Kimco Realty Corporation (KIM) Q1 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Kimco's First Quarter Earnings Conference Call. Please be aware today's conference is being recorded. [Operator Instructions] At this time, it is my pleasure to introduce your speaker today Mr. Dave Bujnicki. Please go ahead.

Thanks, Clayton. Thank you all for joining the First Quarter 2011 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; and Glenn Cohen, our Chief Financial Officer. There are also 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 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 the 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 those questions. With that, I now turn the call over to Dave Henry.

Good morning, and thanks for calling in today. We are pleased with our first quarter results and believe that they represent solid and steady progress on our key 2011 objectives. With help from a slowly improving economy and renewed expansion activity from our national retailers, our most important portfolio metrics continue to improve with positive same-store NOI, leasing spreads and renewals. Mexico also made an important contribution as our combined portfolio of both existing and newly completed shopping centers achieved an 80% aggregate occupancy level and leasing activity accelerated. Overall, we are particularly pleased with the increase in our recurring FFO over year-ago levels. While the economy remains fragile with weak employment and housing levels, the recovery has achieved critical momentum in many respects. Retailers are growing again, and there's virtually no new development activity. Excess space is being slowly absorbed, and rent levels are improving in many markets. Mike will go into the specifics, but we continue to be optimistic about our full year property level results. Subsequent to quarter end, we completed the sale of the Valad convertible bonds to Blackstone. And as a result, we reduced our non-retail portfolio to just over $600 million. We're only 5% of our total assets. We will continue to decrease our non-retail assets in a measured and disciplined way. On a parallel course, we also continue to make progress in reducing our portfolio of retail preferred equity investments through property sales, refinancing, partner buyouts and conversion to pursue joint ventures. The preferred equity retail portfolio has declined from $297 million and 125 properties to $156 million and 91 properties over the past 15 months. Our earnings release also outlined new business activity. And without again listing the specific individual transactions, it is important to note that we are again actively acquiring properties from third parties for both our institutional joint ventures and our own portfolio. So far, new business has come in the form of one-off transactions, but we also continue to evaluate portfolio opportunities. The market is clearly heated for high-quality retail properties, and we, together with our institutional partners, are being disciplined and patient. With our large portfolio, long history and many relationships, we are confident we will continue to have success adding excellent retail properties to our portfolio on an accretive basis. Forgive me for again closing by repeating our 2011 priorities: continued improvement in our key metrics, occupancy, same store NOI and leasing spreads; achieving stability and lease-up of our Latin American property portfolio; reducing our non-retail investments and selling our non-strategic retail properties; growing in a measured way by acquiring high-quality retail properties in our core markets; and further reducing our debt with a target net debt-to-EBITDA ratio of 6.0 or lower. Now I'd like to turn it over to Glenn for highlights of our quarterly financial results and then Mike Pappagallo will provide details on our property operation. Milton will close with his perspective.

