The Advisor Access Interview

Advisor Access: What makes shopping centers an attractive asset class to invest in?

Conor Flynn: Open-air shopping centers, in particular, are a great asset class because they thrive in all economic cycles. They can also be considered a defensive asset because they are necessity-based offering every-day goods and services. There is typically a retail mix of grocery stores, personal service providers, several restaurants, as well as off-price retailers, which continue to do well, in both good times and in bad times. Most importantly, we are currently in a perfect situation in terms of supply and demand with a 38-year low in new supply for open-air shopping centers. That means there hasn’t been much, if anything, built since the recession and retail per capita has actually gone down in the U.S.

We are now seeing steady, increased demand from our retailers who wish to add new stores and that has boosted our occupancy rates to near all-time highs. So with the lack of new supply and present-day demand factors, we like to say we’re in the ‘sweet spot’ of retail with many of our tenants looking to expand and to do new deals with us.

All these factors are leading us to focus on our existing assets: how do we add density to them, how do we develop them, and continue to create value for our shareholders.

AA: What differentiates Kimco from other REITs in the shopping center sector?

CF: Kimco is North America’s largest publicly traded owner and operator of open-air shopping centers with over a 50-year history in this sector. This year will mark our 25th anniversary as a public company. We are also the first open-air shopping center REIT to be included in the S&P 500 index. We have great people and great relationships and we believe the knowledge base of our management team is second to none. The benefit of our history can also be found in the long-term below market leases with near-term expirations providing us with multiple mark-to-market opportunities. Our U.S. portfolio is approximately 37% below market and Anchor spaces are 58% below market; there is significant upside opportunity. We can then selectively choose to re-tenant that box, renew with the existing tenant or reposition it through a potential redevelopment project.

[pullquote]“Over 70% of our portfolio rents are from sites which are anchored by grocery-stores (up from 55%) proving to be lucrative for us…”[/pullquote]We also have a distinct advantage with a geographically diverse portfolio concentrated in the major metro markets up and down the coasts. This includes Boston, the New York metro, Philadelphia-Baltimore-DC corridor and Miami-Orlando-Ft. Lauderdale on the East coast; out west in the Bay area, San Diego, L.A., Orange County, Seattle, Portland; as well as the Texas markets of Austin, Dallas, Fort Worth, Houston and in other markets that include Chicago and Denver. Finally, we have unmatched tenant diversity within our portfolio. Our largest tenant is T.J. Maxx, (they’re an A-rated credit) and yet they still only represent a little over 3% of our annual base rent. Our number two tenant is Home Depot, then Walmart, and each is still less than 3% of our annual base rent. So the overall diversity is pretty phenomenal.

AA: Describe Kimco’s portfolio in more detail.

CF: Over the past five years, we have been transforming the portfolio from a scattered collection of assets in the U.S., Canada and Latin America to a tightly concentrated footprint of high-quality assets clustered in the major metro markets in the U.S. with the highest growth potential. We have been actively investing in the New York metro area, the coasts, and other major metropolitan areas across the country. We have re-positioned the portfolio to be much more urban focused and by doing so, Kimco has become very concentrated. Our top 300 properties have an additional 142 properties within ten miles, which in total, accounts for over 92% of our total net operating income. Over 70% of our portfolio rents are from sites which are anchored by grocery-stores (up from 55%) proving to be lucrative for us since grocery components tend to have a built-in flow of consistent foot traffic bringing increased shoppers to our centers.

AA: How does Kimco plan to grow its dividend?

[pullquote]“The dividend is very important to us and we have been growing it at an 8% compound growth rate since 2010.”[/pullquote]CF: The dividend is very important to us and we have been growing it at an 8% compound growth rate since 2010. As I previously mentioned, the multiple growth opportunities present in the portfolio should lead to a healthy increase in our recurring earnings and further enable us the ability to continue raising the dividend. Also, we maintain a low FFO payout ratio, in the mid-60% range, that provides sufficient coverage of our dividend.

AA: What is the company’s overall growth strategy?

CF: We have multiple levers for growth due to the high-quality nature of our portfolio. The first is lease-up of vacant space; specifically the small shop spaces which we would like to grow from 88.7% occupied to a 90.0% level. The second is capitalizing on old, expiring leases that are significantly below market by either renewing the existing tenant at market rent, re-tenanting the space with a best-in-class operator, adding a grocery component, or redeveloping the space.

[pullquote]“Our growth strategy also includes over a billion dollar redevelopment pipeline…”[/pullquote]Our growth strategy also includes over a billion dollar redevelopment pipeline generating anticipated incremental returns between 8%-13%. Not to mention the future potential of a $2 billion shadow pipeline that we continue to evaluate.

Finally, we have some very strategic, select ground-up developments. These projects are located in our key markets and are being built to hold long term. We currently have five projects, four of which will wind up as top ten assets for the company, with returns between 7%-9%.

AA: How does the company plan to maintain an attractive balance sheet?

CF: Kimco is in a select group of less than 10% of equity REITs that have a credit rating of BBB+ or higher. While this is a nice distinction, we are a cyclical business, and believe this is an ideal time for further improving the balance sheet. We will continue to reduce debt through the proceeds of dispositions to remain well positioned for future market cycles with the goal of a credit rating increase to A-.

AA: Why is Kimco a good long-term investment?

[pullquote]“It starts with management…”[/pullquote]CF: Our founder always says, “It starts with management” and we believe we have a best in class management team. They can identify and execute on the internal/embedded opportunities that our portfolio offers as well as find new external growth opportunities. Our large, national and diversified platform offers resiliency combined with upside opportunity. Utilizing our strengths and our long-term relationships with retailers, we are ideally situated to continue to grow the dividend and provide significant returns for our shareholders.

AA: Thank you, Conor.