Kimco Realty Corp (KIM) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to KIMCO's third-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 for today, Dave Bujnicki. Please go ahead, sir.

Thank you, Anola. Thank you all for joining the third-quarter 2010 KIMCO earnings call. With me on the call this morning are Milton Cooper, Executive Chairman; Dave Henry, President and Chief Executive Officer; Mike Pappagallo, Chief Operating Officer; Glen Cohen, Chief Financial Officer, as well as other key executives who will be available to answer questions at the conclusion of our prepared remarks.

As a reminder, statements made during the course of the call, represent the Company 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 to 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&A portion of the call, we request that you respect the limit of one question, 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 your questions. With that, I will now turn the call over to Dave Henry.

Good morning and thank you for calling in. As a management team we are very pleased with our third-quarter results, and we believe that they represent solid and steady progress on our strategic goals and financial objectives. At the risk of repeating some of the highlights from our recent Investor Day, I'd like to provide an update on the key issues we have repeatedly identified and discussed on previous earnings calls.

Overall, and most importantly, we are very pleased with the improving metrics of our large portfolio of neighborhood and community shopping centers. Mike will provide a detailed discussion, but we continue to be encouraged by the increasing leasing activity of national retailers of all types. With virtually no new retail development activity, national retailers with significant expansion plans are beginning to be concerned about achieving targeted store counts in 2011 and 2012. This is helping to absorb vacant space and obtain improved lease terms for us.

While the economy remains fragile and uncertain, we are seeing many tangible signs of improvement in most markets. In addition, prices for quality retail properties continue to increase with a favorable corresponding impact on our net asset value.

Next, we are significantly ahead of schedule on achieving our targeted leverage levels and strengthening our balance sheet. Glen will provide further details, but our net debt to EBITDA ratio has now declined from 8.1 at the beginning of 2009 to 6.2 today. We remain committed to a further reduction to 6.0 or below by the end of 2012.

Third, we have completely eliminated the corporate debt guarantees related to our US institutional retail joint ventures. These guarantees totaled $694 million at the beginning of 2009 and were a significant concern to the analyst community at the time.

Fourth, we have successfully placed many of the retail assets purchased from two of our institutional joint venture partners over the past 18 months into new institutional joint ventures at prices equal to or exceeding the purchase prices we paid for the properties. We believe we accomplished a win-win situation by matching institutions who needed to reduce their retail real estate investments with institutions seeking to make new investments in our sector.

These new institutional joint venture partners, such as CPP, BIG and Cisterra, have proven to be good partners and are looking to grow aggressively in the US.

With respect to our non-retail portfolio, which now represents less than 8% of our total assets, dispositions will continue to be measured, but accelerated where possible, over the next several years. Since the beginning of 2009, the non-retail portfolio has been reduced from $1 billion to $848 million today. An additional $70 million of non-retail properties and securities are scheduled to be sold or be paid in the fourth quarter.

In addition, our joint venture partners in our largest non-retail investment, the InTown Suites extended-stay portfolio, have now collectively agreed to formally market the portfolio. With year-over-year significant RevPAR increases and increasing interest by investors for hotel properties, we are cautiously optimistic about the sales process.

On the international front, Canada continues to be a bright star. We fully agree with all of the recent analysts' accolades about the Canadian economy and the Canadian retail market. We respectfully note that KIMCO now has ownership interest, including preferred equity investments, in 115 Canadian retail properties aggregating 6.3 million square feet, all in various partnerships with highly-regarded public or private Canadian companies including RioCan, Anthem Properties, Plazacorp, Sandalwood Management and [Centrecorp].

During the quarter, we converted our largest retail development project in Canada, [Auberge Waastbreand], into a long-term joint venture with Sun Life and our local development partner, Centrecorp. The project is a recently completed, high quality, grocery anchor power center in Montreal, with Sobeys, Zellers, Toys R' Us, Future Shop, and other big-box anchors. A second phase of 400,000 square feet of this signature project will be developed over time.

Looking at Mexico. Despite the headline of drug violence, the Mexican economy is growing sharply again with GDP growth 4.5% estimated for 2010, 630,000 new jobs added this year, and a 5.7% unemployment rate. One of the key drivers of our expected FFO growth in 2011 and 2012 remains the lease-up of many of our recently completed development projects in Mexico. Since the beginning of this year, the Mexico team has signed 352 leases aggregating 540,000 square feet.

Signature leases in 2010 include Best Buy, Cinepolis, Cinemex and Coppel. As the 12th largest economy in the world, retail space per capita at less than 10% of the US, strong expansion plans by Wal-Mart, Home Depot, Best Buy and Lowes, and a full cost of living escalation on all leases, we remain confident that Mexico will deliver strong returns.