Okay. Thanks, Dave, and good morning. I would characterize the activity and the results for the first quarter as further confirmation of our team executing the strategy that we presented at our Investor Day last September. As we reported last night, recurring FFO was $0.30 for the quarter, which excludes a $0.02 charge for non-cash impairments related to the disposition or impending disposition of certain non-strategic retail assets compared to $0.28 last year. Now we are all aware that FFO requires the inclusion of impairments in FFO but ignores the gains on sales of operating properties. As we go through the process of disposing of the non-strategic assets, we expect we will have our share of gains and possibly further losses. However, whether included in FFO or not, we remain focused on recurring FFO, which excludes non-recurring income as well as non-cash impairment charges. Recurring FFO came in at $121.2 million for the quarter compared to $115.6 million last year, an increase of approximately 5%. This increase was primarily driven by improved operating profitability from our shopping centers, delivering increased revenues and net operating income, including results from the Mexico portfolio, which exceeded our first quarter budget. Our occupancy for the combined portfolio without regard to ownership percentage was 92.8%, up 20 basis points from last year. Looking just at the U.S. portfolio, occupancy stands at 92.5% without regard to ownership percentage, up 40 basis points from the year ago. We are now providing disclosure on our supplemental package for same-site NOI growth, Canadian and Latin America operations, which produced same-site NOI of 1.7% on a combined basis. Our U.S. same-site NOI increased by 1.1%, representing the fourth consecutive quarter of positive results for this metric. Leasing spreads were also positive for the quarter. We continue to make progress on the disposition of the non-retail assets. Subsequent to quarter end, we sold the remaining investment we had in the Valad convertible bonds to Blackstone for AUD $165 million. At the time we reached a binding agreement with Blackstone, we entered into a foreign currency forward contract to lock in the exchange rate back to U.S. dollars. We received just over USD $169 million plus the accrued interest through the closing date. We will recognize non-recurring income of $3 million for FFO purposes from this transaction in the second quarter. In addition, our CAD $10 million bond investment in Whiterock was paid off at par in April, yielding a non-recurring gain of approximately $1 million. The early repayment of these investments will impact recurring earnings by approximately $0.03 for the balance of 2011. We're pleased to report the non-retail investments are down to just over $600 million as compared to $1.2 billion at the beginning of 2009 with more than half of the remaining balance attributable to the urban assets primarily in New York and Philadelphia and in our investment at InTown Suites, which we are currently marketing. Our capital recycling program is also underway. Since the beginning of the year, we have sold 6 assets, 4 of which were non-strategic retail assets, for gross proceeds of approximately $36 million and debt repayment of $11 million. We have over 40 non-strategic retail properties that are currently being marketed. Our objective is to raise approximately $150 million from non-strategic asset sales during 2011. The proceeds from these sales will be used to acquire properties in our target markets. We have acquired 4 shopping centers and [indiscernible] parcels so far this year, for gross investment of $103 million, including debt assumption of $25 million. Our cash investment to date has been approximately $55 million. On the balance sheet and liquidity front, there too, we have made progress. We finished the quarter with net debt to recurring EBITDA of 6.2x compared to 6.3x at the end of the year and 7.4x at the beginning of 2010. With the proceeds from the Valad and Whiterock bond dispositions, we have reduced the balance of our $1.7 billion revolving credit facilities to less than $80 million outstanding today. Our consolidated debt maturities for the balance of 2011 totaled approximately $100 million and less than $400 million for 2012. Our revolving credit facilities are scheduled to mature in 2012, but we plan to renew the facilities by the end of this year. Based on our current capital plan and excellent liquidity position, barring a major transaction, a trip to the capital market is not expected in the near term. If needed, the capital markets are fully functioning again with Credit Suisse continuing to tighten. The CMBS lenders are back. Portfolio lenders are active, and the commercial bank market for term loans and revolving credit facilities is operating well. We are reaffirming our recurring FFO guidance range of $1.17 to $1.21 per share. Again, this guidance range does not include impairments for non-recurring income. Assumptions in determining the guidance range include: occupancy improvement of 50 to 75 basis points by year end; increased same-site NOI of 1% to 3%, which includes the combined U.S., Canadian and Latin America operations; incremental contribution of $8 million to $10 million from the Latin America portfolio; further acquisition activity with dispositions occurring in the latter half of the year; and the impact of the early repayment of the Valad and Whiterock bonds. Lastly, yesterday, we declared our quarterly common dividend of $0.18. This represents an annualized rate of $0.72 per common share and a conservative FFO payout ratio of approximately 60%. And with that, I'll turn it back over to Mike.

