Kimco Realty Corp (KIM) 2011 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, Dave Bujnicki. Please proceed, Mr. Bujnicki.

Thanks, Cynthia. Thank you all for joining Kimco's fourth-quarter 2011 earnings call. With me on the call this morning is Milton Cooper, Executive Chairman; Dave Henry, President and Chief Executive Officer; Mike Pappagallo, Chief Operating Officer; Glenn Cohen, Chief Financial Officer; as well as other key executives who will be available to address questions at the conclusion of our prepared remarks.

As a reminder, statements made during the course of this call represent the Company and management's hopes, intentions, beliefs, expectations or projections of the future, which are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements.

Information concerning factors that could cause actual results to 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 inancial 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 the opportunity to speak with management. Feel free to return to the queue if you have additional questions.

With that, I will now turn the call over to Dave Henry.

Good morning; thanks for calling in today. I'm a little under the weather, so I'm going to ask Scott Onufrey to read my prepared remarks. But I will be available for any easy questions after this.

We are very pleased with our fourth-quarter and full-year results, and we believe they represent continued solid and steady progress on our key goals and objectives.

Our earnings release contains the detailed numbers for the quarter, but I would like to highlight certain areas and provide further updated information on others.

Overall and step by step, our retail portfolio continues to strengthen, as evidenced by the key metrics -- or as we like to say, our vital signs. Seven straight quarters of positive, same-store NOI growth; positive leasing spreads of 4.9%; and a 30-basis-point increase in our occupancy altogether present a strong and improving picture.

The economy and our retailers are both showing tentative signs of shrugging off the anemic recovery and focusing on growth. With virtually no new development in our retail sector, sustained population growth and improving GDP numbers, we are beginning to see an increase in effective rents, particularly in our strong core markets such as Long Island, South Florida, Baltimore/Washington, Puerto Rico and Canada.

We also continue to make good progress in reducing our nonretail portfolio. From $1.2 billion in early 2009, we now stand at $495 million, representing less than 4.5% of our total assets. Our largest remaining single investment -- the InTown Suites portfolio -- is attracting increasing levels of interest as we have now broadened the marketing efforts with our partners' permission, and as hotel properties are again being aggressively pursued by investors. There are several parties which have conducted extensive due diligence, and we are confident that we will be able to sell the portfolio in the near term.

At the property level, InTown continues to perform very well, with RevPAR increasing substantially. We also have a significant number of other nonretail properties under contract, which will further reduce the amount of the remaining nonretail portfolio.

Under Mike Pappagallo's leadership, we are also making strong progress on our recycling initiatives. In 2011, we sold 31 nonstrategic retail properties, while at the same time we bought 17 high-quality shopping centers, virtually all in our core markets. We are committed to continuing to sell our nonstrategic shopping centers, which will upgrade our portfolio and permit us to concentrate on superior properties in our core markets.

Internationally, our Canadian portfolio is maintaining its very high occupancies and benefiting from strong retailer expansion, highlighted by Target's commitment to open 25 stores in Canada each quarter, beginning in March 2013. The Canadian economy remains strong, with 2% GDP growth forecast for 2012, continued low interest rates and moderate unemployment levels.

We are pleased that we are able to buy the high-quality grocery-anchored center in December in the greater Vancouver market, and we hope to close on another attractive grocery-anchored center in Edmonton shortly.

In Mexico, our retail portfolio is making leasing progress, hitting 84% combined occupancy in the fourth quarter, including several new developments.

The Mexico economy is strong, with 3.9% GDP growth in 2011, higher than that of Brazil for the first time in eight years; a strengthening currency; and strong retail sales performance.

Overall, Mexico's same-store retail sales increased 8% in the fourth quarter and 5% for the full year. We are seeing increased leasing demand from national and international anchors and sub-anchors. Interestingly, anchor retailers in our Mexico portfolio paid percentage rents exceeding $2 million in 2011. And as I like to remind everyone, all of our leases in Mexico contain full annual cost-of-living escalators.

As we move forward into 2012, we feel very pleased with our results, and we believe 2012 will be another year of increasing FFO, portfolio improvements and success in recycling capital to create a very high-quality retail portfolio in our core markets, where we have scale, terrific demographics, and strong retailer relationships.

On this call, I would also like to acknowledge and formally thank Barbara Pooley for her hard work and contributions during her five years with the Company. Her departure was on good terms, as reflected in the mutual and amicable separation document filed with the 8-K. Barbara remains available to the Company for advisory services and consultation for an extended period.

Now I would like to turn to Glenn to discuss the financial details of our fourth quarter, to be followed by Mike and Milton.

Thanks, Scott. Dave, we hope you feel better quickly.