Overall, KIMCO is well poised as we enter 2011. Our increased fourth-quarter earnings guidance, together with our initial 2011 estimates and increased dividend, show the underlying strength of the KIMCO retail portfolio. Expected growth in our US shopping centers from occupancy increases, retenanting below market leases, redevelopment programs, combined with the incremental earnings from our strong Canadian portfolio, Mexico development lease-up, and long-term recurring investment management fees, all together place us in a good position to deliver solid future results.

Now, I'd like to turn it over to Glen for a detailed review of our quarterly financial results and later Mike Pappagallo will talk in depth on our property operations and strategic initiatives. Milton will close with his perspective on retail rents and tenant profiles.

Thanks, Dave. Good morning. At our Invester Day in late September, we described KIMCO's key objectives as we move forward. Objectives that are focused on the ownership and operation of shopping centers primarily in the US, Canada and Mexico; the continued lease-up and value creation at these centers and the growth of their associated recurring flows; the disposition of our non-retail assets as expeditious as practical; the recycling of retail properties which do not meet our strategic objectives; and all while continuing to focus on balance sheet strength and leverage reduction.

Embedded in our third-quarter results are many of the components I have just described. Let me give you some specifics.

First, let's start with headline FFO. Reported third-quarter FFO per share was $0.27, a penny above consensus, which includes a $0.03 charge or approximately $11 million associated with the early extinguishment of approximately $400 million of debt which was scheduled to mature during 2011 to 2013. Also included was non-recurring income of approximately $7 million, primarily related to equity kickers received from the monetization of several Canadian-preferred equity investments. Excluding the early extinguishment of debt charges and the non-recurring other transactions, FFO per share from recurring sources is $0.28.

Our US shopping center portfolio continues to be resilient. September occupancy for KIMCO's combined portfolio, calculated on KIMCO's pro rata interest on our properties, was 92.7%, a 30 basis point increase from September 2009 and flat to last quarter. Without regard to percentage ownership, occupancy increased by 50 basis points from last year and 10 basis points from June. Mike will provide further insight on the performance of our operating properties in just a moment.

Dispositions of non-retail assets included two non-retail preferred equity investments and our interest in the Hyatt Cancun to our partner Westmont. In addition, we have signed contracts with five urban assets totaling over $45 million, which we anticipate closing by year end, and we also expect to monetize another $35 million of other non-retail assets in the near term. We are committed to the disposition of these assets.

During the third quarter, we sold five non-strategic retail assets for $98 million and recycled that capital with our investment in the Riverplace shopping center in Jacksonville, Florida. We will continue to evaluate the appropriate timing for the marketing of each non-strategic asset and continue our prudent pursuit of acquisition opportunities.

As for balance sheet management, we have further strengthened the balance sheet and reduced debt levels with the successful issuance of a $175 million perpetual preferred stock offering at 6.9%. We used the proceeds to repay $166 million of mortgage debt scheduled to mature over the next several years.

In addition, we exercised our make-whole provisions and retired $275 million of unsecured bonds with proceeds from the new 4.3%, $300 million, 7.5-year bond which was priced at treasuries plus 240. Although we incurred a one-time charge of approximately $11 million, we have reduced our recurring interest expense by over $6 million annually and further enhanced our maturity profile.

Since the beginning of the year we have reduced our absolute consolidated debt level by almost $400 million to just over $4 billion. We've improved our net debt to EBITDA to 6.2 times. By way of reference, it was 6.8 times at the beginning of the year. And we are clearly ahead of schedule to meet our stated objective of 6 times net debt to EBITDA by the end of 2012.

Our liquidity position is in excellent shape with over $1.5 billion of availability on our lines and only $110 million of maturities due in 2011. We remain focused on continuing to strengthen our balance sheet. In light of our improved metrics, strong access to capital, and solid liquidity position, Moody's revised its outlook to stable and Fitch initiated coverage of our unsecured debt at BBB+ with a stable outlook. We now have high BBB ratings from each of the rating agencies.

We have had continued success in refinancing the maturing debt in the joint venture programs. We have closed on over $165 million of non-recourse mortgages this year and have term sheets for another $30 million. The largest portion of joint venture debt maturing in 2010 was the guaranteed $287.5 million [PK sale] facility which was repaid full in July with our partners providing 85% of the funding requirement.

Based on the solid performance so far this year, we are increasing our 2010 FFO guidance before impairments to a range of $1.17 to $1.19 for the full year from a range of $1.14 to $1.18 previously. The recurring component of this guidance range is $1.11 to $1.13.

Now, although we have not finalized the bottom-up property-by-property budget process, we want to provide some insight into our view for 2011. We are providing preliminary FFO per share guidance of $1.17 to $1.21. This guidance range does not include impairments or any transactional activity. This guidance range is based strictly on recurring flows. Using the mid-point for the recurring guidance for 2010 and the mid-point for 2011 yields a forecasted increase of recurring FFO per share of over 6%. The forecast, along with our projected capital plan, requires no new equity.

