Kimco Realty Corporation (KIM) Q2 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to Kimco Second Quarter Earnings Conference Call. Today's event is being recorded. [Operator Instructions] At this time, it is my pleasure to introduce your speaker, Mr. Dave Bujnicki. Please go ahead, sir.

Thanks, Felicia. Thank you, all for joining the Second 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; Glenn Cohen, Chief Financial Officer, as well as 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 will request that you respect the limit of one question, so that all of our callers have an 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 your questions. With that, I now turn the call over to Dave Henry.

Good morning, and thanks for calling in today. While worrisome clouds remain in the U.S. and around the world, ranging from the European debt crisis to continued U.S. challenges in housing and employment and deficit spending, the U.S. economic recovery continues its positive momentum, and the retail industry is once again, expanding. A recent RBC analysis is particularly encouraging, as it notes that it's research base of 2,200 retailers planned a total of approximately 73,000 new store openings over the next 24 months. This is expected to translate into increases in effective rents, occupancy and leasing spreads in our industry. At Kimco, we are very pleased with our second quarter results and we believe that they represent solid and steady progress on our key 2011 objectives. Increasing occupancy is just under 93%, same-store NOI growth exceeding 3%, and positive leasing spreads of 2.1%, all combined to show very solid second quarter portfolio of vital signs. Mike and Glenn, will provide further details. But overall, we are confident and optimistic about the balance of the year and our full year operating results. Permit us to take one final vow for completing the sale of the Valad bond at a price exceeding our basis. That done, we are turning our full attention to the disposition of the InTown portfolio, as InTown represents the last major piece of our non-retail portfolio. While no bidder achieved the minimum pricing level established by the joint venture partnership in the first round of bids, 3 potential purchasers are still fully engaged in due diligence and are trying to reach the necessary price level. We are also encouraged because the InTown portfolio itself continues to improve dramatically in terms of RevPAR growth and EBITDA metrics. On an annualized basis, the portfolio EBITDA is now within 6% of its prerecession high, and our annualized FFO return exceeds 20% on our equity investment. The InTown portfolio, like the rest of the extended stay industry, is experiencing some substantial rate and occupancy increase. In addition to the possible sale of the InTown portfolio this year, we anticipate the sale or repayment through refinancing of an additional $75 million of non-retail investments over the balance of the year. As a result, our non-retail portfolio should finish the year at less than 4% of our total gross asset through property sales, refinancings, partner buyouts and the conversion into pari passu joint ventures. The retail preferred equity portfolio has also declined from 297,000,125 properties to 136,000,081 properties over the past 18 months. With respect to new business, we continue to acquire high-quality retail properties in our core market, in a deliberate, patient and disciplined manner. So far this year, we have closed on 7 properties, totaling $165 million for both our institutional joint ventures and our own portfolio. Additionally, we currently have a firm pipeline of 10 additional property acquisitions, totaling a further $190 million. Internationally, Canada is performing wonderfully, with portfolio occupancy of 97%, strong currency, low mortgage rates and continued U.S. retailer expansion into the Canadian market. Illustrating this trend, our RioCan Kimco joint venture owns 9 Dollar stores, of which 8 will be converted to new Target stores, and one will become a new Wal-Mart store. Ed Sonshine and his team did a terrific job in negotiating these transactions, and converting 9 out of 9 Dollar stores in our joint portfolio. Bravo, Ed. In Mexico, we are also benefiting from a strengthening currency, and making good progress in leasing our new retail development. We even approved our first new project this year, a small development project in Mexico City, 94% pre-leased to Wal-Mart. Despite the violent headlines, the Mexican economy is strong, with 2011 GDP growth expected to exceed 4%. The unemployment rate is 5.4%, and the country has added 400,000 new jobs so far this year. U.S. and Mexican retailers are both expanding, and leasing activity is finally increasing in small store space, which has been very soft for the past 2 years. Overall, we remain committed to our strategic goals of improving our portfolio metrics and financial results, while selling in a measured way both our non-retail assets and selected nonstrategic retail properties. And then using the resulting proceeds to acquire additional high-quality shopping centers in our core markets, and reducing leverage over time. Now I'd like to turn it over to Glenn to discuss the details of our quarterly results. And then Mike will provide an operations overview, and Milton will then close with his perspective.