Our fourth-quarter results demonstrate a continuation of the strategy we set forth at our investor day almost 18 months ago, the strategy that is focused on our property operating metrics, which Dave has coined our vital signs, such as occupancy, same-site NOI growth and leasing spreads, the continued monetization of nonretail assets and the disposition of nonstrategic retail assets, while using the proceeds for acquisitions of shopping-center properties in the key markets we have identified.

All these activities are being executed with an eye toward a strengthening balance sheet, strong liquidity position, and improved debt metrics.

I'm pleased to report we have been executing on all aspects of the strategy. Let me expand upon the results noted in the earnings release.

Headline FFO per share came in at $0.33 for the quarter, bringing headline FFO to $1.27 for the full year as compared to $1.21 for 2010, a 5% increase. The fourth-quarter 2011 headline amount includes $0.04 of transaction income and $0.01 of impairment charges.

The result I just mentioned have been adjusted to reflect the NAREIT revision to the FFO definition, which now excludes impairments of depreciable operating assets and depreciable assets impaired in joint ventures. We have adopted the revised definition and have adjusted previous periods to reflect the modification.

Our recurring FFO per share for the fourth quarter was $0.30, with a full-year recurring FFO-per-share result of $1.20 compared to $1.14 for 2010, a 5.3% increase. This meets the top end of our guidance range.

The recurring FFO increase is attributable to a 5.7% increase in the recurring retail contribution, fueled by positive results at the operating property level. The revised NAREIT FFO definition has no impact on recurring FFO, and FFO per share.

Our shopping center metrics continue to improve. Gross occupancy for the US portfolio increased 30 basis points from last quarter and is up 50 basis points from a year ago to 93.2%. Gross occupancy on a combined basis including the US, Canada, and Latin America increased 30 basis points to 93.3%.

Same site NOI growth was 1.6% on a combined basis, representing the seventh consecutive quarter with positive results. Our same site NOI was negatively impacted by about 20 basis points due to the weaker Canadian dollar and weaker Mexican peso. We also had positive leasing spreads this quarter, up 4.9% combined from new leases, renewals and options.

As we mentioned toward our nonretail monetization objectives continued the sale of $7 million of illiquid bonds, the return of our preferred equity capital plus a $9.6 million promote on one of our preferred equity investments, the sale of several urban assets in our Canadian hotel portfolio. In addition, since year-end we have monetized several other nonretail assets bringing the balance to $495 million, or a reduction of over $300 million since the beginning of 2011, exceeding our annual target.

During the quarter we sold five nonstrategic retail assets from the consolidated portfolio and two others from joint venture programs for a total proceeds of $55 million. For the year we disposed of 31 nonstrategic retail assets.

The proceeds from the nonretail and nonstrategic asset sales were quickly put to work with the acquisition of 10 fully owned assets for an aggregate purchase price of $204 million. Our balance sheet and liquidity position is in excellent shape. Our net debt to recurring EBITDA was at 6.2 times.

If you pro forma in the EBITDA from the late fourth quarter acquisitions, the metric stands at 6.1 times. We remain committed to a net debt to recurring EBITDA level of 6 times by the end of this year. As a result of the transaction income during the quarter, the headline net debt to EBITDA was 5.5 times.

We have in excess of $1.4 billion of immediate liquidity through our recently renewed revolving credit facility. Our consolidated debt maturities are well staggered, with only $350 million of maturing debt this year, mostly in the latter half of the year. The bank market and public capital markets are open with noticeable spread [findings] for unsecured bonds and perpetual preferred issuances.

This may present an opportunity later in the year for us when our 7.75% perpetual preferred issuance becomes callable in October. We will continue to monitor closely the capital markets.

Lastly I'd like to provide additional color around guidance. As a result of our completed property by property detailed budget process, we are reaffirming 2012 recurring FFO per-share guidance of $1.22 to $1.26. This guidance is based solely on recurring flows and does not assume transaction income or impairment charges, if any.

Assumptions used in determining this guidance range include an increase in combined portfolio occupancy of 50 to 100 basis points by the end of 2012 and combined positive same site NOI growth of 1.5% to 3.5%, providing a midpoint increase of 4% from recurring retail flows. We anticipate decrease in the nonretail contribution as a result of the continued monetization of these assets, including the InTown Suites portfolio and continuation of the capital recycling plant.

As a result, our capital plan assumes no new equity requirements. These assumptions support our dividend level of $0.19 per quarter.

Now I will turn it over to Mike for his report on the shopping center portfolio.

Thanks, Glenn. On the operating side we're pleased with the solid finish to 2011 in terms of the portfolio metrics of occupancy, leasing spreads, internal growth and the investment disposition activity as reported to you last night.

Leased my occupancy improved across the board, both anchor spaces and small shops, as well as overall in our strategic portfolio. The 70 basis point increase in the overall US occupancy rate over the past year was driven by both positive absorption as well as the effect of dispositions of the bottom tier of the portfolio.

