Kimco Realty Corporation (NYSE:KIM) Q4 2023 Earnings Call Transcript
Kimco Realty Corporation (NYSE:KIM) Q4 2023 Earnings Call Transcript February 8, 2024
Kimco Realty Corporation misses on earnings expectations. Reported EPS is $0.22 EPS, expectations were $0.39. Kimco Realty Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to Kimco Realty's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to David F. Bujnicki, Senior Vice President, Investor Relations and Strategy. Please go ahead.
David Bujnicki: Good morning and thank you for joining Kimco's quarterly earnings call. The Kimco management team participating on the call today include Conor Flynn, Kimco's CEO; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, our CFO; and Dave Jamieson, Kimco's Chief Operating Officer; as well as other members of our executive team that are also available to answer questions during the call. As a reminder, statements made during the course of this call may be deemed forward-looking and it is important to note that the company's actual results could differ materially from those projected in such forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to the company's SEC filings that address such factors.
During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco's operating results. Reconciliations of these non-GAAP financial measures can be found in our quarterly supplemental financial information on the Kimco Investor Relations website. Also, in the event our call was to incur technical difficulties, we'll try to resolve as quickly as possible and if the need arises, we'll post additional information to our IR website. And with that, I'll turn the call over to Conor.
Conor Flynn: Good morning and thanks for joining us. I will lead off today with a summary of our stellar Q4 leasing results and then provide some strategic updates on our completed RPT acquisition. Ross will follow with an update on the transaction market, recent activity and plans for 2024. Glenn will then cover our financial metrics and provide 2024 guidance. We concluded 2023 on a high note with record-setting leasing activity and a deeper, broader and more resilient tenant base for our grocery-anchored and mixed-use portfolio. We've built on this positive momentum kicking off 2024 by closing our acquisition of RPT on the first business day of the year. I will provide additional perspective on RPT shortly. Let's start with our leasing accomplishments.
For the quarter, overall occupancy finished up 70 basis points on a sequential basis to 96.2% on a pro rata basis. Importantly, the 70 basis point gain is our highest quarter-over-quarter uptick in occupancy going back more than 15 years. Our year-over-year overall occupancy increased 50 basis points. Anchor occupancy grew a record 80 basis points sequentially to 98% and finished flat year-over-year. Smaller shop occupancy was up 60 basis points to 91.7%, surpassing our previous record high of 91.1% and ended up 170 basis points year-over-year. We signed over 1 million square feet of new lease GLA in the fourth quarter, the highest quarterly level in over 10 years. We also maintained our strong pricing power as the spread on new leases was 24%, marking our ninth consecutive quarter of double-digit leasing spreads.
Our retention levels were equally strong as we signed 321 renewals and options totaling 1.7 million square feet, surpassing our 5-year fourth quarter historical average. The fourth quarter renewal and option combined spread was 7.8%, with renewals ending at 8.5% and options at 7%. Overall, fourth quarter leasing volume totaled 480 deals for 2.7 million square feet with a combined spread of 11.2%, a phenomenal effort and a tremendous team accomplishment. I'd be remiss to mention that what makes our leasing efforts in 2023 more impressive is that we've absorbed the vast majority of our Bed Bath & Beyond spaces at spreads that far exceeded our initial expectations. Just to recap, we started 2023 with 29 Bed Bath & Beyond locations, representing approximately 70 basis points of pro rata ABR exposure.
During the year, we resolved 21 leases with a combined pro rata spread of 43%. Of those 21 leases, 4 were signed in the fourth quarter at a combined spread of 57%, demonstrating the strong demand that remains for these high-quality locations. This includes our remaining 8 boxes which we're confident that will resolve as we move through the year and believe that our strong overall leasing success in 2023 will continue into 2024. Looking ahead, with the RPT deal closed, we are excited about our new team members who are fully engaged and seeking to add further value to the Kimco platform. Integration of the new portfolio is well underway and we expect it to have a positive impact on our overall strategic plan throughout the year. Over time, we expect to benefit from the upside in the RPT portfolio as we mark-to-market leases and take advantage of the supply constrained environment using our best-in-class platform to raise occupancy levels.
Glenn will provide additional color on the financing of the transaction and how it has positively impacted our balance sheet. We also see redevelopment and mixed-use opportunities in the RPT portfolio that will complement our existing pipeline and further contribute to our long-term growth. One particular example of incremental value that can be created through redevelopment is Mary Brickell Village, a one-of-a-kind mixed-use property located in Miami. As we look to the future on an asset such as this, we believe there's a lot of upside and opportunity to use our platform to unlock meaningful long-term value and expand Kimco's Signature Series portfolio. Ross will discuss our 2024 transaction strategy in more detail. But I did want to highlight our plans to recycle lower growth centers, especially those with high CapEx loads and lower-than-acceptable returns.