Thanks, Glenn. I'd like to touch on a few areas and move quickly to leave more time for your questions. As Dave said, we continue to be encouraged by the ongoing positive signs in the portfolio in terms of space demand and stabilizing markets and the consequent effect on net operating income growth and value creation opportunities. And since I'm always advising against reading too much in support of the leasing statistic. I guess that holds true even when the numbers look good. That said, this quarter's 5.1% jump in new leasing spreads was certainly a positive development, especially as it was driven by major new lease signings from Wal-Mart, Kohl's and Marshalls. Looking back at the past 12 months, the leasing spread statistic represents a mix of 3 drivers, specifically: large anchor boxes with below-market brands being brought up to today's levels with meaningful upside; second, the junior box category, which had the highest demand but were affected by the roll-down from boxes of specific retailers that went into bankruptcy; and lastly, small shops, which we’re still seeing negative spread result as high rents from the leases of 4 or 5 years ago are being marked at today's levels. As Glenn mentioned, we had another positive quarter of same-site net operating income and within the range we suggested during our last call. We decided it made sense to bring further clarity to the impact of our primary international activities on NOI performance as non-U.S. shopping centers contributed almost 14% of NOI for the quarter and continues to increase. The combined 6.7% same-site NOI increased and our non-U.S. numbers added 60 basis points to the composite number. Currency rate changes had a substantial effect on those numbers, but in turn, that speaks to the economic fundamentals relative to the U.S. There was a modest decline in occupancy of 20 basis points from the preceding quarter from both the pro rata and full basis without regard to ownership. With about half of the drop associated with post-holiday, small-store fallout and the other half related to 2 big-box vacancies at certain non-strategic assets. Year-over-year, however, gross occupancy was up 40 basis points, and that underscores the slow and steady progress in the portfolio. The quarterly and past year metrics point to, I think, a more important dimension, that being the difference in performance between our strategic and non-strategic shopping centers. The difference in occupancy is stark: 93.7% for the strategic assets, which was flat from last quarter versus 84.1% for the non-strategic assets, which actually declined by 170 basis points. The combined spread on new leases and renewals was a positive 2% for the strategic assets and a negative 2% for the non-strategic assets with similar gaps experienced throughout the past couple of years. It reinforces to me the program that is underway to shed these underperforming assets over time. Glenn mentioned where we stand in terms of activity so far, and pruning these assets will become more important in the future so we can focus on value opportunity at our strategic properties. Overall, the operating environment continues to show slow and steady improvement but again, driven by the relative supply and demand dynamics with national and regional retailers pursuing space, either increasing market share or entering new markets. Rents are slowly rising at the better-quality centers, but capital continues to be a major part of the discussion to capture that new business. For smaller spaces, much of the demand is coming from franchisees and the reality that mom-and-pops are still struggling. And as we have indicated, regional differences are apparent with high barrier to entry markets such as Long Island, Puerto Rico and our Canadian assets doing well. While other areas, such as parts of Florida and Nevada, are slower to recover economically due to the severe housing bust in those markets. Likewise, there are varying degrees of operating performance with many of the soft good discount formats, such as T.J. Maxx, Marshalls and Ross, showing improved sales results, while other areas, such as office supplies, are showing decline. Bottom line is that in the face of the uneven recovery and long-term effects of e-commerce on space needs and retailer strategies, the better positioned asset with the best co-tenancy and stronger markets barriers to entry will win the battle. Since our last earnings call, Borders filed Chapter 11, and Blockbuster announced that it's being acquired by DISH Network. Our exposures are relatively small. At this point, 1/2 of the 16 Borders leases at Kimco owned centers have been rejected, aggregating about 175,000 square feet and about $1.6 million of Kimco's proportionate share of base rents. While that will impact our second quarter occupancy level, we have been active -- have active deals working on 5 of the 8 spaces. It's too early to give solid estimate of rent levels, and I expect some roll-down from the Borders weighted average rent of $18, but not nearly as severe as the Linens and Circuit City experience. And with respect to our Mexican operations, we've made it plain that 2011 is an important year in terms of leasing and growth and earnings contribution. As to the first quarter results, so far, so good. The team signed a 175,000 square foot of leases in the quarter, on track to the full year 700,000 square foot target. For the Mexico portfolio, total NOI increased $3.5 million for the quarter on a year-over-year basis, underscoring the tick-up in the leasing momentum that began in the latter half of 2010. And with that, I'll turn it over to Milton.

Well, thanks, Mike. I would like to share with you a few observations on Internet sales and its effect on our retail centers. The Internet and eCommerce will continue to have a growing effect on all types of retail users. Key advantages include pricing, partially due to the avoidance of sales tax of many transactions and the convenience to buy goods over the Internet. The largest impact will be to electronics, music, video and bookstores. There will be far less of an impact on supermarkets, discounters, warehouse clubs, off-price retailers, dollar stores, Home Depot, Lowe's, et cetera. Thus far, no one is ordering lumber on the Internet. Looking at the composition and the diversification of our top 50 tenants gives us some comfort that our exposure to the incursion of the Internet is, on a relative basis, somewhat muted. Our 3 largest tenants are Home Depot, TJX and Wal-Mart. In addition, I believe we are largest land lord of Costco. Adding to the impact of the Internet, many retailers are trying to become more efficient and are reducing their store sizes accordingly. We have been aware of this trend and have been focusing on some time for new users to utilize space in our centers. As an example, demand for medical space, dental clinics, urgent care facilities, vocational schools, community colleges and entertainment-focused businesses have all been increasing. We are one of the few real estate companies that have attendees at dental conventions, where we encourage new dentists to begin their practices in our centers. There has also been an increased interest by all ages who belong to fitness clubs and, the demand for this space has been increasing. On an optimistic note, we expect very few new retailer developments in the United States, not withstanding that our population grows by 3 million people a year. At the same time, retailers have an increased appetite for additional space, and this will reduce our vacancies over time. What is most exciting for me are the Kimco regional presidents and the teams we have in the field. Their enthusiasm is contagious. I want to thank Mike Pappagallo, Paul Puma, Tom Simmons, John Visconsi, Conor Flynn, Rob Nadler, Kelly Smith, Mike Melson and many others. They have great energy, creativity, integrity that will help us achieve our goals. And with that, we are all ready to answer any rational questions.

[Operator Instructions] We'll take our first question today from Jay Habermann with Goldman Sachs.