Thanks, Dave. Good morning. The positive results produced during the second quarter are a continuation of our progress toward our strategic objectives, which Dave has just articulated. As we reported last night, recurring FFO per share was $0.30 for the second quarter, compared to $0.28 last year. $0.30 level excludes $0.02 or $8 million of noncash impairment charges attributable to the disposition of certain nonstrategic retail assets and $0.01 or $4.6 million of nonrecurring income, primarily related to the monetization of certain non-retail assets, including the Valad convertible bond we have previously announced. Our recurring FFO, which increased 5% from last year was fueled by positive NOI growth of $11 million or 7.5% from the shopping center portfolio. About half of the growth was from acquisitions and incremental growth from our Latin America portfolio, as lease-up continues, and the other half from organic growth in the U.S. portfolio, with all our regions beating our plan for the quarter. Now although not included in FFO, we did sell 3 other nonstrategic retail assets, which produced gains of $4.7 million. We will continue to focus on recurring FFO, which excludes both nonrecurring income and noncash impairment charges. As Dave mentioned, our key shopping center operating metrics: occupancy, same-site NOI and leasing spreads were all positive for the quarter. Occupancies for the combined portfolio without regard to ownership percentage increased to 93.1%, up 30 basis points from last quarter and 30 basis points from a year ago. Looking just at the U.S. portfolio, occupancy reached 92.9%, up 40 basis points from last quarter, and up 50 basis points from a year ago. Same-site NOI increased 3.1% from the combined portfolio, including the U.S., Canada and Latin America. The U.S. same-site growth was 2.6%, representing the fifth consecutive positive quarter to this metric. Leasing spreads were also positive, with an overall 2.1% increase from new leases, renewals and options. Mike will provide more color on that portfolio in just a moment. Our previously stated capital recycling program has also gained momentum during the quarter, with the disposition of 11 nonstrategic assets providing proceeds of $48.5 million. Those proceeds were quickly put to work with the acquisitions of 2 fully-owned assets, and one property in a joint venture. The gross acquisition costs was $75 million subject to an aggregate debt of $43 million on 2 of the property. We are currently in contract negotiations to sell 10 other nonstrategic retail assets and actively marketing over 40 other properties. We remain comfortable with our target range of $150 million in nonstrategic dispositions for 2011. We continue our focus on the monetization of the non-retail portfolio, which now stands at just over $600 million, and we expect several other non-retail preferred equity investments to be liquidated by the end of the year, providing an additional amount of $75 million. Our balance sheet metrics strengthened further during the quarter. We ended the quarter with net debt to recurring EBITDA at 6x, compared to the 6.3x at the beginning of the year, a level we expected to achieve by the end of 2012. Our liquidity position is in excellent shape, with over $1.7 billion of availability on our credit facilities and our capital plan is on track, and with less than $90 million in maturities for the balance of the year, we do not foresee the need for a public capital raising in the near term. With regard to the joint venture programs, we have been successful in refinancing the maturing debt in the various ventures. We have closed on 8 mortgages for $147 million in proceeds, and have another 4 expected to close in early August, for another $70 million at rates ranging from 4.68% to 5.79% of 10-year money. Although spreads have widened recently, mortgage financing remains available at attractive rates from insurance companies, commercial banks and CMBS. As for guidance, as we have attained recurring FFO of $0.59 per share for the first half of the year, we are comfortable reaffirming our recurring FFO guidance range of $1.17 to $1.21 per share. Again, this guidance range does not include noncash impairments or nonrecurring income. Similar to last quarter, assumptions in determining guidance include occupancy improvements of 50 basis points by year end, same-site NOI growth of 1% to 3% from the combined portfolio, incremental contribution from the Latin America portfolio of approximately $8 million, and additional acquisition activity with dispositions in the latter half of the year. This guidance range incorporates the recent impact resulting from the early repayment of Valad and Whiterock bonds. One last point, yesterday, we declared our quarterly common dividend of $0.18 per share. We continue to have a conservative FFO payout ratio of approximately 60%. And with that, I'll turn it over to Mike.