Last, but certainly not least, as a result of the 2010 improved performance and continued progress expected during 2011, our Board of Directors has approved an increase in the quarterly dividend of $0.02 to $0.18 per quarter with the first payment at the increased level to be paid in January of 2011. This increase is in line with our forecasted FFO per share growth, while leaving the FFO payout ratio at a conservative level of just over 60%.

And with that, I'll turn it over to Mike.

Thanks, Glen. As we head towards the important holiday season, we see a continuation of the leasing and operating environment that has characterized much of the past year, one of slowly improving fundamentals, improving financial results and liquidity for many retailers, and the pursuit of second- and third-generation space by those retailers driven by the lack of new supply.

Now in regards to KIMCO's recent portfolio performance, as Glen mentioned, our overall occupancy levels increased by 10 basis points to 92.9% in June and from 50 basis -- by 50 basis points from last September on a gross basis. And on a pro rata basis occupancy was flat from June at 92.7% and up 30 basis points from last September.

In the US portfolio, the story was similar. We experienced a 10 basis point improvement in net absorption since June, but those gains were offset by the inclusion of three former development projects still in the lease-up phase in the numbers resulting in a flat occupancy at 92.3%.

Our quarterly occupancy numbers have had noise in them over the past couple of quarters since we're converting former development properties to long-term whole properties once construction is complete and a year has passed, regardless of whether they've reached a stabilized occupancy of 90% or more.

In the US, we still have two former development projects which are about 70% leased which are not yet included in occupancy. These properties will be included in occupancy by year-end 2010.

The driver for the positive net absorption of 10 basis points this quarter was once again driven by the healthy growing retailers in the junior box side, such as our first Ross lease in the Chicago market in Matteson, Illinois, new deals with both the AJWright and HomeGoods divisions of TJX Companies in southern California, and in Tampa a 50,000 square foot Hobby Lobby deal to take over a theatre pad that's been vacant for over three years.

The story on leasing velocity and spreads also underlies the gradual improvement in conditions in our market as the overall combined spreads increase by 1.5%. This increase was importantly driven by the positive spread on lease renewals of 2.9%, the best results in that category in over a year.

The second quarter of positive same-store net operating income of 2.2% is another good sign. As in the prior quarter the primary driver of this increase was net new leasing and rental revenues. We also saw lower charges for bad debt, which accounted by about 40 basis points of the increase.

Of note, much of the vacancy fallout from the Linens, Circuit City and Value City bankruptcies have been substantially addressed. Only six of the original 67 boxes from those retailers have not been spoken for. And to date we've seen virtually no impact from Blockbuster bankruptcy filing on our portfolio as only three of the roughly 40 some-odd leases in the US portfolio have been rejected so far.

Layer on top of that the very solid sales increases and profit reports for many of our primary tenants, particularly the discounters, and there is legitimate reason for optimism. You probably saw some of the sales comps this morning with Target up 1.7%, Costco up 3% for the gas sales, and also Ross up 4% and TJX up 1%, with the latter two having very tough comps from last year. All that said, we remain cautious.

The economic recovery is still not at a level to reduce unemployment and small business growth is still tough sledding. While less than 15% of our portfolio is comprised of moms and pops, most of the activity in that segment has been a push in terms of new leases and vacates. Certainly better than the severe fallout from the recession, but in my view, an area that will take more time to recover.

I fully appreciate the market's interest in the quarterly results and the standard portfolio metrics and we are certainly all encouraged by the change in trend lines from the dog days of 2009. That said, the shopping center business, more than most sectors, is better suited for marathon runners, not sprinters. That leads to asking what portfolio strategies we must embrace to improve occupancy, grow rental revenue, improve operating margins, and position KIMCO for value creation opportunities while managing risk.

As we discussed last quarter and again at our Investor Day, our first step is to delineate those assets that support that strategy, primarily based on their market position, demographic traits, tenant base and rental profile. We provided a detailed analysis of the over 650 US properties that fit into this strategic profile and have continued with the disclosure in our quarterly supplement.

The roughly 150 assets in the portfolio that do not meet that profile are targeted for disposition. And while they represent only about 11% of the pro rata share of our annual rent, these non-strategic assets have markedly different characteristics than our strategic core. For example, they have an occupancy rate of 86% versus 93%, a third lower average population, and 10% lower median household income.

The strategic portfolio generates about two-thirds of its rent from the top 20 MSAs in Puerto Rico, with demos generally higher than the local market average.

In addition to the five non-strategic assets KIMCO sold this quarter, we have disposed of two additional small positions in October, and have six more sites under contract for a total price of about $38 million. Further, we have about 15 additional sites in the market and are targeting to take another 30 sites out before year-end. But while we're aggressively pursuing those actions in the US portfolio, our Latin America team is focused on a more specific context that being leasing.