Milton, maybe just starting with you in terms of just the small shop space overall. You mentioned, obviously -- or Dave mentioned the continuing I guess negative spreads there. But what do you think it's going to take to stabilize the small shop space? I mean, are you looking for sort of stabilization in the housing market? Is it going to be continued rent reductions or rent relief? And I guess just a separate question, could you give us some sense of the pricing you're seeing for the assets that you have for sale, the non-strategic?

Sure, Jay. First, the amount of a local store exposure is relatively small on total basis. The issue in my mind will be the demand will come back when the demand for housing comes back. Housing is such an important part of our GDP. It's furniture, appliances, you name it. And until the housing market is absorbed, I think we will continue to have issues on local stores, because when my housing market comes back, employment will come back. And employment is -- and jobs are necessary for local stores. So that I think that is the issue, and I -- it will take time, but I'm relatively optimistic. In so far as the pricing, we'll ask Dave or Mike.

Yes. So far, Jay, we've -- in terms of in assets we've sold because of the vacancies, it's a relative loss NOI. It's not been that severe, so it pencils in to about a 6% to 7% cap rate, but that somewhat a false positive, because there have been some vacant centers. Our expectation is that these centers will go anywhere from the 8% to 10% range depending on where they are and the tenant base, which I think underscores the difference between what you've been hearing us and others saying in terms of the higher-quality centers, where they're being priced at, where -- cap rates that start the 6%, are pretty much the norm versus the growing difference between B- and C-quality centers.

We'll take our next question from a Christy McElroy with UBS.

Last quarter, you gave guidance for U.S. same-store NOI growth of 0% to 2% in 2011. This quarter, it's 1% to 3% for the combined portfolio. Have your same-store growth expectations changed for the U.S. at all? And to what extent do you expect non-U.S. to contribute to the growth rate? I think you said it was 60 bps in Q1?

Yes, I would comment that in terms of the U.S., we have not changed our points of view and in terms of where we wind up. And then I think that the reason for the change, overall, is simply because by now adding the international numbers, which are going to cause an uptick of 50-or-so basis points, we've ranged it a little bit higher.

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

I've just got a currency question. You benefited on the sale of the Valad notes from the strong Aussie dollar and the weak U.S. dollar. And you're obviously benefiting from your Canadian exposure, which you can see in the NOI. I'm curious how you're thinking about the U.S. dollar and if there's a temptation to maybe sell additional assets. Or are you still confident that there's ways that you can structure up deals and you still could be active in investing in offshore markets?

Well, I guess my take on the -- weakening the U.S. dollar, again, it makes foreign buyers even more interested in coming into the U.S. market. We've seen a tremendous demand by foreign pension funds and life insurance companies to reenter the market for high-quality retail properties. So in some ways, I think it's going to strengthen the market. I think we remain as scheduled in terms of what we're selling. We have identified a certain number of non-strategic retail assets and they are in the market. And we're hoping between the improving CMBS market and the high demand for hard assets today that are cash flowing, we will do okay on those assets. And Mike, you may want to comment...

Well, I'll just take it on the other way to Quentin's question with respect to whether the currency shifts are making us change our thinking about growing internationally and increasing our investment. And certainly, it makes things a little more pricey on a U.S.-equivalent basis. But I think as we look at international markets, we're thinking about it for the long term. So currency by itself will not preclude us from further investment. What is precluding us, and I think David mentioned it, often, particularly with respect to Canada, is the expensiveness of the product even in local currency terms and the lack of availability of product. So I think the single important is that we continue, over the long term, to think about increasing our non-U.S. exposure. But everything needs to kind of fall into place, and currency is just one of those dimensions.

Got it.

We'll take our next question from Craig Schmidt with Bank of America, Merrill Lynch.

In your earnings release, you mentioned an improvement in the InTown Suites performance. I wonder how would you characterize the NOI relative to peak? How far are we off peak at this point then?

I'm glad you brought that, up because I would like to complement the InTown Suites management, because we've seen a tremendous improvement on the operational side, and the team is doing a wonderful job. My rough guess is we’re 5% to 10% lower than the peak levels in terms of the EBITDA on the operations. It's improving rapidly. We get weekly flash reports on the RevPAR, and it really is nice to see it escalating in terms of its improvement. The business is doing very well. To update everybody on the call on where we are in the marketing process, we're in a second round of bidding activity. We'll know more, within the next 30 days, how that is going and how aggressive these bidders are. We will then consult with our partners, and we'll make a decision on going forward or not at that time. What is comforting to us is the revenues that are coming from that investment are producing very nice FFO for us at this point.

We'll go next to Nathan Isbee with Stifel, Nicolaus.

Can you just break out the same-store NOI in Mexico and Canada in local currency?