Another encouraging sign is the continuing deceleration of vacancies of smaller box users coming out of the holiday season. Vacates of space under 10,000 square feet for the first quarter were at their highest in the first quarter 2009, with 645,000 square feet, then dropped to 557,000 square feet in 2010, and 361,000 square feet last year. Through January of 2012, we're trending even better than that, providing a bit of positive news in the health of this component of our tenant mix.

And as a fun fact, I would offer that not only is our portfolio getting healthy, but so too are the consumers visiting our centers.

Loss of square footage since 2009 in the small space has included many video, books and music shops -- all sedentary type activities. Some big net gainers in that same time frame include specialty health and spas, yogurt shops and weight reduction centers, just in case you were wondering.

The recycling process both continues and will be continuous. This is not a one-shot initiative, and the asset decisions are driven by each regional president's assessment of their own portfolio strengths and weaknesses.

A great example is in our Southeast and Florida region. Over the past year Paul Puma and his team have sold 10 properties with five more slated for the first half of 2012, which combined represent about 1.2 million square feet and $8 million of net operating income.

The total sales proceeds of $95 million have partially funded the $133 million of the region's purchase of new centers. That will generate about $9.5 million in NOI.

While the sale cap rates were around 9% and the purchase cap rates were about 7%, we moved out of poor markets with either weak anchors or chronic vacancy into well-leased and well-positioned assets in our core markets.

The US same site net operating income of 1.1% for this past quarter as well as the third quarter was nicked a bit by the effect of the Borders and A&P bankruptcies, which shaved about 60 basis points from the fourth-quarter number. That said, the news on those spaces is good. We have now signed new leases with supermarket users for each of the three A&P lease rejections totaling 150,000 square feet.

Of the 16 Borders, we now have four leases executed and we expect another 8 done by mid-2012. At this point, the composite re-leasing spreads are actually a slight positive. Contrast that with the 15% to 20% downsize on the Linens N' Things and Circuit City boxes from two years ago. This reflects the quality of the real estate and the changing market for space.

The interest level and these boxes underscore what we and other landlords have been saying for a while -- that there is continued demand by retailers for space and a declining inventory to satisfy it.

Within the Kimco portfolio the number of anchor spaces 10,000 square feet and greater, as we define it, has been reduced to a little over 100 boxes or just 2.7% of the total GLA, which essentially means that opportunities to capture stronger retailers and concepts will be more from rollover or recapture of maturing leases and, yes, even more bankruptcies. That may not result in big increases in reported occupancy, but more a continuous repositioning and value creation opportunities within the existing shopping center portfolio.

We're seeing that in a couple of very recent examples. In Pompano, Florida we negotiated a termination of an announced Kmart closing with limited term left, and are currently pursuing a redevelopment for a supermarket and hard goods retailer. Conversely in San Diego, we took a long-standing dark and paying supermarket at a location with a 2012 lease end date, and re-let it to a fitness club alongside a sporting goods cotenant at a much higher spread.

And considering the ongoing action in anchor leasing and retention, the big push is in the smaller spaces ranging from redoubling our efforts in the traditional approaches, pursuing alternative use, combining spaces where economically viable, and sometimes demolishing and refocusing available land for out parcels. 2012 will be very much a year of working the small details, the nickels and dimes of shopping center leasing and management.

And beyond traditional approaches, we're also pursuing any and all angles to secure new users and enhanced shopping center performance with a series of initiatives ranging from pre-approving locations with franchisors to market to potential users, mobile marketing technology and site specific programs to support mom and pops, and ancillary income from cell tower, solar, trash management and other programs.

And finally in our Mexico portfolio, our team met their goals for leasing by signing 732,000 square feet of new deals and driving the composite occupancy rate to 84.4%. Our target is an additional 800,000 square feet for 2012.

With that, I will turn it over to Milton.

Well, thanks, Mike. We are in an environment of low interest rates. There is little inflation and there are signs of improvement in the job market and other economic indicators. Much more is needed, but we're heading in the right direction.

If the trend is confirmed and continues, all commercial real estate will benefit. Of course we have no control of the economy, but what we do control and where our focus must lie is on our portfolio and our strategy.

What does that mean for Kimco? One, continue improving our key portfolio operating metrics. Two, continue our momentum of exiting our nonretail assets and our nonstrategic shopping centers. Three, anticipate the ever-changing landscape in retail and seize opportunities as we have done on so many occasions in the past.

Overall, we feel very good about the prospects of many of the retailers and their increasing need for space. Restaurants, health clubs, service businesses such as dry cleaners, nails -- all are relatively new to the Internet and are rapidly growing their guests.

The positive news is that there is essentially no development -- new development [on spec], and specifically there have been no new malls built within the past several years. And some of the existing mall tenants are seeking space in neighborhood and community shopping centers to meet their expansion needs.