Dave mentioned a few of the larger deals recently completed and the business plan requires success for both box and small-store tenants, and we have a full-court press on. In addition to the seven key KIMCO asset and relationship managers overseeing the process, there are over 70 leasing resources from both our local operating partners and external brokers focused on the leasing effort in Mexico. We have also brought together our key leasing associates in the US with our KIMCO Latin America team to share best practices.

Leasing and asset recycling will be an important part of the 2011 portfolio strategy. We will also remain focused on redevelopment and complex retenanting strategies for which we provided some additional disclosure in the financial supplement. We also expect to capture some upside from rollover below-market rent.

In the perfect world, these opportunities for organic growth and the significant proportion of existing cash flows coming from centers and better markets would be reflected in the implied cap rate underlying our market valuations. But it doesn't appear to be the case on a relative base. It will be our job to deliver the results that shine the light on that imbalance.

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

Thanks, Mike. I yearn for KIMCO to get back to the magic of our halcyon days, when we enjoyed the highest multiple and our mantra was "under promise and over perform." And I believe we're on our way back. Our strategy is simple and our entire team is focused and passionate to execute it. We must monetize as expeditiously as possible our non-retail assets and also monetize single shopping centers that are not within our core markets.

My sense of the markets is that our timing is good and pricing will be favorable. We will apply the proceeds to further lowering leverage and growing our shopping center business.

Now our portfolio has the advantage of contract rents that are below market. The safest return is from rents that are below market. Safety is also enhanced when a retailer has a large investment in the space and not the land. Whenever possible, we prefer the retailer will fund improvements to the space.

By way of illustration, the retailer with the largest amount of square footage in our portfolio is Home Depot. Of the 41 leases with Home Depot, all but three are ground leases. Home Depot leases our land and built the building with its own funds. We prefer to lease space as is and have the tenant fund its own improvements.

I believe "as is" rent deserves a lower cap rate compared to a higher rent resulting from the landlord financing tenant improvements to a retailer. The investment of tenant improvement money on behalf of the retailer is tantamount to a mezzanine loan to the retailer.

Now, shopping centers with cash flows from long-term strong credits, credit leases are, in my opinion, a mispriced asset. The cap rates; Wal Mart, Target, Costco, TJX, etc., have a spread that is too large compared to the yield on their long-term bonds. The long range of inflation protection and tax shelter from the real estate should partially offset the advantage of the liquidity of the bonds. Our portfolio has opportunities to create substantial additional value and to grow our per-share cash flow.

Now, next November, we're going to celebrate the 20th anniversary of our initial public offering. The theme must be, "The magic is back and my yearning will be satisfied." And with that, I'll turn it over to Dave Bujnicki.

Thanks, Milton. We are ready to move on to the question-and-answer portion of the call. Please respect the limit of one question. Operator, we are ready to take questions.

(Operator Instructions) We'll take our first question from Jay Habermann with Goldman Sachs.

Good morning, everyone. Milton, good to hear your optimism.

I guess maybe for Mike, as you provide some of the details on 2011 FFO can you give us some sense of the breakout between the increase in the US versus the lease-up you talked about perhaps in Mexico? And then I guess even for Dave, with the deleveraging now on track would you look to further delever the Company? And can you talk about where and you your partners might seek to deploy capital in 2011, just given where cap rates are?

Jay, I'll take the first part. As we put together our thoughts on initial guidance, some of the underlying thoughts about the US really was pretty consistent with what you saw in the third-quarter results. Positive same-store NOI, it was 2% for this past quarter; single digit, low single digit net leasing spread; and in terms of occupancy, basically at this point we're looking probably up to a 50 basis point increase.

But in thinking about the timing, we're kind of factoring it to be more back-end loaded further to my point with respect to the small tenants needing to recover and until the economy continues to recover that will take more time. So that was really the broad brush of the US portfolio estimates that are behind the guidance.

Jay, in terms of our leverage, I think we remain committed to getting it to the 6.0 level by 2012, that is our official commitment, and we'll take a look from there at taking it down. We have always been opportunistic in terms of redeploying capital, but we are determined to be very patient and disciplined as we move back on offense, if you will.

Mike and Glen referenced the property we bought in Jacksonville. Very high-quality property at what we believe is the very nice cap rate, but the market is fully back and there is lots of capital chasing high-quality centers. And we're just determined to pick the centers in our core markets, as Mike mentioned, and have an underwriting discipline as we chase those particular centers on the way back. And we'll see what time brings.

Glen, do you have any other comments (multiple speakers)?

Yes, I would say when you look at what we have talked about, in terms of the capital plan itself -- again, measured acquisitions versus dispositions which will probably wind up as a push overall and using some of that capital to continue to delever the balance sheet while recycling these properties. And that is really what has been built into the plan.

Great, thank you.

We'll take our next question from Alex Goldfarb with Sandler O'Neill.

Good morning. Milton, just want to go back to your comments on the Wal-Mart and Target. It's a theme that you have been speaking about over the years. Given the recovery in real estate and the demand for institutional real estate, do you think that the OpCo/PropCo theme that was sort of running around in the 2006/2007 timeframe, do you think that has a chance this time to succeed or do you not believe in that arbitrage?