Thanks, Glenn. Good morning. We are, obviously, quite pleased that the direction of the shopping center portfolio is making, as evidenced by the array of portfolio metrics recorded for the quarter. The improvement on occupancy, the continuation of positive same-site NOI results and the stabilizing leasing spreads, not only reflect the shifts in shopping center fundamentals over the past year but also, the outstanding efforts of the Kimco organization. By now, the takeaways from the shopping center convention in May, have all been reported and analyzed by the research and investment community. But nonetheless, it bears repeating that demand from national retailers continues and remains strong, and the absence of new supply has improved prospects for filling existing second and third generation space. The appetite to expand is most notable for the smaller format users, including franchise-based businesses and national chains such as Anna's Linens and ULTA Cosmetics, each of whom are looking to double their store count over the next 2 years. Yet despite this healthier environment, it seems that there are always clouds that confront retailing and in turn, challenges for shopping center owners, and this period is no exception. There's no shortage of the question about the effect of online retailing on brick-and-mortar space, the trending for smaller footprints for many box retailers, the difficulty of mom-and-pops to access credit to form and build new business, concerns over cost inflation and the potential impact on operating margins in the second half of the year, all overlaid by an uneven recovery, stubborn unemployment and even scarier reminders of the people in Washington running this country. There are no silver bullets to solve these issues. To deal with the challenges, our approach is simple: invest in and extract as much value from our core group of assets that have the greatest ability to generate stable and increasing cash flows in any environment; find external opportunities that have similar potential; and eliminate those assets that in our judgment have more risks than rewards over the long term. In the U.S. portfolio, I am particularly encouraged by the number of value creation opportunities starting to percolate from our existing property base. In addition to the projects that are active, we are seeing an increase in opportunities in the evaluation stage, as well as situations where the key anchors leases have been signed, and the approval and resultant re-merchandising process has begun. For example, I'm sure you've all heard us talk about the potential in our portfolio in the New York City borough of Staten Island. The redevelopment of the Richmond Avenue site with a brand-new Target store and an overhaul of the rest of the center, will begin construction later this year after 2.5 year of planning and entitlement process. At another location in the northern part of the island, we signed a lease with Stop & Shop for a new 55,000 square-foot store, filling the existing big-box vacancy in the center and absorbing the balance of the vacant space. It's a very long approval process in New York City, but the plan calls for an opening in early 2014, and will include a complete upgrade in renovation of the center. In yet another center, in the southeast part of the island, a potential redevelopment of the center is on the drawing board and targeted upon the expiration of the anchor tenant's lease, an anchor paying $2.26 in rent, about 6 to 7x below market. I call out these 3 relocations as the type of opportunities we're seeing in our core markets. Similar projects are on the drawing board in Palm Beach Gardens in Live Oak, Florida, Farmingdale, New York, Columbia, Maryland and New Bedford, New Jersey. And while the redevelopment stories are the most interesting, core leasing activity and creative approaches to increase ancillary income sources are being applied across the entire portfolio. And that's where I feel our superb operating team will make a big difference. We're making investments right now at sophisticated, energy management systems to reduce site operating costs, as well as pursuing revenue through programs such as the solar program, with 3 locations online and 3 others approved. Being nimble and responding to mix changes will be critical to be successful. A recent ICSC publication pointed out that only about 2/3 of shopping center space consists of pure retail use and adding on the restaurants, brings that up to about 79%. Leaving about 1/5 of space occupied by non-retail uses. I point that out as service tenants for nontraditional use can be an important part of a successful center. And our tenant relations and portfolio review program will be increasingly focused on franchise, service, medical and other nontraditional use to make sure all bases are covered. On the exit side of the equation, the program to dispose of nonstrategic shopping centers has begun to pick up speed. In addition to the 14 properties totaling 1.2 million square feet sold through the first half of the year, as Glenn mentioned, we have another 10 under contract negotiations. And no surprise, the profile of these assets is markedly different than our strategic pool. The aggregate of assets sold and under contract since we kicked off this process last year, has had a composite occupancy of 81%, an average base rent of $8.21, and demographic statistics that are anywhere from 10% to 25% less than the corresponding statistics for the strategic portfolio. While not an overnight process, I'm confident that this program has the commitment of the entire company, and will demonstrably change and enhanced the quality profile of the portfolio. There's still a lot of work to do but interestingly, the opportunity to increase earnings and operating cash flow and consequently, value not only comes from executing on the individual asset strategies in our core shopping center assets, but also the dislodging of low-yielding assets on the balance sheet. Those certain assets accumulated at the last market peak, as well as some of our shopping centers assets during the development cycle, primarily in Mexico, but also a few properties from the vestiges of our former merchant building business. This opportunity, either by increasing the operating yield of certain assets, as well as recycling out of unproductive assets can be an additional source of earnings growth in the future. Milton, final comments?