With relatively few new retail developments and continued population growth, there should be improvement in both occupancy and rents. I also believe that cap rates will compress the spread between 10-year treasuries and cap rates is simply too high compared to historic trends -- spreads. My sense is that it is good to control close to 1 billion square feet of land in a growing country.

We continue to seize opportunities with weak retailers with strong real estate, using our extensive experience and contacts in the bankruptcy arena. We recently took back three leases in both the [Simms and AP] bankruptcies that will allow us to either redevelop the centers or simply re-lease at higher rents. We're continuing our program of rationalizing our portfolio by selling nonstrategic assets.

Now, let's look back and note what we have achieved since the depth of the Great Recession.

Since the S&P 500 index reached its lows in March 2009, Kimco's total return of [182%] compares very favorably to the S&P 500 total return of 74% over the same time period. We also outperformed the NAREIT index.

We have been through many cycles and we now have more than 20 years' experience of being a public Company, and celebrated our anniversary last year. It was a special celebration for all of us at Kimco, and we're excited about our future and the prospects for our Company. And with that, we will be delighted to answer any questions that you may have.

We're ready to move on to the question-and-answer portion of the call, please.

(Operator instructions) Paul Morgan, Morgan Stanley.

Hi, good morning. Milton, you just said you expect cap rates to compress further. I'm wondering if you could maybe add a little color there.

And then, just to the extent that you think that is upcoming, would that affect your acquisition and disposition appetite? If you expect cap rates to compress, would you kind of hold back a bit on dispositions and wait for that? Or similarly kind of accelerate or change the target set for acquisitions?

Let me answer the latter part of your question first. It will not affect our desire and momentum to exit the nonstrategic assets and the lesser quality assets. Our objective is to have the highest quality portfolio.

And I do think that cap rates, as I've mentioned, have spread. If you are buying a cap rate of 7%, let's say, or even 6%, it's still a spread of over 400 basis points at the lower end over Treasury. And when you consider the possibilities of inflation, the fact that there is a tax savings in having depreciation and real estate assets, that residual value should increase as the country grows.

We will have 39 million more people in America at the end of 10 years. That's more than the population of Canada and Australia. So, residual values seem to be higher. So that is my thesis, or my view that cap rates will compress.

And, Paul, we're seeing it every month in terms of the high-quality centers we're bidding on. There's more and more bidders for those very high-quality centers and cap rates continue to drift down.

Quentin Velleley, Citi.

I'm here with Michael Bilerman as well. My question just focuses on the small shop occupancies, so maybe for Mike.

In terms of the occupancy in the quarter sequentially I think it was up about 70 basis points. Obviously there's been some changes in terms of asset acquisitions and sales. So firstly, I'm not sure if you had like a same property, what the occupancy increased by over the quarter.

And then as you look to 2012 guidance, can you give us sort of an expectation of where you think small shop occupancy is going to move throughout the year?

Okay. My first question back to you is -- were you looking for same site occupancy for the smaller spaces only?

Yes, just for the smaller spaces.

I have not broken that down at that level. What I can tell you is that the increase in the small store occupancy and even the anchor occupancy came about, I would suggest, half-and-half. Half from positive absorption and half from the disposition activities, as we sell these poorly-occupied centers in this nonstrategic part of our portfolio where we're gaining disproportionately, if you will, in the small store vacancies.

So, while I did not give you the numbers, I think you could take from my comment that a lot of the improvement has come from addition by subtraction.

Now, your question on 2012 with respect to targets and the underlying assumptions on small ticket leasing, Glenn had pointed out that the overall occupancy increase is going to be 50 to 100 basis points. That's a combination in our planning of both positive absorption as well as that ongoing disposition activity.

Again, I think it will probably be a half-and-half proposition with the high-end improvement in the occupancy reflecting more aggressive disposition activity. Hopefully that helps.

Craig Schmidt, BofA Merrill Lynch.

Hi. You had commented on the progress in Mexico. I was wondering when do you think those leasing levels of Mexico will be sort of in line with the rest of your portfolio? Are there any challenges to getting there? And what is the concentration of vacancy, like small shops, whatever?

Our budget is to try to get to a 90% level for the entire basket. And you have to remember the entire basket has some recently completed properties, so that is why it is not there yet.

Leasing is accelerating. We feel very good, as we said in the remarks. We're seeing increasing activity from Mexican retailers as well as the continued activity from the international retailers. And we are seeing a pickup in Mexico, just like the US, in the small shop leasing.

The challenges to getting there, obviously, especially in an election year in Mexico, is possible turmoil in Mexico. But honestly it really seems that they are just powering through the headlines that you may see. And it's helped by the fact that Mexico continues to be under stored by any metric you want to look at compared to the US.