Well, clearly -- I'll jump in for a second -- clearly, private equity firms that own retailers like very much the PropCo/OpCo strategy as a way to get a much higher multiple by converting some of the income into rents and selling them at much lower cap rates than they can get as an operating company, but it all depends on the underlying strength of the retailer. But clearly, that strategy is out there by many of the private equity firms.

But do you think -- I guess the point is, do you think there is something inherent? If that strategy were to be employed, where do you think KIMCO would fall out? Do you think you would be a beneficiary of that or not?

It seems like the retailers benefit from lower cost to capital. But if you broke it out, maybe the cost of capital goes up and maybe that falls on the landlord. Instead of benefiting, maybe it's a hindrance. What do you think about that?

I will just take a shot. We have a long history of doing sale lease backs with retailers at what we believe are very attractive rents for us and it is a win-win. If the retailer makes it long-term, we're getting a relatively high sale lease back yield. If the retailer doesn't make it, we have backed into some high quality real estate at a very low cost.

So we like that. It's part of our DNA to do sale lease backs with retailers and we underwrite that carefully. And there probably is a win-win for retailers here. They can unlock capital. They can get capital for their businesses and sell at a much more attractive multiple in effect their real estate than they could an operating business.

Alex, another factor. Price is a function of supply and demand and there have been very few transactions because there is not that much real estate product available. It's a fraction of what is available compared to the enormous demand from the liquidity that is on the sidelines. So I see the continuation of that capital available at a pricing that would be appropriate for the kind of transactions that we did in the past.

Okay. Thank you.

We'll take our next question from Nathan Isbee with Stifel Nicolaus.

Hi. Good morning. Just going back to 2011, can you give me a sense of how many of those junior and mid-box anchor leases that you have signed are still yet to come online and not captured in the NOI yet?

You're speaking specifically about the reference to the Linens and Circuit boxes, Nate?

And anything else that you have signed over the last six months or so.

We're estimating about $10 million all together coming into cash flow in 2011 for leases that have already been signed but have the normal waiting or delivery period.

Okay, thanks.

We'll take our next question from Quentin Velleley with Citi.

Good morning. I'm here with [Marco Billerman] as well. Just wanted to focus on the InTown Suites. It is good to see that you are going to be able to move forward with marketing that portfolio. Could you be able to give us a sense of what the EBITDA is today and what the peak EBITDA was?

Then, secondly, I don't know if you have got any early indication of potential demand for those assets. I just note that yesterday Hyatt had pulled a portfolio of tertiary assets because pricing and demand was too weak, so I don't know if you have got some comments there.

Okay, I'll take the easier part first, which is the second question because EBITDA -- remember everybody looks at hotels different ways. There is a trailing 12, there is current, there is a projection and so forth, and maybe Barb can follow up with on you that.

But in terms of the demand, you are right. It is back and there has been a lot of preliminary interest on our InTown Suites portfolio. I remind everybody that we not only own the assets themselves, but we own the operating company, the platform and the brand. And there is a whole management team based in Atlanta that manages this extended stay chain.

We're seeing significant increases in year-over-year RevPAR numbers. We're optimistic and our price per door and so forth, our basis, is attractive. So we are -- as I mentioned, we're cautiously optimistic that this will be met with good demand. It has taken us a while to get all the partners to agree to put this out on the market. There was a debate, particularly last year, that the timing was not right but we believe the timing is right now.

We're back roughly between 75% and 80% from when we bought the portfolio the high of the NOI in the Westmont.

If that helps. We can follow up separately with you on the exact definition.

Yes, that would be great. Thank you.

We'll take out next question from Craig Schmidt with Bank of America.

Thank you. I was wondering, and maybe this is for Michael, where does he think the national market stands regarding leasing spreads on big boxes and when may your leasing spreads for the US turn positive? And if you had any comment on Latin America's negative new leasing spread.

Let me start with the US and then I will have Rob Nadler, who is also on the phone, give his two cents for the US portfolio.

Relative to where we were two, three, four years ago, there still has been a compression in rent, there is no question. There is some recovery, there go all the points that David mentioned earlier. For KIMCO, a lot depends on the specific lease. Milt said there are a significant number of below-market leases and we're going to have on a quarter-by-quarter basis a variety of reported results because there are going to be leases that are going to come on stream or turn over that are going to have significant upside.

If you refer back to the investor day, you will see some examples of leases that are burning off over the next two or three years that are going to have a significant upside to them. Putting aside those, the rent market, relatively speaking, is still tepid and it is still going to be a tough stretch over the next few years. So you're going to see ups and downs relative to leasing spreads and that is why I suggested that for 2011 on a net basis we will probably be up but on a relatively low single-digit basis.

Rob, do you have anything to add on US?