Well, thanks, Mike. Well, Dave, Glenn and Mike have covered a great deal, so I'll be very, very brief. When I reflect on the quarter, the word that comes to mind is quality. Quality of property is in quality of people. The quality of a shopping center is tied at the hip, with the ability of the center to generate a sustained and growing cash flow. The historic results of our portfolio of property showing growing same-store NOI from tenant, selling essential nondiscretionary items, all from tenants that have strong credit and occupy spaces under long-term leases. The quality of our people is a source of great pride to me. Working with our associates, we see their passion for the business. Our regional presidents are solid energetic entrepreneurs and managers. Dave, Mike and Glenn have been with Kimco a long time. Dave has been with us, for over 11 years, and I have the opportunity to work with Dave for many years before he joined Kimco, while he was at GE Capital Real Estate. Mike, has been with us for approximately 14 years. And Glenn, for 16 years. You may note that I have been at Kimco for a somewhat longer period. So I am confident with the quality of our people and our portfolio, and I know it will result in growing cash flow. Growing cash flow leads to increase share value and that is why we are here. And with that, we'd be delighted to entertain your questions.

[Operator Instructions] We'll go first to JJ Habermann (sic) [Jay Habermann] of Goldman Sachs.

It's Jay Habermann here, everyone. Just a question on the InTown Suites portfolio, you mentioned the 3 potential purchasers at this point, and EBITDA, that's pretty close to where it was going back in time. So I guess at the peak of the cycle. Can you give us some sense of your expectation for the second half of the year?

In terms of the EBITDA or in terms of getting the sale done?

Getting the sale done.

We remain somewhat optimistic. The first round bids, as I mentioned, did not come to that minimum price, but they weren't that far away either. So we're hoping to get one of these 3 bidders up to that minimum pricing level. And we're hopeful, what is particularly encouraging as I mentioned though, at the property level, it's doing better every single week, and we're of course, immediately, giving that information to these 3 bidders, to try to get them to that price. So there's no guarantee we'll get there, but we're going to be patient about it. And in the meantime, the FFO we're throwing off, is very impressive.

And how close are they at this point to your minimum level?

8%, 9%.

We'll go next to Christy McElroy of UBS.

I just wanted to follow up on Jay's question. To what extent, if it all, have the financing markets impacted demand for, in terms of the overall sale process of the InTown portfolio? And what's your sense for how price or market demand for hotel assets have changed over the last 3 to 6 months? I'm just trying to get a sense for the process and what the biggest challenges have been.

Well, taking your second question first, I think the market for hotels have picked up dramatically. People recognize it as a hard asset that you can reprice everyday. And with the hint of inflation down the road, hotels have come into favors, especially when you can buy way below replacement costs. You are seeing a lot of activity in the hotel sector. And now, it was driven in my opinion, first by the opportunity funds, rather than the hotel companies themselves, as they move to come in at low prices. But now you're seeing across-the-board demand. In terms of the availability of financing, that's also increased. Although I will say, lenders, in general are leery of hotels and they underwrite very conservatively. And they're not going to be aggressive. And I doubt this is the place where the CMBS market is going to focus as it comes back. But there is financing available especially for the stronger companies that are buying hotels.

What gets the bidders to sort of your minimum level? Is it an overall improvement in fundamentals or incremental improvement in fundamentals? Or is it incremental improvement in financing markets?

It's probably, a combination of both. What we're hoping is they look at this hockey stick trend that we're seeing at the property level. And for the first time in years, we've been able to push rate as well as occupancy. So driving that RevPAR now is proven rate demand. I'll just give you, since we've had a couple of questions on InTown, I'll give you an interesting anecdote. We're seeing a pickup in demand as AT&T and Verizon spend literally, billions of dollars building out their cellular network. And so all these construction workers that are doing them are staying at InTown Suites and other extended stay facility for months on end. And this is the type of tenant that we need to be able to drive rate. So it's encouraging.

We'll go next to Jeffrey Donnelly of Wells Fargo.

I guess it is to Glenn or Mike. Concerning your 2011 guidance of 1% to 3% combined portfolio of same-store NOI. I think year-to-date, you're up just shy of about 2.5%. So what do you see on the horizon that would cause your full year same-store NOI assumption to come in towards the low-end of your NOI guidance?