And the underlying economy is strong with sustained GDP growth between 3% and 4%, low unemployment; the manufacturing base is coming back very strong. So we feel good. So test us if we get to the 90% level by year-end, but that is our firm goal.

And just one other thing to add to that, Craig, in terms of reaching that goal and, if you will, to your point about catching up to the rest of the portfolio. If things proceed as planned, it's really a 2013/2014 type full stabilization point across the entire portfolio where we hope that US occupancies and Mexico occupancies will be, for the lack of a better term, indistinguishable, as long as it is all to the good. But that is our timeframe.

Jay Haberman, Goldman Sachs.

Good morning. Just a question on the hotel portfolio; it sounds like the interest has increased as you broaden the marketing. Can you give us a sense of perhaps pricing as compared to where you were last summer, and maybe some expectation for timing?

Well, you hit the two things that really make us firmly believe that we will get this baby sold this year. One is that the whole market has picked up since the second half of last year. When the CMBS market imploded and we were headed towards another downturn, we are seeing the exact opposite right now. There is an increasing level of interest in the hotel portfolio.

And with our partner's new permission, we have broadened the marketing effort and we do have a number of very interested parties. Our pricing remains exactly what we established before, which will get us out whole in terms of our book investment and maybe a little more if we're lucky.

Underneath it, as we mentioned, the properties are doing very well. The RevPar is increasing substantially. And I think that is what's going on.

As there's the hint of recovery out there, investors are looking at hotel assets, which can be priced daily or in our case weekly as possible inflation heads. In our case, even at our price you are buying way below replacement costs. And it is an established brand and platform and so forth. We feel good about making something happen with this relatively soon.

From a modeling standpoint in our guidance, we model in that it would get sold sometime during the third quarter.

Christy McElroy, UBS.

Hey, good morning guys. Just to follow up on some of the prior questions, but just to be clear on 2012 guidance, I'm wondering if you could talk about -- just for the US portfolio, what is your same-store NOI growth and your occupancy upside expectation, and then if you could also provide a total dollar volume for non-core, nonstrategic disposition assumption for 2012?

On the US same-store NOI, Glenn gave you the range of 1.5 to 3.5. And our base case in the US lands right in the middle of that range, and that is why we have ranged it out as such.

So, for us, the upside case in the US is really accelerating the timing of getting some of the leases that were signed late in '11, as well as some of the planned leases signed in early '12 to get those commencing rent sooner than our plan. And that's the primary driver more than it is occupancy increases.

The upside in occupancies was really just a level to anticipate as the economy continues to recover more strongly, that will have a disproportionate positive effect on some of our small storage strategies. A long way of saying, Christy, that the US piece of the puzzle is very consistent with the combined piece of the puzzle. Glenn, do you want to comment on the disposition (multiple speakers)

Yes. So in terms of nonretail dispositions, as we mentioned, there is $495 million of book value assets remaining. We expect and have modeled in to sell around $250 million during 2012. So it's going to bring the number almost in half.

And then on the nonstrategic retail assets, we have modeled in there about $250 million of sales as well. So you can do that and (inaudible) our overall capital plan. That's why we just remain in this recycling program and no need for the equity at this point.

Alexander Goldfarb, Sandler O'Neill.

Just going to look at the buyers of your non-core, the stuff that you are selling, curious how they are financing -- if they are cash buyers, if they are using local banks, or if it's just by simply assuming the existing mortgage or maybe they don't have to put that much equity into it. And as a follow-up to that, the banks -- at least at the community bank level seem to be -- everyone loves apartments. Curious what their view is of shopping centers, of the type that you are selling?

Alex, the predominant buyer of our shopping centers, these B-quality smallish centers in our non-core markets, are almost always local guys; local guys who either have capital available, have a local banking relationship, maybe coming off a 1031 exchange of selling another property. But it is very, very local.

Our strategy has been on a one-off basis because these assets are diverse. There's no common thread to them. It's not a single market, etc.

So, because of that, and we're oftentimes asked about how the CMBS market has affected our program or capital availability in general, it really hasn't.

The thing that more impacts the velocity of our program is the fact that because this is the bottom rung of our portfolio, there is in the normal course of business more tenant fallout. There's more questions about viability of other smaller tenancies and the resiliency of whatever anchors are there. So there's a lot of horse-trading that goes on.

We try to accelerate the process as best we can, and we'll make concessions in certain cases. But we are committed to move. It isn't financing that is going to drive the bus, at least for this round of disposition.

Okay. And then as far as rates staying low through potentially the end of '14, are you seeing -- Milton, you spoke about cap rates coming down, which makes sense just given the environment. But are you seeing the lenders coming down commensurately? Or you see that gap between financing and cap rates widening?