I think you hit the nail on the head, Mike. It is really on a case-by-case or region-by-region basis. There will be some of the junior anchors where we have a tremendous positive spread and some where it is still going to be negative in the Las Vegases of the world or the Phoenixes of the world. But Northeast, Mid-Atlantic, Central region, you will see some pop so it is really on a case-by-case basis.

But overall, the news from retailers is mostly positive today. Consumer spending is choppy as we have all talked about and there is uncertainty, but when you look at the earnings they are very solid and sales comps are positive. They are not illustrating a robust recovery, but the list of retailers today looking to open locations is much greater than the list that is not expanding. In fact, interestingly, CoStar I saw a report that they have five straight quarters of positive absorption in the top 60 markets so we're clearly heading in the right direction as an industry.

Would you say that holds true for Latin America?

On the Mexico front in our particular portfolio, you will notice there are very small square footages, under 1,000 feet, for the leases that are in the new lease -- same-store spread or same type spread. And a couple of things there. They are under pressure a little bit from competition in a few of the geographies as well as the challenging economic environment that also exists in Mexico, so we have had a couple of properties, particularly [Centroserve] and [Rosarito], where we have had to lower rents to backfill some of those tenants.

But overall, just as Rob said in the US, you are seeing an improvement in the retailer demand in Mexico. We're seeing not only the US retailers continue to expand aggressively, like Wal-Mart, but you're also beginning to see the Mexican retailers jump back in and start to increase their store count. So we feel good about the increasing level of demand in Mexico, but that said, just like the US market rents fell and they are now on their way back.

(Operator Instructions) We will take our next question from Steve Sakwa with ISI Group.

Good morning. I just wanted to follow up with Glen. In terms of the investment activity for 2011, are you saying that you are -- basically your acquisitions will equal dispositions? And if that is the case, do you assume any kind of positive or negative arbitrage spread on the cap rates?

I think actually our plan is to actually be more of a seller than an actual buyer for the plan. And as we sell some of the non-strategic assets you will have a little bit of a negative, but it is going to be -- it is going to be modest. I would say overall it is going to be pretty close to a push.

And it is baked in our numbers.

Yes, and I'm just trying to get a sense of if you're a $50 million to $100 million net seller and do you assume cap rates are reasonably similar or 100 basis point differential.

It's probably more in the $50 million to $75 million area of being a net seller. And, again, that is all part of the plan of the continued debt reduction that we're going to use from that.

And we have assumed a negative arbitrage.

We'll take our next question from Paul Morgan with Morgan Stanley.

Yes, so kind of I guess sticking with that, your retail FFO guidance, it looks like it has FFO of about $30 million so I'm hearing you say that is a net number. Subtracting the non-core retail dispositions and then adding some acquisitions to that, it's also, I assume, net of a combination of development lease up and same store. Is there any kind of additional detail you could just kind of help me triangulate those different components there?

Remember, Paul, this has been preliminary so it is kind of -- it is very much at a high level but I think you succinctly put the points together. When you're looking at the retail guidance it is a triangulation of internal growth, which I indicated earlier, and spread analysis; the increase in occupancy of up to 50 basis points somewhat back-end loaded; a net push, slight negative, as Glen suggested, in terms of volume activity with some negative arbitrage on the buy and sell because we recognize we are trying to exit assets which are not strategic and not as high quality as the core portfolio.

So on those broad numbers and analysis we framed it into that retail component and then, of course, provided a range because of timing and estimates.

Understand also we built in a little bit of the savings that we're going to get from the capital market activities that we recently completed. So you will save a little bit on the interest expense side as well.

We have been a little conservative when we have looked at the Mexico lease-up for next year, just not being -- having total insight into having done our bottoms up budget and wanting to make sure that we get down and understand what is happening in the general economic environment down in Mexico. So when I look at Mexico we have only sort of layered on $10 million to $12 million of additional NOI coming out of Mexico next year.

We'll take our next question from Laura Clark with Green Street Advisors.

Good morning. Going back to the two preferred investments that you converted to joint ventures during the quarter, what is the main driver behind this conversion and would you expect to convert additional preferred investments into joint ventures in the future?

We're looking for the best structure to hold these assets long term. We like the assets very, very much. The 12-property portfolio with Anthem, generally in the Vancouver market, are wonderful properties and converting from effectively a participating loan structure to a long-term joint venture made a lot of sense to us. And we now own two-thirds of these 12 properties indefinitely for a long period of time.

And then the Montreal development asset, which is a Class A+ asset, putting this in a joint venture with Sun Life Financial, we will hold this indefinitely and we will develop a second phase and we're excited about it. So we continue to go through our preferred equity portfolio, pick the best assets, and are going to try to convert them to long-term ventures.

We'll take our next question from Michael Mueller with JPMorgan.

Hi. That question on preferred equity that I had was just answered. But can you just clarify, when you were talking about the $50 million to $75 million net seller in 2011, is that relative to the non-strategic retail bucket or everything in there including the non-retail?

