Kimco Realty Corporation (HC)

Good morning and welcome to Kimco's third quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. David Benicki, Senior Vice President, Investor Relations and Strategy. Please go ahead.

Good morning, and thank you for joining Kimco's third quarter 2020 earnings call. The Kimco management team participating on the call today include Connor Flynn, Kimco's CEO, Ross Cooper, President and Chief Investment Officer, Glenn Cohen, our CFO, David 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 certain reference to some 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 the investor relations area of our website. With that, I'll turn the call over to Connor. Hello, everyone, and thank you for joining us. Today, I will give updates on how, as one of America's largest owners and operators of open-air grocery-anchored shopping centers and mixed-use assets, Our strategy is enabling us to successfully navigate and actively manage our portfolio to offset the impact of COVID-19, how we see the evolving retail landscape, and how we are keeping focused on our longer-term objectives for creating sustainable growth and shareholder value. Ross will cover the transaction market, and Glenn will discuss our performance metrics. Both our short- and long-term strategies share two overlapping principles within the evolving retail landscape. First and foremost, Kimco's product type, open-air, grocery-anchored shopping centers and mixed-use assets in well-located markets are where retailers want to be and consumers want to go. We see it in our traffic data, our leasing pipeline, and highlighted as the product of choice by retailers on their respective earnings calls. This reality has become even more pronounced during the pandemic, where, as I will discuss shortly, The open-air format is so conducive to both online and physical delivery. Second, but no less important, is that the last-mile store is more critical than ever to the retailer's supply chain, acting as a hub for profitable distribution and fulfillment as the demands and needs of the consumer continue to evolve. With these core principles in mind, our short-term strategy is simple. collect, and lease, assist our tenants, and tenaciously stay on top of our costs. The good news is that we have been focused on this strategy for quite some time, well before the onset of the pandemic. So our team has been ready, tireless, and efficient in executing on it. And our results reflect these efforts. While Glenn will provide more detail, our portfolio has remained resilient during the pandemic, with occupancy currently at 94.6%. We are seeing a pickup in leasing demand, and our leasing pipeline is starting to build to a level we experienced pre-COVID. We anticipate a faster recovery for anchor occupancy versus small shops, and for essential retailers versus non-essential ones. Of particular note, our strategy to focus on grocers has been spot on, as grocery anchor demand for space is surging. Over the past portfolio from 64% to 77% grocery anchored and have outlined a strategic plan to reach 85% to 90% grocery anchored over the next five years with over 10 new grocery opportunities currently in negotiation. In addition to growth in grocery demand, e-commerce sales across our retailer Rolodex has exploded and created a powerful halo effect on our existing store locations. Driven by changing consumer demand and The need to improve margins and data analytics, our tenants are transforming their store operations and expansion plans to include shipping and fulfillment. Tenants like Target, Costco, Walmart, Best Buy, Home Depot, Lowe's, Dick's, and many others continue to expand omnichannel programs like buy online, pick up in store, and curbside pickup. These programs have proven the most cost-efficient way to deliver goods to consumers. sizing. We don't believe there is a one-size-fits-all solution to the last mile challenge, and we need to recognize how each retailer determines how best to serve their customer base. For Kimco, helping our tenants at the last mile is one of our highest priorities, and that's why our portfolio and our team are well-positioned to retain tenants by helping them optimize their stores to provide for shopping, shipping, of finding new opportunities and location voids for certain retailers and redevelopment potential. These experienced personnel employ a mix of old-school networking and market research and new-school data analytics to help tenants find opportunities for profitability and growth. Our overriding philosophy is that retailers are our partners. By listening to their concerns, engaging with them, and helping them maximize the profitability of their space, Kimco continues to be their partner of choice. That's where Kimco continues to step up. Unwilling to wait to see who will stay or go, we are in daily dialogue with our retailers to listen to their needs and challenges and to see how we can partner to help them navigate the situation. Our TAP, Tenant Assistance Program, initiatives have been a welcome site for these tenants. Whether we help tenants pay for legal costs, provide health and financial information on our website, locate vendors to facilitate tenant acquisitions without curbside pickup program, we are letting our tenants know we are in this together as they fight to continue for success. We can't save every tenant, but we can do our part to make sure we help those that want or need a fighting chance. As the world learns how to live with the virus, our team is working In times of crisis, we want to make sure our retailers know which landlord picked up their call and which landlord called them. We are confident in our portfolio, our team, our improving rent collections, our liquidity about security worth over $550 million is a clear differentiator and gives us tremendous optionality in the future. I continue to be humbled and impressed with how our team at Kimco has rallied around our strategy to navigate the COVID challenge and how they are also able to focus on the long term as we position Kimco for the future. As for the long term, we continue to add to our war chest of entitlements. these projects. We believe our five-year goal of securing 10,000 apartment units is certainly achievable and that these entitlements can provide future opportunities to unlock embedded value. Our development and redevelopment pipeline is now at a five-year low. Similarly, in the transaction market, we continue to witness a wide disconnect between the public and private valuations for well-located grocery and home improvement anchored open-air shopping centers. Open-air centers in our well-located areas of concentrations to 6%, which is clearly at odds with our current valuation. While purchasing our core product does not make economic sense given our current cost of capital, Ross will outline our capital allocation strategy for the next year and how we plan to invest accretively by taking advantage of the lack of liquidity in the commercial lending market. In closing, our consumers are comfortable with the shopping center experience, together destination for goods and services. We know we have the right assets, a diverse tenant geographic mix, a strong balance sheet, and the entrepreneurial spirit to not only survive but thrive during this pandemic. Ross?