The local currency in there was about 40 basis points. The currency impact is about 40 basis points of the increase.

So 40 of the 60?

Yes.

Okay. All right.

We'll go next to Steve Sakwa with ISI Group.

I guess, Dave, you had kind of touched on my InTown Suites question, but could you just talk a little bit about the timing of some of the acquisitions that might be in the pipeline and just remind us what's in guidance for acquisitions and dispositions for the balance of the year?

Sure. As I mentioned, so far, we've been successful acquiring perhaps 1/2 dozen properties so far this year, but the activity has been on a one-off basis. We have a number of lines in the water. We anticipate closing at least a couple more in the quarter. We're in the game on looking at bigger transactions, but there's certainly nothing that we could account on at this point nor do we have that -- a large portfolio in our numbers or in M&A transaction and our numbers. Glenn, what's our total that we...

We targeted for our capital plan to put out our capital, about $250 million, and we had sales, roughly about the same. So on a cash basis, we would net pretty well down south.

That translates to quite a bit of buying power if you think about it, because many of our acquisitions are done with institutional partners, and the properties are leveraged. So if you assume a 50-50 deal, 250 of equity and 50% leverage, that's $1 billion of assets for this year, which I think is a reasonable target.

Right. We have laid out on the non-strategic, to raise again proceeds of roughly $150 million. Separately, we had a target of about another $150 million, $200 million on the non-strategic assets. So we're pretty well on plan with that with the sale of the Valad and the Whiterock bonds.

Then I guess, Dave, are you just -- are comfortable at -- maybe your partners are. But if cap rates are down at the 6% level or the low-6s for high quality, are you comfortable I guess putting $1 billion of yours and your partner's money into this kind of asset at that pricing?

Well, we'll see. So far, the assets we bought, they all have a story to it. And the average cap rate has been significantly higher than 6% on what we bought, and the debt rates have been attractive. So we've locked in some pretty good leverage yields for ourselves and our partners. But you're right. We'll have to wrestle with it. What we do look for is more than that headline cap rate. We look at the built-in growth. We look at redevelopment plays. We look at the price per square foot, if you will, whether it's way below replacement cost. So there's a lot of other met and barriers to entry obviously. We look at a lot of other factors besides the headline cap rate. But as I pointed out, the market is heated. We're determined to be careful. If we do $1 billion, we'll do $1 billion. But if not, that's not a problem and will not impact our numbers significantly.

We'll go next to Rich Moore with RBC Capital Markets.

Could you shed a little more color on the Mexico assets. I noticed that the -- there were 4 assets moved into the stabilizers. It seemed to bring the occupancy down quite a bit. And they look like they're big assets. So maybe if you could provide a little color on what's going on there?

Rich, as you remember probably, we start to include the Mexico assets in occupancy after 2 years whether or not they've reached the "90% stabilization". The recession hit Mexico like it hit the U.S. And as we're coming out of it, the leasing is accelerating quite well, as Dave mentioned, in the overall portfolio including the development assets. It's up to 80% total. You're -- so you're continuing to see some impact on occupancy over the next few quarters as we bring some of these Mexico develop -- previous developments into our occupancy number that are not yet 90% or 92% leased up. But we do expect that, that lease-up will get done over the next 18 months so that it will not be a drag on overall occupancy.

Okay, Barb. So the 4 assets, they appear to be big. It's not an issue that they're maybe too big, and you're having trouble leasing those?

No. No, I just came back from a Mexico City visit, and I came away with renewed confidence that the Mexico economy is picking up nicely and retailers are accelerating their plans, including all kinds of U.S.-based retailers, people -- and small tenants like Nike and McDonald's. I mean, they're just -- they're accelerating their activity in Mexico as well as the big guys that never slow down: the Home Depots and the Wal-Mart and so forth. So our operating -- our local operating partners are feeling better, and they're coming out of their recession the same way we are and perhaps at an accelerated pace. I mean, GDP is expected to be 5% in Mexico this year, unemployment under 6%. They're adding jobs like crazy. Manufacturing's doing well. $120 oil is obviously helping Mexico. So notwithstanding that headline drug violence, which does have an impact and does have -- international retailers have a pause and have a concern about Mexico. But at the neighborhood level, there is increasing activity, and we feel good about achieving an accelerated lease-up. And obviously, that is helping us to move.

Great.

We'll go next to David Wigginton with DISCERN.

Just a thing with Mexico. Can you maybe just comment on investor demand there in light of the re-legislation that was passed last year? Have you seen an increase? And have yields come down at all as a result of that? And what is -- and how does that impact your -- I guess your operating strategy in the short and long term?

