as you sharpen your focus on the core North American retail real estate portfolio, that there is a fairly large pile of assets that will not fit into that core profile, and obviously, the market right now is not really all that favorable for monetizing those assets. I want to make sure first of all that there's nothing in your numbers, in your cash flow numbers this year assuming any monetization of those assets and then sort of more conceptually, I'm trying to understand whether you would plan on holding those existing assets, or whether over time, you would like to actively monetize them. Thanks.

In terms of the numbers the core business assumes no monetization of existing assets with the exception of a collective group of assets in the Pan Pacific portfolio that we and the Prudential sponsored funds have previously agreed to market and sell, depending on market conditions, but it's -- that doesn't affect our earnings guidance. It affects just some of the strategy of what we're going to sell or not sell. So that's from a numbers perspective is the answer.

Yeah. And in terms of the non-retail holdings we have, for instance, in Kimco Select and preferred equity, these were always anticipated to be shorter term holds, and trading a place for us. So at the right times you will see us monetize these investments, but gains or the capital flowing back is not embedded in our base numbers.

And you think market conditions that it would be reasonable for us to assume that we won't see any real capital flows from those portfolios from your marketable equities portfolio for the next 12 months?

Well, nobody knows exactly what's going to happen, but we're trying to tell you embedded in our base case are no, for instance, large participating kickers from our preferred equity portfolio or selling big stakes in our non-retail portfolio. That is not embedded in our numbers.

I think you'll just have to refer to the guidance in the press release.

Thank you.

Okay. Next question.

We'll go to Jeff Donnelly with Wachovia.

Good morning or good afternoon, guys. Can you remind us how currency movements are accounted for on your foreign investments? I know that's not a short topic, but in the case of Mexico, for example, despite the sharp deterioration in the peso since Q3, the actual revenue and NOI contribution that you report in your supplemental continues to rise. I was curious how does that sort out in your financials?

We'll focus on Mexico. On balance sheet assets and liabilities it's a negative or positive translation adjustments do not hit earnings. They go into the other comprehensive income account so that goes to the plus or minus, but the earnings statements themselves are translated on average exchange rates for the period. So if the average exchange rate deteriorates year-over-year, you're going to have a negative effect from currency. So it may be netted against the growth that you see would be higher if we didn't have the currency effect.

And in terms of budgeting for '09, we have assumed a much weaker peso.

Okay. That's helpful and then -- and I guess, Mike, concerning your assumptions for 2009, I think you mentioned the same store NOI would be down I think you said down flat to 2% but if you're looking for 92% occupancy or roughly around there, that should almost get you there alone. So does that mean you're more optimistic on the rent side because I guess I would have expected a wider range to the down side?

Well, the number I put out there is an average for the balance of the year -- or from the balance of 2009, and we are looking at positives or anticipating positive although moderate rent spreads. So I think the combination of occupancy of that double trend downward for most of the year but not materially coupled with lower same store growth and moderate rent spreads are really the three factors that get us to the numbers that we are at. Does that answer your question?

Yes, it does. Thank you.

We'll take a follow-up question from David Fick.

Actually -- are you with me? I'm sorry. I don't know what happened. Thank you.

Okay.

We'll go to [Craig Schmidt] with Banc of America.

Thank you. I just wondered how successful you'd been in finding fill-ins for some of the big boxes that moved out in '08, I guess linens N things, value city and Steve and Barry's.

The Steve and Barry's that we had, David, were only two and those we have not had much productivity on. They tend to be larger and they're certainly in tertiary markets. Linens, the majority of on them we just got back December 31. In the past six weeks we have been actively marketing. We do have a number of properties that have letters of intent being exchanged, and that group of assets kind of falls half between very, very good quality locations and the other half in reasonable locations, and nothing that's over live frightening, but the activity right now for junior anchor boxes needing to expand space is really only a couple of users. So we'll see in the next quarter how much of them get swallowed up and how much of them we'll have to continue to work on for another couple of quarters.

We have also on about 10 or 12 of the Linens 'N Things we have a guarantee from CVS on those, and we're working with them to work on the rent payments and working out a settlement with them over time.

And the half dozen or so we have in Canada there's actually very good activity and there's pending leases on most of them.

At the Value Cities?

No. The Linens 'N Things, sorry.

Okay. Thanks.

Our final question comes from Jim Sullivan with Green Street Advisers.

Thanks. My question relates to the write-down that you took on the approved joint venture. I'm curious how the valuation process worked there. Was it an appraisal process? Was it your estimate of value? And I'm also curious about some of the key valuation parameters, the cap rate, the NOI expectations that led to the final result on valuation.

Yeah. With respect to the assets in the portfolio, it was a combination of things. It was involved in the sale bucket, if you want to call it that. It was pretty much as close to current market value in our handicapping of selling that within the year. If it related to the longer term hold, so-called hold bucket where we took an impairment charge, that was based on a discounted cash flow analysis, your traditional 10 year discounted cash flow with discount rates in the mid-eights in term of the discounting and cap rates kind of approaching somewhere I think close to the 8% range, but again these you're dealing with long term holds as opposed to immediate sale and some of those assumptions refer to things like past studies and the like, kind of midpoint ranges for discounts and discount rates over the long term.

Was that done by you or third-party appraisers?

That was done by us and audited by our accounting firm, who they in turn use their valuation consultants and experts. So it wasn't simply an accounting exercise. They employed valuation expertise to determine the reasonableness of the pro forma.

Okay. And then a follow-up. There was some commentary before on the Valad convertible bond. Last quarter management said that there wouldn't be a write-down. Your previous comments suggested that there was a write-down there. Can you just clarify that?

No. Let me clarify that. The question was of the remaining marketable securities on the balance sheet, what was it comprised of? And I guess just made the point that the largest remaining item was, in fact, the Valad convertible bond. We did not say that there was a write-down there.

The current write-down was the Valad equity securities that we had.

So you're still carrying the Valad convertible bond at cost?

We are carrying it at -- it is a combination. It's both the bond component and then the convert component, which you need to separate for GAAP purposes and under GAAP we wrote down the convert piece, but the bond piece was at a relatively historical value and will be accreted up back to the face over the course of the life of the bond. I'm sorry.

That's all the time we have for questions today. I'd like to turn the call back over to Barbara Pooley.

Thanks. As a reminder, our supplementals are at our website at www.KimcoRealty.com. Thanks, everybody, for participating today.

Once again that, does conclude today's conference. Thank you for joining us and have a wonderful day.