Thank you, and good morning. Following up on Connor's commentary, we continue to see aggressive pricing for high-quality, primarily grocery-anchored product, albeit at a much lower transaction volume. Multiple trades occurred in the third quarter throughout the country at sub-6% cap rates in Pennsylvania, Northern California, and Florida, with another high-quality asset trading in Los Angeles at a sub-5% cap rate. With the right location and tenancy, there is still strong demand and an abundance of capital available. The biggest impediment to deal volume is the continued pullback in the market from the traditional lending sources. With cash flow uncertainty and general concerns stemming from the pandemic, it has never been more important to have strong sponsorship, quality tenancy, and substantial liquidity. And as Connor alluded to, we see that as a tremendous differentiator and opportunity for Kimco. With our cost of capital elevated and institutional quality property cap rates remaining at all-time lows, there is a clear disconnect between public and private pricing. centers accretively. So for now, we will continue to remain disciplined. However, we do expect the pricing dislocation to eventually change, and when it does, we will be opportunistic where we can invest capital at a spread to our cost while getting our foot in the door on prime locations that match our view of quality and downside protection. While the traditional acquisition market remains stalled, we are seeing and evaluating opportunities to provide either preferred equity or mezzanine financing on infill core MSA locations with strong tenancy and existing sponsorship. These owners need value-add capital to either redevelop the asset with signed replacement leases in place or bridge the gap on refinancing an asset that has a near-term debt maturity. Historically, this would have quickly and easily been funded by traditional lenders or CMBS. In this environment, finding that additional financing is not as easy, and we have sourced a few great assets where we can provide assistance. As part of our investment approach in this area, we seek a right of first offer or right of first refusal in the event the owner looks to sell the property. If the asset performs as expected, we collect a double-digit return and get paid off in a relatively short hold period. If the downside scenario occurs, we ensure that we have conservatively underwritten the properties so that we are very confident stepping in and owning or operating the asset at a comfortable basis of less than 85% current loan to value. Given current market conditions and the expectation that it will remain this way into 2021, we anticipate this deal structure will become a key component of our investment strategy next year. While the instances of these deals are still infrequent as we sit here today, our expectation is that the opportunity set will substantially increase into next year as lenders start to realistically assess their existing collateral and prepare to take necessary impairments on their balance sheets. As always, we will be judicious with our capital and selective with how we deploy it. That said, we do believe this program can unlock attractive yields and potentially add desirable properties to the future Kimco portfolio. With that, I will pass it along to Glenn for the financial summary.