It's a combination. It's a combination of us continuing to dispose of the non-retail assets as well as the non-strategic assets that we are starting to put on the market.

Okay, got it. Thank you.

We'll take our next question from Chris Lucas with Robert W. Baird.

Good morning, everyone. Just a question on just sort of retailer sentiment. After the ICSC event in May there was a lot of optimism about new store concepts and new store demand. And I guess as the economy has sort of continued to sort of chug along here, I was wondering if you could characterize what you're hearing from retailers in terms of their sentiment and then when we might actually start to see new concept ideas translated into store leases?

Chris, just as a preliminary comment, there clearly continues to be that increasing positive sentiment from the retailers in terms of continuing to advance. And the notion of that concern about double dip or that little bit of pick up in the summer really did not affect the dialogue that we were having with retailers across the board.

Rob actually just got back from Chicago's ICSC so, Rob, maybe you could provide some very current perspective of [extra] dialogue (multiple speakers)?

Sure, the Chicago show was held last week and we had numerous, of course, one-on-one meetings with most of the national retailers that were in attendance. And, as I said before, the news really is positive. There is very little to almost none -- I would say there was no conversations about rent reductions or help.

In fact, as stated earlier, a lot of these guys are concerned with the lack of development as to how they're going to fill their pipelines going forward, 2012 and beyond without new development, which is really music to our ears. It really gives us a great opportunity to backfill existing space in well-located shopping centers.

In terms of a few things that are new, JC Penny is opening up 5,000 square foot Big & Tall men's wear stores. We are in lease on a location in Dallas that should get signed. And Home Depot is experimenting with a 12,000 to 15,000 square foot concept of designer goods, sort of the best sellers out of their former Expo concept.

What you're seeing is a lot of national chains that are expanding into new markets. Ross is opening up in Chicago. Dick's is going to Oklahoma City. dd's; we are under lease in Houston, which will be a new market for dd's which is a Ross concept.

Additionally, you're seeing regional chains expanding into new areas. H.H. Gregg also coming to Chicago, which is a new area for them; expanding into Pennsylvania which is a new for them. Gordman's out of Omaha is coming in to Chicago with 50,000 square foot stores. And you're also seeing quite a few chains making deals in smaller markets today. T.J.Maxx informs us that they are looking at several small markets in the Southeast as is Joann's and Kohl's is doing a smaller concept in smaller markets.

Even home furnishings. In meeting with one of the leading consultants for home furnishings, they are also starting to look at new opportunities. That is being driven by both less competition as well as the available space and economics that are in the market today. There is a 30,000 square foot tenant I can't name right now, but looking at Cincinnati to come in with five or six stores. So we are even starting to see home furnishings starting to peek around now for expansion opportunities.

Okay.

We'll take our next question from Ross Nussbaum with UBS.

Hi, everyone. Good morning. I'm trying to reconcile the comments with respect to retailers feeling like there may be a shortage of space for them over the next few years versus the lack of construction activity that is going on in the industry. And I'm curious whether or not you feel this is the time to get ahead of the curve and start putting some shovels in the ground again to meet that demand with new development.

The economics just don't work, Ross. Rents are down. Local store demand, which powered a lot of the economics, is down. Credit is unavailable. You can't get construction financing or equity capital for a new development that is several years off.

And then think about it from the retailers' standpoint. While there is some vacant space that they can lease and get open today, why get involved in a two- to three-year development project where you need entitlements and so forth. So all of those factors combine to indicate to us that new development is still a long, long way off.

Ross, in order to have new development for retail, it has to follow new housing and new subdivisions. The retailers want to see rooftops, etc. So until all of the existing housing over supply is absorbed and there are new housing developments, it would be very difficult to have sense for new development.

If I could add one final thought, Ross, in that there are a few circumstances that we are pursuing right now Where you are dealing with a relatively small parcel in which we have the ability to bring a single or a couple of tenants who have expressed interest in almost like a supplement, or call it a larger redevelopment on specific space, that we're finding opportunities. So it is very small, it's very specific and absolutely tenant driven, and those are the sort of things that I think you will see us put a shovel in the ground for over the next year or two.

We'll take our next question from Jeffrey Donnelly with Wells Fargo.

Good morning, guys. I just wanted to follow up on Quenton's question about Westmont. I was curious if the financing there is assumable and maybe what your sense today is about who ultimately is the most probable buyer for that portfolio. Is that another financial buyer or perhaps a management-led group?

Well, let's take the financing first. There is two layers of financing. The first mortgage piece is assumable with whole rights; the second is not in general. In terms of the buyer, the interest has so far been expressed by private equity opportunity funds that already own hospitality and looking at the InTown as a bolt-on acquisition you can probably guess where some of the interest is already coming from; other hotel operators and some of them again owned by private equity or opportunity funds.