Alex, it's Glenn. When you look at non-recourse mortgage financing, rates have definitely started to compress. Spreads are starting to compress again.

As you know, the market got pretty frozen again during the latter half of '11. That has definitely thawed. There's a lot of activity again. And you are starting to see spread compression both on the nonrecourse side, and you're seeing spread compression even in the unsecured bond market, even at the levels that treasuries are at today.

So I think the capital markets are actually in very, very good shape. And it also goes to the bank market. Bank market spreads have also come in.

Jeffrey Donnelly, Wells Fargo.

Good morning guys. Actually I just wanted to maybe follow up on Alex's question. Can you talk about the spreads that you were seeing between cap rates between A and B and C centers, and maybe how that has changed in the last three to six months? I'm just curious if it is widening and tightening and maybe what is driving, which segments are moving around most.

At least as we see it through the lens of our dispositions, again with the peculiar nature of the properties, the (inaudible) exit cap rates are generally -- hover in the 9%'s as an average. So are less, some are more, depending on what type of asset we're really exiting. So, it has remained relatively speaking at that level, notwithstanding some of the compression in financing spreads and so on, again because there is much more real estate risk associated with some of these assets.

As to the higher-quality properties, now the A's, the B-pluses, just echoing what Dave had said, is as the continual flight to quality persists, we're seeing more and more compression of cap rates. So as Milton suggested in cap rates are going down, you are clearly seeing it on the frontier of the A's and the B-pluses.

I would add cap rates and interest rates are tied at the hip. I think Glenn has pointed out to us that financing is available, 10-year financing is available at the 4%'s. And if you have 10-year available at the 4%'s, you could readily determine that cap rates are going to be less than 7%.

But it really is the tale of two cities out there. The high-quality, very low cap rates; and the B properties and the secondary markets, or tertiary markets, limited bidders and higher cap rates.

Nathan Isbee, Stifel Nicholas.

Can you just give us a little insight into how you are game planning for the remaining 48 Sears/Kmart locations into your portfolio, maybe how do you stratify the stores between easy re-lease and those that might languish for a while?

We do have a business plan for each and every Kmart location, and primarily our exposure is Kmart. There a handful of Sears. But there is a game plan and they're in different buckets. Milton, if you want to talk a little more.

Well, again, the Sears are a very tiny portion. Insofar as Kmart is concerned, there are two aspects. One, their credit; and when we look at the credit, it is still a $4.4 billion equity market cap. And they, thus far, have not closed any of the stores in our market.

Indeed in Pompano we paid to cancel the lease to Kmart. And we're replacing that with a very aggressive supermarket, a sporting goods. We can redevelop that and do very well.

So, you get back to the fundamentals of real estate. When real estate is good and the rents are (inaudible) we should be able to recycle those that are closed. There has only been one closed in our portfolio.

And if you remember in 2002, when Kmart went bankrupt, the very high rent leases or the very poorest performing stores were rejected at that point. So the portfolio at that time that we were left with was a very high-quality portfolio, either in terms of very low rents or very good locations.

And we just want to assure everybody, we're being very proactive about this. To the extent that we can take back some of these properties early, we will do so, and they should find good homes.

Another comment on the Sears/Kmart credit. Let's remember, one, as Sears owns a very large stake in Sears Canada -- that is wonderful assets and doing relatively better. Two, they have an Internet function that has been quite successful. So that maybe the reason why there is that $4.4 billion market cap.

Rich Moore, RBC Capital Markets.

Hello, good morning guys. I saw a gain on the sale of development properties in the income statement, and it reminded me of the old KDI days. And I'm curious I guess two things. One, was that a KDI gain? And two, how do you guys think about KDI going forward? Is there a possibility we could see more life to the merchant development sort of concept?

We haven't had a merchant building gain in quite a wall. This was a KDI asset, so it wasn't merchant building asset. And we had the opportunity to sell it. It is an asset that is in our taxable REIT subsidiary.

And as we have always done, merchant building gains have been included in FFO, but only to the extent of the economic gain. So will you see a lot more of it, probably not. There's not a whole lot of KDI assets that are left within this PRS. There's a few and we'll keep an eye them as we go.

But again, I think the main focus for us is that we continue to focus on the recurring flows and the gain, again, is part of the headline number but not in the recurring numbers.

Two comments. One is we will probably -- very unlikely that we would ever go back into the trading business, merchant building, where we build and sell. To the extent the economics make sense we will build and hold. We are a believer in the long-term recurring income, especially if we're going to build a quality property, we're going to hold that. But just to clarify, a lot of that gain in the numbers came from selling a KDI property into a new joint venture with SEB.

Cedrik Lachance, Green Street Advisors.

Thank you. Just going back to your views on cap rates, to the extent that the gap perhaps between the not-so-good assets and the high-quality assets has continued to widen, does that make you want to accelerate your disposition program in order to increase the pace at which you are investing in better quality properties?