The only reason why we dialed back and we kept that low end is because we have the immediacy of the Borders bankruptcy and liquidation. So in the short term, that will take a nick out of occupancy and cash flow. We are confident that with respect to the Borders locations, which prior to bankruptcy we had 16, that they will be filled in due course. Interest and activity has been quite good. We're very pleased with the level of interest from various box units and the like. But in the short term, Jeff, it may take a little bite out of the range.

We'll go to David Wigginton of DISCERN.

A topic that seems to be gaining momentum, and has come up on recent mall conference calls, is the demand for space the mall operators are seeing from traditional big-box retailers. I guess, to the extent that this is occurring in your markets, can you maybe talk about the competition from malls for these types of tenants? And what your strategy is in response to that competition? And maybe just provide us with an idea of how big of a potential threat that is to your business in the short to medium term?

Well, we have Rob Nadler, President of our Central Region on the phone. And, Rob, if you can just give a perspective because your portfolio obviously has many box retailers involved. And just maybe some assessment on what you're seeing in the competitive landscape in terms of malls.

Mike, are you guys hearing me?

Yes.

All right, terrific. David, I think what's occurring in the mall arena is the lack of development of outdoor retail, strip retail, is forcing the retailers in the boxes to be more adaptable and more flexible than they ever have been before. Now that's playing out very well for our ability to backfill and our success in backfilling our boxes. These guys, I think, will be first to tell you that their preference is still going to be the convenience and the low cost of being outside and not attached to the mall. But I think that they're, in some instances being forced, so to speak, to look at the mall as an expansion vehicle with the lack of new construction going on. But the costs of operating within a strip and power center format is by far, the superior way for these guys to continue to look to grow. And as reported early, our lease-up of our second-generation boxes has been very brisk over the last 12-month period. So I think it's more a function, it's probably happening more outside our core markets, more in the secondary market than it is in the core market. Because for the most part, in the core markets, the malls have held up fairly well, they don't have the type of vacancy to be able to attract the big boxes.

And I would just add one perspective. There's roughly 800 malls in the United States, and depending on how you define the neighborhood, the community shopping centers, there's somewhere between 50 and 100,000, the neighborhood and community centers. So it's not -- even, if every single mall has the demand, it's not going to change the dynamics of our industry.

We'll go next to Craig Schmidt of Bank of America Merrill Lynch.

I was wondering, when we think of leasing spreads, especially just your results in the second quarter. Do you think they're going to improve going forward from that level, kind of hold at that level, or weaken somewhat in the second half?

Craig, I think, what we have continued to see is a continued improvement, a forward march on negative territory, trying to get it to positive territory. If you look at the new leasing spread on a full 100% peak level, we are positive or rather it's slightly negative. But point being is, we are definitely moving away from a very, very tough environment. And we're starting to see continued improvement in terms of renewal and even in leases. In quarterly reporting, there's always going to be those situations, where there could be a big tick up or a big tick down because of a particular lease. And I'm sure with some of the box vacancies, with Borders coming, that not every damn lease is going to be signed at a higher rent. But the overall trends, if you map it out from where we were in '09 to where we are today, I think you're seeing a continued upward momentum and that trend line, I think will continue, and particularly as we get into '12 and early '13.

And then that's true for big boxes, the heavy in-line space?

Clearly, for big boxes, and I think that reflects the demand, the supply-demand, the balances that you just heard from Rob, and you've been hearing from many of the strip center operators over the past year. Small ticket leasing, as we've all talked to that, is still tougher. But more and more is being isolated to certain geographic regions. The last to recover in Kimco, we are seeing some improvement. But parts of Florida are still tough, parts of the West Coast and Vegas, are still tough. So it's really the mix equation, but even on the small ticket leasing, I think, you're starting to see rehabilitation from where we were a year and a half, 2 years ago.

We'll go next to Paul Morgan with Morgan Stanley.

You guys have been involved in a lot of retailer liquidations one way or the other. And I just want to get your thoughts, maybe on kind of what we would expect from the Borders lease dispositions, and whether you may expect -- apart from kind of the direct exposure that you have in your portfolio, where you may expect a period where there's a pause in the market as retailers look at the opportunities from the 250, 300 or so new full-line stores that are out there, and implications for kind of the second half there.