Extended-stay as a segment is doing very well right now and people are looking at buying something like InTown at way below replacement cost and you have an existing organizational structure. So if you want to bet on the economy recovery strongly, it is a wonderful inflation hedge. We set our rates weekly and so forth, so we think the timing may be good and the demand may be good. But we'll know more next quarter.

Thanks, guys.

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

Hello guys, good morning. I want to go back to Ross's question, if I could. If I'm a retail analyst as opposed to a retail real estate analyst, would I be assuming that T.J.Maxx, Ross, H.H. Gregg, Hobby Lobby, all these guys are going to open no stores in 2012? If we have used up all the existing space and you guys are not alone, no one seems to want to build any new space. I'm guessing retailers just stop opening stores?

No. There is still a huge -- millions and millions of square feet of vacant, vacant, vacant space out there and these retailers are going to start to do two things in my opinion. They're going to look for maybe not the very primest locations. They'll be forced to look at some of the other boxes. As Mike referred to, we started with 67 and now we're down to six, so the inventory is less that they have to look at.

And, secondly, they're going to have to be a little more aggressive in the rents that they are going to pay, which is good for us. All of us landlords got clobbered 12 months ago and now there is a little more leverage and they can't get quite the bargain. So if I was a retail analyst, I would build in the fact that they are not going to get as much concessions out of the landlords as they did a year ago.

And, Rich, don't forget about expiring leases. And that, and when Rob said it was music to his ears it is because as leases expire on existing boxes now there is a little bit more of a balance or a perspective of retailers who are growing to potentially take that space, or at least give the landlord some relative negotiating power. So factor that in to mix as well. It is not a clearly all or nothing scenario for retailer expansion.

Rich, just look at how much the world has changed. A year and a half ago all these retailers were having their acquisition people read their leases and looking for ways to get out of leases or get more concessions. Now it's completely reversed.

Where am I going to get my store count for 2011? The inventory is getting less. I can't quite get the same bargain I was getting 12 months ago. So for us, it gives us a great deal of optimism coming in to 2011.

We'll take our next question from Nathan Isbee with Stifel Nicolaus.

Yes, just one follow up. David, I can appreciate your comments about the health of the Mexican economy. I'm just curious if you can comment on how your approach to Mexico might have changed over the last few years just in terms of underwriting, perhaps increasing your required yield to account for the increased risk. Have you seen any drop off in demand from competitors for Mexican real estate?

Two things I would mention. We -- as a management team we have a strong consensus. What we have to do is prove the case for Mexico and the best way we can prove the case is to get all these new properties that have come on stream within the last six month leased, deliver the projected returns, deliver those cost of living increases that I keep bragging about that are embedded in all our leases. We still feel very good that 40% or so of the income is coming from these anchor tenants all of which have cost of living.

We have many, many ground leases with Wal-Mart, Home Depot and others in Mexico. It should do well and we are now seeing some increasing demand from retailers, so we hope to fill in those spaces. And then perhaps we will be a little more aggressive.

To answer your second question, we would definitely build to a much higher unleveraged return today than we did a couple years ago to account for things that we have experienced. One, the currency volatility. We were very depressed this time last year when the peso went [for] 16. We are a little happier now that it is 12.2.

But certainly the currency volatility in Mexico is sobering. The drug violence remains an open issue to some extent, so you want to build in a higher return to the extent we increase our bet. But long term we still feel very, very good that for 100 million people there is less than 1,000 quality centers in that country. There is a reason Wal-Mart wants to open up 300 more stores in Mexico.

All right, thank you.

We'll take our next question from Ross Nussbaum with UBS.

Hi, guys. As a follow up on your non-retail investments, can you talk about what the game plan is for the convertible notes at Valad? My understanding was those were convertible at AUS1.33 and their stock is roughly there. It was a heck of a lot higher than that earlier in the year. Why not monetize that? Is there a more strategic game plan for that investment?

Ross, you may have missed the reverse 20 to 1 split.

Oh, was that -- did I miss that?

Yes.

For a second there, Ross, we were like, wow, had a great day in the market.

I am afraid we're way out of the -- we're still out of the money. The good news on the Valad note is they continue to pay us on a current basis. This has been an earning asset from day one. The equity market cap has doubled or tripled since its low and over time, well -- as Milton points out, there is a stated maturity in the note so in the worst case we will exit there.

But the company itself has announced evaluating certain strategic initiatives which will include the sale of the company, the sale of certain parts of the businesses, so there is other things that may happen with the Valad note to the good in terms of reducing our investment over time.

Got it, thanks. I'll go crawl in my hole.

We were happy for a minute, too, Ross.

It appears we have no further questions. I would like to turn the conference back over to today's presenters for any additional or closing comments.

Thanks, Anola. A final reminder, our supplemental is posted on our website at www.kimcorealty.com. Thanks again for participating today.

Thank you, ladies and gentlemen. Once again that does conclude today's conference. We thank you for your participation.