Yes, I think we are accelerating it. And we do believe that notwithstanding these higher cap rates for the lower quarterly properties, interest rates are at historic lows. Real estate is attracting capital again.

It's an inflation hedge, as I mentioned, and alternative investment would yield virtually nothing. So it's a good time to sell, notwithstanding these higher cap rates. And we can offset the dilution in many different ways.

And Cedrik, I will just again restate what I had said earlier, and what Milton said. We continue to aggressively pursue the disposition of these assets. We're not going to wait for any further lowering of cap rates.

Our biggest hurdle, quite frankly, is the fact that these are a series of assets across the country, small and not in any one particular market. It's very much a ground war of individual negotiation.

If I had an entire market of was getting out of, then we would probably package it up and market it to a different set of buyers. We don't have that in this situation. So we're moving as quickly as we can, but it's going to be a lot of singles and doubles and not a lot of grand slam home runs in any one transaction.

Vincent Chao, Deutsche Bank.

Hi. Good morning everyone. I just had a follow-up question on Sears. I apologize if I missed it but he does have an estimate on the mark to market on the remaining stores? I know it is quite low, but --

In other words, suggesting whether the market rents on the spaces are above or below the contract rent?

I'm trying to get a sense of what the order of magnitude is. Obviously the leases are pretty low rental rates in place, but just trying to get sort of an order of magnitude sense of what the market rents would be today on those stores.

Well, the average base rent is about $5.62. So, on balance, we feel that the market rent for the available space is higher. But that is a theoretical comment in the sense that, since many of these leases still have a significant amount of turn, trying to extract yourself -- trying to get out of those leases is a little bit more of a difficult proposition.

Theoretically, we feel that the market rent is higher. Now whether it is 10%, 15%, 20%, that is tough to gauge because it is pretty diverse.

You know, the one example we always like to give is, depending on the market it could be substantially higher. As we always talk about, the target that replaced the Kmart in Staten Island, a very dense market with very limited supply; and that upside was tremendous. That was (inaudible) what percentage was that?

I would say that it was 15 times the prior rent.

I knew that but (multiple speakers) (laughter) so it varies across the board.

But I think it's safe to say, what, 75% to 80% of these leases are below market; some of them significantly below market. Do we have some that are above market? Sure.

But most of these are under market and not bad locations that we should be able to replace them relatively easy, if something happened. And in the meantime, we are being proactive on the stores that perhaps Kmart or Sears want to close, trying to work with them, trying to get the space back early if we can on a fair basis.

(Operator instructions) Mike Mueller, JPMorgan.

Hi. I dropped off the call, so I apologize if this was asked already. But maybe Glenn can you walk through -- for 2012 guidance, what's embedded in there for investment activities? So just thinking about either on balance sheet, investment activity through the funds, non-core retail as well as nonretail?

From an acquisition standpoint we have modeled in roughly $350 million of our investment dollars. So that will be a mix of consolidated fully-owned properties as well as any capital we would invest further with joint venture partners. So that is our target.

On the disposition side, as I mentioned, roughly $250 million of nonretail assets to be monetized over the year, as well as another $250 million of sales of nonstrategic retail assets.

Okay, great.

Quentin Velleley, Citi.

It's Michael Bilerman. I just wanted to come back to this debt to yield and sort of asset yield cap rate spread. And Milton, I recognize you are not an economist and have been doing real estate for a few years. But given the fact that the bond market has been right about where our economy has been going for the last five years, what do you think the bond market is actually telling us with these sort of low rates?

Are we sort of in this low inflation, low growth type of market? Or are we simply having a technical bubble, because we have had this massive globally-induced policy that has pushed a thirst for yield and safety that's going to reverse and cause -- rates eventually will skyrocket? And given the fact that rates and cap rates are joined at the hip as you said, we're going to be in for (inaudible) your asset value compression. So I'm just trying to figure out sort of where your mindset is about what the bond market is telling us.

Well, A, how much of it is influenced by the actions of the Fed or the government, I'm not sure. We all, all are aware that these rates can't last forever and that there will be much higher rates in the future.

Now, but coming back to cap rates, in the worst times -- and believe it or not I remember a time when time was prime was 21, when the 10-year Treasury was north of 10%. And even in those periods of extremely high interest rates, on decent shopping centers it never went really above 10%.

People felt it was an asset. They wanted a safe yield. There were benefits of depreciation, feeling there would be ultimate residual values. So historically, Michael, you never had that.

Now, 10% is a long way off from 6% and 7%. But I'm trying to put it in perspective. It doesn't mean that as rates run away that cap rates will go to 13%, 14%, et cetera.