These anticipated dispositions have already been incorporated into our model and strategic plan which is further supported by improvements in both the transaction and financing markets since we first announced the RPT transaction in the third quarter of 2023. We believe we are well positioned for 2024 with significant opportunities for both organic and targeted external growth. Our pipeline of leases that have been signed but not yet open shows strength in the quality of our portfolio and visible cash flow growth. Additionally, history has shown that our platform is ideally suited to take advantage of market dislocations and generate growth. In the end, we pride ourselves as being one of the most efficient operators and are laser-focused on driving total shareholder return.
That said, despite improved conditions, the macroeconomic environment remains temperamental. Inflation, interest rates, employment, credit card delinquencies and the election cycle all have the potential to impact our sector over the course of the year and beyond and that is why underlying our overall strategy is an emphasis on building a portfolio that is both resilient and able to generate steady and reliable growth. Ross?
Ross Cooper: Thank you, Conor and good morning, all. I'd like to quickly reflect on 2023 before sharing some perspective on the year ahead. As Conor noted, the leasing environment for our asset class was very positive in 2023 but volatility in the capital markets significantly muted transaction activity. Through the first 3 quarters of '23, underwriting was difficult and lender financing was inconsistent at best. That said, Kimco successfully turned the sluggish environment into opportunity. Using our advantageous liquidity position and balance sheet, we were able to acquire several joint venture partnership interests, a new signature series asset in Stonebridge at Potomac Town Center and an exciting portfolio via the acquisition of RPT Realty.
In our view, these were timely deals that would price more aggressively in the current market. In the fourth quarter, sentiment began to improve with the 10-year treasury dropping more than 100 basis points and currently hovering in the 4% range. This created renewed optimism, a more vibrant financing market, additional deal flow before year-end and a further increase in activity at the start of 2024. We were able to take advantage of the more positive environment, selling 3 challenged joint venture sites in our portfolio in December. We also provided mezzanine financing for a new partner before year-end and now anticipate potentially pursuing additional structured investments with the same group. Turning to 2024; we are confident that the healthy fundamentals in open-air retail, coupled with a more favorable macroeconomic backdrop will present opportunities that we can leverage to enhance our performance and success.
We will continue to primarily focus on sourcing off-market and core grocery-anchored shopping centers that become available. On the structured investment side, we expect additional investment opportunity for preferred equity and mezzanine financing for high-quality real estate. The stabilizing of interest rates and improvements in the capital markets should lead to more opportunities stemming from acquisition financing of new deals and debt paydowns on maturing loans. We continue to maintain a disciplined approach with these investments and as such, we expect them to be bespoke investments with unique attributes. On the RPT dispositions, as previously indicated, there are a select group of assets that do not align with Kimco's long-term geographic and/or growth targets.
We have initiated the strategic process of trimming these properties from our portfolio and we are confident that we will successfully execute on this plan, predominantly in the first half of the year. To provide a bit more context, we aim to sell between $250 million to $350 million of former RPT centers at a blended low to mid-8% cap rate in that timeframe. It's worth noting that the blended cap rate of the RPT properties being sold matches the cap rate for which we acquired the entire company, further cementing our belief that RPT is and will continue to be an extremely successful acquisition for Kimco. In 2024, we have already closed on our first RPT disposition in Carmel, Indiana, within this cap rate range. As part of the disposition structure, we retained a piece of the capital stack in the form of mezzanine financing.
This not only helps to ensure a successful transaction but also presents an opportunity for Kimco to earn an attractive yield at a safe basis in a passive structure while focusing our team's efforts on our core properties and markets. You will likely see us structure additional transactions in a similar manner. And to be clear, this is factored into the 2024 guidance that we've provided this morning. We are excited about the prospects for 2024 and look forward to keeping you apprised of our progress. Now off to Glenn for the financial results and full year outlook.
Glenn Cohen: Thanks, Ross and good morning. We finished 2023 with solid fourth quarter results, highlighted by very strong leasing activity, increased occupancy and improved positive same-site growth. In addition, we bolstered our liquidity position ahead of our upcoming 2024 maturities and the closing of the RPT transaction. Now for some details on our fourth quarter results, the financing of the RPT transaction and our 2024 outlook. FFO for the fourth quarter was $239.4 million or $0.39 per diluted share. This compares favorably to last year's fourth quarter FFO of $234.9 million or $0.38 per diluted share. The primary driver of the increase was higher pro rata NOI of $10 million generated by a high-quality operating portfolio.