Yes and yes. And well, it remains to be seen at our proper level. I mean, we're basically a long-term hold for Mexico. I mean, you look at our Wal-Mart ground leases with the cost of living increases every year, and you feel good about holding these assets long term, but you're right. There's increasing investor appetite. Cap rates have come down. The Fibra UNO first public offering down there went remarkably well. But I will remind everybody, there was a lot of dollar-based rental revenues incorporated in that, so I wouldn't read too much into that headline, that cap rate, because it wasn’t all peso revenues and retail assets that were effectively sold to the public there. But anyway, it's clear that property values are increasing. Investors are taking another look at all of Latin America for that matter. Brazil, as you know, has attracted, a lot of interest, and now it is spilling once again over to Mexico. And some of the outside institutional investors that paused, if you will, have renewed their interest, and we have been approached in a number of cases to bring in fresh partners in some of our deals. And we may look at that over time, especially if we see new opportunities.

And so this -- Dave, this circling back to your comment about the drug violence there. Is that not impacting the market overall just because of the locations where it is, and it hasn't entered into the local neighborhood yet? Or is there another reason why people are still very optimistic and want to get into Mexico at this point in spite...

Drug violence or violent is an issue, particularly in certain border areas, but Mexico is a huge country with 106 million people and growing like crazy. It's got a middle class that's growing. Again, as I said, employment is doing well. GDP is doing well. Most of our centers are -- 95%, I believe, are grocery-anchored neighborhood centers. These centers provide necessities and service-based businesses. People feel very safe and comfortable going to these centers. Almost all of our properties are in closed malls. In Mexico, they're air conditioned. They're pleasant. They're secure environments, and the retailers are doing quite well in general. There are a couple of centers we have, Rio Bravo in particular, which is a center of a current problem, and leasing is delayed on a center like that. But in general, we have so many properties in Mexico, and there's so many towns where the violence is not an issue. It's just not the issue that the newspaper and the TV shows would make it out to be.

I'd like to mention it's somewhat of a U.S. phenom. More -- the European don't necessarily see it as such an impact in tourism, because after all...

That's true. I mean, Fox News isn't on the Paris news stations every night. And for instance, foreign tourists in Cancun have not slowed down a bit, whereas U.S. tourists to Cancun have. But again, our sensors are neighborhood focused, and the economy is doing well. And there is a little bit of fear and apprehension by not only the local population but outside investors. And we will not deny that that's not an impact, but it doesn't take away from the fact that this country is the 12th largest economy in the world, headed towards being the 5th largest economy in the world. And somebody like Wal-Mart is opening a store a day in this country.

We'll go next to Vincent Chao with Deutsche Bank.

I just had a question on the comments about the alternate uses that you're looking for, for some of the retail space as a way to mitigate the impact of the Internet stealing some sales. Can you just discuss what you're seeing in terms of returns on those types of properties at the -- on the actual lease itself as well as on the overall shopping center?

And to my earlier comment that generally, what we're seeing in the environment, whether it's core retail or whether it's alternative use in that capital requirement continued to increase, retailers and others are demanding more dollars to get into -- to get them into the spaces. So that said, I would not necessarily differentiate materially a retail versus an alternative use just to recognize that it’s both requiring capital. I think the net effective rents, if you want to use that term, has stabilized from where they were from the declines that were being experienced over the past few years. That said, they're still probably lower than they clearly were lower than at the height of the market 4 years ago.

Okay. So no discernible difference then.

[Operator Instructions] We'll go next to Laura Clark with Green Street Advisors.

Going back to your comments about non-traditional tenants, how much of the center do you feel comfortable turning to this type of a tenant? And do you have a dedicated team going after these types of tenants?

Laura, I wouldn't specifically say that we have a guideline or a percentage. It's going to be very locational specific. There are some assets that we have that -- where essentially retail had shifted away, so we have no limitations on putting it to alternative use. There are other situations where we will change our strategy. There's one particular project in Orlando, where it was initially meant to be primarily retailed with some office and kind of a whiff of a lifestyle-ish type center on a smaller scale. But what we've seen is that medical -- our office and medical users have become the dominant force. So we are shifting our thoughts and our strategies. And that conceivably, over the next few years, it could be substantially all medical use, because that's where the demand is. So there are no particular limitations or requirements on that. What was the second part of your question? I apologize.

If you have a dedicated team.

Oh, a dedicated team. We don't have a dedicated team per se, but what we do have, with respect to our national portfolio, a review program that we have certain individuals who will target and will focus their energies on these alternative uses, Milton had mentioned of medical and the dental users. So we reach out whether those users, whether it's the for-profit colleges, whether it's government users. And we will target our initiatives to try and garner information and reach out to the right constituents to through-put some increased activity and then deliver that information to our regional operating teams.