And the other thing that has happened, the demand for real estate as a portion of total investments has increased. The performance of REITs compared to other common stocks has been excellent. You have not had any Enron scandals. You haven't had any Global Crossings.

By and large there are managements with entrepreneurs and decent track records with good character, and they do have yields. So while I'm a pessimist born in the Great Depression, I still feel optimistic that we're not going to revert to very high cap rates. I hope I've answered it.

And I would just add that we're seeing an all-time high level of interest from life insurance companies, pension funds and sovereign wealth funds getting back, if you will, into the real estate market as they look to book higher yields. Their alternatives in terms of treasuries and corporates are just so low. And they're -- in many cases insurance companies need actuarially much higher yields, so the level of interest that we've received in investing in, again, high quality, is very high.

Todd McCasik, MorningStar.

Thanks. You mentioned the role the local market leaders have in the capital recycling program in terms of identifying assets to sell and ones to purchase. And I was just wondering if there are any sort of hard and fast targets or guidelines from corporate with regards to demographics of the markets or perhaps expected NOI growth with regards to those assets, particularly on the acquisition side, or whether or not that is sort of a decision made on a market by market and asset by asset basis.

We are trying to be more disciplined. We've identified 25 or so (multiple speakers) core markets, basically consistent with some of the larger SMSA's and with strong demographics. So we have restricted our acquisition activity to those core markets, with maybe one exception.

But in general we are going after where we have already scale, where we have presence, where we have long-term relationships and we like the long-term prognosis.

With respect to what the field, in effect, is identifying to sell, there's lots of things that going to that calculation. One is whether it is in one of our core markets or not. Secondly, whether they are possibly worried about the local neighborhood or the tenant mix or the anchor tenant or so forth. They make their case about which properties they think we should sell and put into the nonstrategic bucket, and we review that. And I think, Mike, the bucket is pretty much fixed.

Right. But it is fixed at this point in terms of what we rolled out from an investor day on forward, but one of the points that I made in my prepared remarks is that it is a continuous program. And we will -- we have asked our regional leadership to continually reevaluate the markets, the submarket, their individual asset-level business plans. So this "portfolio" will expand and contract as need be.

So, if you move beyond strict white lines about what is strategic and what is nonstrategic, the more important dimension to understand about where we are coming from is that recycling will be an ongoing part of the landscape going forward. We're not simply accumulating for accumulation sake. Size does have advantages, but it's not the be-all and end-all. And we have really started to think more aggressively about how we create the optimal portfolio, not the largest portfolio.

Jeffrey Donnelly, Wells Fargo.

Yes, just a question actually about your -- I think it is your fast-track leasing program. I'm just curious how that works, if all franchisees are preapproved and maybe how much business you feel you've done as a result. And is that helping your small shop leasing activity?

We've recently launched that, Jeffrey. And essentially what we do is we -- the Kimco team reaches out to establish franchisors to develop a program and get our locations preapproved based on the franchisor's criteria. Then this facilitates marketing those spaces to the prospective franchisees.

So we've recently launched it. I believe we have about 16 different franchise concepts that are part of the program. We are starting to see some traction in terms of access to our webpage that this program links into. We are in franchising the events and conferences and we're starting to gain some traction in that regard.

It is one among a whole variety of things that we have been pursuing. And almost all of these initiatives that I've mentioned before, they're coming from the ground up. These are not corporate-induced programs where I'm sitting here in New Hyde Park coming up with the next great idea.

All of these ideas are bubbling up from our regional people who, based on the market, based on the needs, are coming up with different ideas. We test them out in maybe a market or a region, and if we like what we see, then we bring it across to the entire portfolio.

Quentin Velleley, Citi.

One quick one. The severance payment that is being paid to Barb, how is that being treated sort of in guidance? Is that going to be a one-time thing this year? And can you just touch on the size of the payout?

I recognize she was a named executive, but the size of the payout certainly was significantly in excess of -- when you include all the bells and whistles in there, certainly in excess of what was in the proxy. So is -- how that sort of came about?

Quentin, it will show up in the first quarter as part of a one-time nonrecurring. So we won't include it in our recurring FFO, but it will show up in the headline number and impact it there.

And just to add to my remarks, we do want to acknowledge that Barb made some wonderful contributions to our Company over the years that she was here, specifically in the property accounting group, Latin America, she was extremely helpful. And most of you on the call know her from her investor relations activities, which were second to none. And we appreciate that.

At the end of the day, there were just a number of things we didn't see eye to eye on. And we're a generous culture and that's the form of the payment.

This will conclude today's question and answer session. Mr. Bujnicki, I will turn the conference back over to you for any closing remarks.

Thanks, Cynthia. And to everyone who participated on our call today, as a final, reminder our supplemental is posted on our website at www.KimcoRealty.com. Thank you.

Ladies and gentlemen this will conclude today's conference. We thank you for your participation.