Our pro rata interest expense was up $8 million, resulting from the issuance of a $500 million unsecured bond to prefund our upcoming '24 maturities. We invested the proceeds in short-term money market-type funds earning $7 million of interest income which mitigated a large portion of the dilution. In addition, during the fourth quarter, we incurred $1 million of merger-related expenses for the RPT transaction. Our operating portfolio continues to deliver positive results. Same-site NOI growth was positive 3.2%. And if we exclude our redevelopment sites, would have been 3.5%. For the full year 2023, same-site NOI was positive 2.4%, exceeding the top end of our same-site NOI range of 2.25%. Higher minimum rent was the primary driver of the growth.
As a result of our strong leasing production, the spread between leased occupancy and economic occupancy grew to 350 basis points, an increase of 30 basis points sequentially and represents $57 million in future annual base rent. We anticipate approximately 70% of this rent to commence during 2024 providing approximately $15 million to $20 million. Turning to the balance sheet; we ended the fourth quarter with consolidated net debt-to-EBITDA of 5.6x. And on a look-through basis, including pro rata JV debt and preferred stock outstanding of 6x, maintaining the favorable end of our target range for this metric. As mentioned previously, at the beginning of the fourth quarter, we issued a new 6.4% $500 million unsecured bond which matures in 2034.
This issuance addressed our 2024 bond maturities comprised of $246 million at 4.45% with an effective interest rate of 1.1% which was repaid on January 15, 2024 and $400 million at 2.7% due March 1, 2024. Our year-end liquidity position remained very strong, comprised of over $780 million of cash and the full availability of our $2 billion revolving credit facility. Subsequent to year-end, we monetized our remaining 14.2 million shares of Albertsons, receiving nearly $300 million in proceeds. We will record a $75 million tax provision on the gain in the first quarter which will enable us to retain $224 million for future investments and debt reduction. Similar to last year, our shareholders will be eligible for a pro rata credit of the federal income tax Kimco will pay.
Now for some details of the financing for the $2.2 billion RPT transaction. We issued 53 million common shares to the RPT shareholders and an additional 953,000 OP units for an aggregate value of $1.2 billion. We also converted each share of RPT's 7.25% convertible preferred shares into newly issued depositary shares representing 1/1,000th of a share of Kimco 7.25% class and convertible preferred stock. The class and convertible preferred stock has a liquidation preference of 92.5 million and is publicly traded on the New York Stock Exchange. Each 7.25% class and depositary share is currently convertible into 2.3071 Kimco shares. On the debt side, we paid off $130 million outstanding on RPT's revolver, repaid $514.4 million of RPT's outstanding private placement notes, including accrued interest and amended and assumed $310 million of RPT term loans.
We funded the repayment of the revolver and private placement notes from cash on the balance sheet and a new $200 million term loan with a final maturity in 2029. The $200 million term loan was swapped to a fixed rate of 4.57%. The $310 million of amended and assumed term loans are comprised of 4 tranches with $50 million maturing in 2026, $150 million in 2027 and $110 million in 2028. Each of the tranches has been swapped to a fixed rate with a blended weighted average rate of 4.77%. Overall, the total debt related to RPT added to our year-end balance sheet is $510 million, with us using $440 million of cash on hand. Now to our 2024 outlook. Notwithstanding some of the macro factors that Conor mentioned earlier, we remain confident about the growth prospects of our operating portfolio and are enthusiastic about unlocking the potential of the newly added RPT assets.
Our initial 2024 FFO per share guidance range is $1.58 to $1.62 before any RPT merger-related costs which we expect will be in the $25 million range or $0.04 per diluted share. Our guidance range is based on the following assumptions: same-site NOI growth of positive 1.5% to 2.5%, inclusive of the RPT assets. Included in the same-property NOI guidance range is a credit loss assumption of 75 basis points to 100 basis points. This is a similar level to our credit loss experience in 2023. Lease termination income between $1 million and $3 million. This is compared to $7 million in 2023. Interest income between $2 million and $4 million as compared to $19 million in 2023, as we had significantly higher cash balances during '23. Acquisitions, including structured investments ranging from $300 million to $350 million, weighted toward the second half of the year.
Dispositions ranging from $350 million to $450 million weighted toward the first half of the year, comprised primarily of select RPT assets. Corporate financing costs ranging from $319 million to $325 million, comprised of consolidated interest expense and preferred stock dividends. Annual G&A expense ranging from $133 million to $139 million. The G&A range is inclusive of the expected cost savings synergies from the RPT transaction ranging from $30 million to $34 million. Our guidance range also assumes no material impact from RPT-related noncash GAAP accounting income comprised of above and below market rent amortization, straight-line rents and fair market value adjustments to debt. Lastly, the guidance range assumes no redemption charges or prepayment charges associated with callable preferred stock outstanding or early repayment of debt obligations and no planned issuance of additional common equity.
I want to thank all our associates whose tireless effort brought the RPT transaction to a successful closing and drove our strong results to end the year. We look forward to a successful 2024 together. And with that, we are now ready to take your questions.
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