All right.

We'll go next to Mike Mueller with JPMorgan. Michael Mueller - JP Morgan Chase & Co: In terms of the increments, the additional investments you're looking at for your acquisitions, could you characterize it in saying you're looking more at community centers or smaller format neighborhood centers? And is there a pricing differential between the higher-quality asset today in each of those buckets?

Mike, we couldn't hear you too well, but I think the effective part of your question was the difference between neighborhood and community centers and perhaps big-box centers, and we're seeing opportunities to purchase both. As we've mentioned, we're trying to make sure we focus on the higher quality. In terms of a difference of cap rates, generally, the grocery anchored, especially if it's a high-quality grocer, is commanding a little bit lower cap rate than the big-box centers. In our mind though, that's almost an arbitrage opportunity for us, because we're very comfortable. If it's the best big-box center in a market, it's something worth going after. And to the extent it's trading at a little bit higher cap rate than a grocery-anchored neighborhood center, that's okay with us. I think it is fair to say there's still a difference out there in terms of pricing on the grocery-anchored versus a big-box all else being equal, but I can't emphasize enough that all of these centers are different in so many ways: how much local space is involved; the quality of the big-box centers, the market that it’s in and so forth. For instance, at Long Island, which is a barrier-constrained market, we're very comfortable paying a very low cap rate out here, because the long-term prognosis for rent growth is very good. Michael Mueller - JP Morgan Chase & Co: Okay. Okay, that's helpful.

We'll go next to Nathan Isbee with Stifel, Nicolaus.

Yes, just one quick follow up. Glenn, can you just address the guidance range given the $0.03 of dilution from the Valad sale? What is offsetting that in terms of maintaining your guidance?

Yes. I mean you see the improvement coming really in both the U.S. portfolio and within the Mexico portfolio. So we came in a little bit better than we were expecting and some budget in our first quarter and feel good about where that's headed. So that's the bulk of the offset. There's also some currency benefit that will come on Mexico and Canada that adds a little bit to it as well. So in total, they almost balance out. So we're comfortable with the current range.

So while you maintain your U.S. same-store guidance range, you might be more biased towards the high end now. Is that fair to say?

I think we're comfortable with the current rates where we are, knowing that we're going to have the $0.03 impact from the sales that have occurred. So we'll leave it there for now.

All right.

We'll go next to Christy McElroy with UBS.

It's Ross Nussbaum here with Christy. I'm not sure if this is for Milton or Dave or Mike. Can you talk a little bit about Kmart's last years and giving it some unique insights to their operating history. How long, in your experience, can a retailer survive with its store count after seeing a decade of declining sales?

Well, it comes to 2 parts. First and foremost, the survival depends on the balance sheet. And what -- the balance sheet of Sears is relatively strong, that's not -- will not offset the fact that their stores have not been attracting the customers, so that I think that they have the ability to hang in for a long time with that balance sheet. They also have real estate that they own at relatively low rents. So I think they'll be here. They have balance sheet. They have market caps. The equity is what rate?

It's $4 billion.

It's right at $4 billion or $5 billion, and so they'll hang. But Ross, you know as well as anyone, we have seen retailers come and go, and I'm thinking one of our Sears locations, where we've had -- we have a 5th tenant each time we got higher rents. So we are in the real estate business, and you got to watch what your rents are and how does that compare to market, et cetera. But I think their balance sheet is strong.

I would echo Milton. Their occupancy costs are low, so they've got a cushion. And they've got a margin, and they're using that margin.

And they're focusing on exclusive brands. They know they can't compete with Wal-Mart or Target, but they have Craftsman, and they have Lands' End. They have Martha Stewart, Kenmore. And I wish they were better at promoting their brands, but they have that as an edge.

Okay.

We'll go next to Jim Sullivan with Cowen Group.

I just have one quick question. Following on the comment you made, Mike, about leasing costs and given all the challenges in terms of some of the tenants downsizing and the changes in use as well as the still competitive small-shop leasing environment, leasing cost per foot in the quarter were a little bit higher than they have been. And I guess, is it fair to say that what you're saying is that we should expect that number to continue to be fairly high throughout the year?

I would say, Jim, that when you're comparing it say over the past few years, it will be elevated. I can't predict exactly where it's going to go and if it's going to top out at a particular level, but I think you hit the nail on the head in terms of the exit. You know our disclosures that [indiscernible]. Now the difference -- interestingly enough, the difference between now and 2 years ago is that the money needed to be put out, but the rents weren't being paid for it, at least, at this point, because of the supply and demand dynamics that the retailers are in fact paying for that TI. And now even more importantly, it becomes underlying, being -- or analyzing the retailer, their ability to pay that rent over the long term and how that is positioned in the center.