I don't see that the additional vacant space being put on the market with the Borders bankruptcy and liquidation is going to materially change the dynamics that we're experiencing in the marketplace. Many of -- the same users, the same retailers that we have been talking about, now are expanding and are looking for a new space, they're viewing this as opportunity. So many of those box retailers, that we gave names of during the Linens and Circuit bankruptcy, are similarly looking at the Borders boxes. There's even that new contingent, I mentioned, ULTA Cosmetics as an example, where they may take 10,000 to 20,000 square feet. There are some opportunities for us on single-store Borders to demise and split the premises and put in 2 users. Point being is that, I don't think the marketplace is going to be adversely affected or there's going to be any significant change in the dynamics because of this additional space in the Borders bankruptcy. It all still comes down to the better locations and what the relative supply and demand dynamics are in a given market.

Mike, I would just add one thing. I think there's some retailers that have been waiting for this to happen. So I think it's something that's building up for 6 months. You have people like Barnes & Noble, do a one-year extension with us, I think, looking for opportunity for Borders and things like that. So I think you've already have some buildup and some of these retailers waiting for this to happen, so that will be positive.

That comment came from Ray Edwards, who runs the Retailer Services business. And he's well-schooled and well-known in the bankruptcy world.

And one final comment, I think you've seen retailers that now that there are some nice location becoming available, taking another look at their expansion plans and increasing those expansion plan, somebody like Container Corp -- somebody like Container Stores, is an example of a company that's going to do more this year because of the availability of these prime locations, they're coming available. So we don't expect this to be a big overhang on the market.

Do you think you'll end up optimizing many of yours that are something?

So far in terms of the relative interest we've seen, no. A couple of pick me up situations.

We'll go next to Alexander Goldfarb of Sandler O'Neill. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: Just a question, with all the recent headlines about private REITs and some of the scrutiny they've been receiving on their valuation metric. Just curious if you guys see an opportunity to expand more wealth management relationships, like the one you have with UBS? Do you think that the transparency that the public REITs provide, provides an opportunity for you to do more UBS-type ventures?

Well, it certainly highlights the attractiveness of doing a problematic joint venture with a public REIT and an S&P 500 REIT, blue chip REIT, so we would say, yes, it certainly enhances our ability to grow the Investment Management business. But as a REIT, we hate to see this publicity that's happening on the private REIT side. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: But do you see more wealth management franchises seeking out partners such as yourselves?

Not an immediate demand. As we've mentioned in prior calls, the demands so far has really come from foreign pension funds and foreign insurance companies, as well as domestic institutions like that and sovereign. Well, we have not seen the private of wealth people particularly increase their demand. It's going to take a lot to wean financial planners that are getting 7% or 8% commission away from that private REIT model, in my opinion. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: That doesn't sound surprising.

We'll go to Rich Moore of RBC Capital Markets.

My question is actually a follow-up to that question. Could you give us some color on the overall interest from partners on the equity side of things? And how that may have changed in, say, the past 6 months? And maybe who some of the most important partners are today in terms of interest in committing new joint venture capital?

Yes. The trend continues in terms of increasing amounts of interest by these life companies and pension funds in getting back into real estate. What has amazed me is how quickly all of them exited 2 years ago, and how they see the benefits of real estate, being a hard asset, being a cash-yielding asset that is far better as an alternative than corporate bonds or U.S. Treasuries or other things. I mean, we can provide a pretty, say, 6% to 7% reasonably leverage yields for these institutions. So we see it every day in terms of inquiries. Our challenge is finding the products because pricing has increased the levels where it's difficult for us to justify joining some of these very frenetic bids. We're trying to be disciplined and we're trying to be patient, and trying to be very selective in what we buy for our own account and for our institutional partners. But the demand side is strong.

And, Dave, where would you say, geographically, that money is coming from? I assume it's international for the most part. But what is the source specifically? Or maybe broadly of where that's coming from?

Well, on our particular case, we have Canadian money, we have Israeli money and we have German money coming through a Swedish bank, SEB. So those are 3 foreign sources that are active as we speak. I'm sure other REITs have other foreign sources. But if you think about it, their currency buys a lot today, in terms of U.S. dollar assets. They're looking at this as a particularly opportune time to buy U.S. real estate because they can get a lot for their money, and they're still buying at below replacement costs at a time when inflation may be coming back.

We'll go next to Cedric Lachance of Green Street Advisors.

