Kimco Realty Corporation (HC)

Good day, and welcome to the Kimco Realty second quarter 2024 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 a touch-tone phone. 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 David Bushnicki, Senior Vice President and Investor Relations Strategy.

Please go ahead. Good morning, and thank you for joining Kimco's quarterly 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, Dave Jameson, 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. With that, I'll turn the call over to Connor.

Thanks, Dave, and good morning. I will begin with an overview of the Kimco Consumer, provide an update on the favorable supply and demand environment for our business, and then share some highlights on our strong operating results, all of which will underscore the resiliency of our high-quality grocery-anchored and mixed-use portfolio. Ross will cover the current transaction environment, and Glenn will provide additional financial metrics, report on our balance sheet position, and provide our updated outlook. We continue to navigate an economy that gives off mixed signals. A recent Bloomberg report noted that the American consumer savings have declined with the excess savings cushions that have been built up during the pandemic and used to offset rising prices that are no longer available. On the other hand, the labor market remains strong, reflecting both job growth and wage growth in the areas of our portfolio is situated. This has led the consumer to remain resilient, as they've tempered spending but not retrenched. As JP Morgan recently reported, the consumer is now rotating towards staples and seeking value at Walmart, Costco, and off-price retailers who are gaining market share. As such, we've benefited from the needs-oriented nature of our portfolio, as over 83% of our annual base rents come from grocery-anchored open-air shopping centers. It is also why traffic at our properties has increased both sequentially and year-over-year. This is translated positively to our operating fundamentals as our leasing team is firing on all cylinders. Demand for our well-located product remains strong as tenants seek to retain existing space or add new locations. Our retention levels are near all-time highs, with heavy competition for any vacancies, generating increasing rents, better credit, and higher valuations. Nationally, store openings are outpacing closings, and the lack of quality retail is having a positive impact in tenant bankruptcy auctions, as leases are being acquired by healthy tenants striving to meet their expansion goals. In terms of new retail supply, the outlook remains in our favor. It has been well documented that shopping center development, which currently stands at approximately 0.2% of existing inventory, remains exceedingly low. The shopping center sector has been sub 1% since 2010 and has provided the retail sector a meaningful tailwind to drive record low vacancies across the country. More importantly, we don't see this dynamic changing anytime soon. As we have previously noted, rents would need to increase upwards of 35% to make new development investment worthwhile. This assertion was recently validated by a notable REIT equity research firm, which calculated that the range of rent increases required to stimulate a creative development in the top 50 markets needed to be between 35 to 55%. All of this highlights the strength and unique position of our portfolio. As I noted, with our focus on grocery-anchored necessity-based off-price retail, we are able to generate solid results in all kinds of economic weather. This includes uncertainty of national elections and potential policy shifts, predictions of hard or soft landings, and the like. Our company, which features a resilient, well-located portfolio and strong demographic trade areas, solid balance sheet, and best-in-class team, stands out. To further illustrate this point, now let me touch on a few operating highlights. During the second quarter, we signed 144 new leases, totaling 669,000 square feet of pro-rata GLA with rent spreads of 26.3%, our 11th consecutive quarter of double-digit new leasing spreads. Renewals and options continued their positive trend with 338 renewals and options completed at a spread of 9%. Overall deal volume totaled 2.3 million square feet with combined rent spreads of 11.7%. Leasing velocity and retention drove pro rata occupancy higher by 20 basis points sequentially to 96.2%. ProRata Anchor Occupancy increased 30 basis points from last quarter to 98.1% and was up 40 basis points year over year. Small Shop Occupancy increased 20 basis points sequentially to 91.7%, matching our all-time high set in Q4 of 2023 and representing an increase of 70 basis points year over year. Of note, we continue to derive meaningful outperformance from the RPT portfolio, which further validates our acquisition thesis. We executed 90 leases in Q2 with comp rent spreads of 146%, driven by a grocery anchor replacing a furniture store and a strong fitness operator replacing a weaker fitness credit. We also executed 24 renewals and options during Q2 at a 17% average spread. Year-to-date, we have executed 19 new leases at former RPT sites with spreads of 87% and 46 renewals and options with spreads of 14%. The former RPT portfolio also produced same-site NOI of 4.5% for the quarter and 3.7% year-to-date, meaningfully outperforming our underwriting. We also increased our cost-saving synergies to be realized this year, as well as additional future revenue opportunities, stemming from increasing the RPT small shop portfolio, which currently sits at over 400 basis points below Kimco's. Additional growth in ancillary income will also be generated by our specialty leasing program. In closing, we are enthused by the performance of our team and our portfolio, resulting in increases to our FFO and same-site NOI outlook. The growth profile of our portfolio continues to trend up, and our team continues to look across the investment spectrum for new growth opportunities, all while remaining vigilant on costs.