Okay. Good.

We'll go next to Quentin Velleley with Citi.

Yes, it's Michael Bilerman. Dave, in your opening comments, you talked a little bit about pursuing portfolio deals, and you also talked about the acquisition market, I guess, getting overheated for higher-quality assets. And I was wondering if you could just flush out sort of a little bit on the portfolio side and what you're doing. And also talk a little bit about the capital that's in the marketplace today and how you're finding sovereign wealth and pension capital and how you're thinking about trying to monetize that a little bit in this environment.

Okay, that's a lot of questions built into one. First of all, I'd correct it a little bit. I didn't say overheated. I said heated. So I don't think it's to the point where you want to say you're not a player. Clearly, prices are high, and there's lots of interest in the retail sector again, particularly for the higher quality, and we're now seeing it start to move down a scale. When you finish 17th out of 30 bidders, you begin to look a little harder at perhaps a B market or a B property, so we're starting to see that. In terms of either M&A or portfolio traction -- portfolio transactions, because of our size and our relationships, we are having an opportunity to take a look at some of these pending things. And obviously, if you are a private owner with a large portfolio, that's considering going public, you're also looking at the possibility of selling that outright as a way to maximize price. And there are -- there is a discount involved in going public, if maximizing your price is where you want to be versus being just a public company with other benefits. You're certainly beginning to show those portfolios out there as an alternative to what the bankers are telling you about going public. So we've seen some of those in the market, and we have evaluated those. We are wrestling, in some cases, with quality in the markets involved. We've said 2 things: We want to upgrade our portfolio; And secondly, we want to concentrate on our core markets. And so in some cases, the portfolios that we've been shown do not meet that test. And if it doesn't meet the test for us, we don't and we are not comfortable bringing in an institutional partner. But we're very pleased that we're continuing to have those opportunities, and we'll see what this year brings over time.

And size wise on those? I mean, these opportunities that are coming in, talking in a...

There's a -- they are a large range, 5-property portfolios and up, if you will.

Okay.

We'll go next to Jay Habermann with Goldman Sachs.

Just another question on the urban assets. Can you give us an update there? I know it's just a couple of hundred million but just curious on the process and timing there are well.

Sure. And Jay, I apologize, I don't think we answered one of your questions from the first round in terms of our -- the pricing on our non-strategic asset sales. But in general, we're looking at somewhere around 8% to 9% in terms of...

That's answered.

Okay. I'm sorry. In terms of the urban assets, it remains part of our non-core portfolio, and we are trying very hard to move those. We're having some progress in the Chicago market and the Boston market. The Philadelphia looks to be longer term.

It's fabulous property.

Yes. I guess, the bones of the real estate that we have are very good. We're comfortable with them. Many of these properties were purchased as redevelopment plays, and that market just has not come back yet. So it's not the right time to sell them. We do have one or 2 on the market, and we'll see what time brings. But I think you'll see us probably sell our Chicago assets before we sell the Philadelphia assets. But we're determined, over time and at the right price, to move those assets.

And if you win the right acquisitions, what sort of increase in cap rates are you assuming, say, over a 5-year time horizon?

50 basis points.

Okay. So that hasn't changed at all?

No.

Okay.

The New York assets are fabulous. You have to look at 21st Street and some of them, they really -- I think we bought it right. We'll have a wonderful exit. There's a solid partner there. So I think we will all be pleased with the end result.

Our last question today will go to Vincent Chao.

Just a quick follow-up on the comments about parts of Florida not doing as well. Are their certain parts that are doing well? And if so, what's really driving that?

Yes. Our part portfolio in Southern Florida or in Miami is -- has done and continues to do very well. Where we see the most issue in our portfolio is more on the West Coast of Florida, both Orlando as well as the West Coast of Florida, just in terms of housing, in terms of unemployment and where -- disposable income levels of rent. So that's the area that we've had the toughest slog. And it also is reflective of the fact that in that part of the state, proportionately, we have more small-store tenants. And as a consequence of the -- what we talked about earlier, we've had the most fallout in those small-store tenants. But even in that respect, Vincent, things on the margin are getting better, just slower than in other parts of the country, which have rebounded quite nicely, some of the markets I have mentioned earlier.

Okay. That's very helpful.

And I'll turn it back over to Dave Bujnicki for closing remarks.

Thanks, Clayton. And a final reminder, our supplemental is posted on our website at www.kimcorealty.com. Thanks again for participating. Good day.

This does conclude today's conference call. Thank you for your participation.