Just going back to small shop space for a little bit. Mike, can you give us some details in regards to some of the various drivers on small shops that you're absorbing? So when you think about demand from the mom-and-pops, and demand from national retailers. And perhaps, touching a little bit on the financing environments as well for the mom-and-pops.

Well, I think -- to the point, Cedric, is that the mom-and-pops really have not recovered all that much. We're seeing some very slow improvement in some areas. But really, that's not where we're seeing the thrust of small store interest. If you want to, say, less than 10,000 or less than 5,000 square feet, however you want to play it. Where we're seeing a lot of the interest is from more of the national chain, from franchise, franchisees, franchise stores, everything from the Five Guys Burgers to the auto parts dealerships, et cetera, that are really driving some increased demand for small store available space. I don't think you're going to see a lot of mom-and-pop robust increase in space demand for a different period of time. And that's what the point I was trying to emphasize, about the improvement, it becomes a gradual improvement in small store leasing, is really coming from national and regional and franchise operators than it is for mom-and-pop.

And from a rent perspective, does changing the type of rents you're able to change -- to charge if you have more national retailers? Or are we still in an environment where it's difficult to gain pricing power on small shop rents?

It's, of course, it is market and property specific. But because of the relative expansion trends of the smaller users, I would not say that rents are being severely pressured in that regard. It comes down to what space you're trying to fill and the dynamics of filling a small store space in a center in Las Vegas, versus a center in Long Island are dramatically different. And I think that's reflected, not only in the occupancy levels but also, in the leasing spread level. It is a bit of a binary situation depending on the market. That said, overall, really, what I was trying to convey, on an overall basis because of the increase in that relative interest in demand from the smaller national users, I'm somewhat optimistic that we, over time, can get that small ticket vacancy up.

We'll go to Michael Miller of JPMorgan.

I was wondering if you can talk a bit more about the difference in the rent spreads on the gross basis and a pro rata basis. I think it was 2.1 or2.7 versus minus 1. I mean, is there something in there that's a bit of an anomaly? Or is it a function of the process of getting rid of the nonstrategic assets, and that's going to help to close the gap, or is it something else ?

Michael, it is purely a mix calculation in terms of where leases were signed and what centers, and what our respective ownership interest rates are. I hate to say it, but it's more math than anything else. And the reason why we wanted to provide, why we provide gross levels with increasing frequency these days, to give you an overall perspective of where the portfolio dynamics are going. The pro rata information is provided, so you can do your math and your financial model that relates to the effect on Kimco. And that's really it, there's no hidden meaning in those 2 numbers.

We'll go to Vincent Chao of Deutsche Bank.

Just wanted to touch base on the nonstrategic retail sales. It sounds like you got some stuff that's in the market, and I just wanted to get your commentary on whether or not that increasing interest is translating into better pricing on those types of assets?

I would offer that, overall, pricing has improved to some extent, I think that's just the reflection to some degree of the market, and that's even starting to open up a little or less than 8 property. That said, as we've talked about in previous call, some of the properties that we are looking to exit are shop structural problems, severe vacancy, et cetera, and we are looking really and finding per pound buyers, so you really can't apply that broad statement to these very specific issues. So in general, yes. But I think there are certain situations that are always going to come outside the normal market channel.

Okay. And then just a follow-up on A&P, has there been any final list that's come out of them? I thought they were supposed to make some decision by the end of this month?

A&P has basically got an extension until the end of the year, to make decisions on what they're doing. They are trying to reorganize the company, it's really 2 major things they have to do. One was to get a new supply agreement done with C&S, which they have done. And the second part of it is to negotiate a new agreement with the union. And they are in the midst of doing that. And they're hopeful they'll get it done and with that, they feel they can exit bankruptcy. But it's beyond our -- yes, still at the end of the year before that will be done.

We'll go next to Nathan Isbee from Stifel, Nicolaus. Nathan Isbee - Stifel, Nicolaus & Co., Inc.: As you look at the box leases you signed over last year or so, can you just quantify about how much of those leases and associated NOI have yet to come online? And maybe as an extension, how much will take occupancy in the second half of the year, and how much will slide into '12?

I would often say, as a general matter, I'm going to guess half and half between time designing and when lease rental income starts to flow, and that's just an estimate based on kind of the normal time in terms of turnover of space and tenant fit out before you go open the business. Nathan Isbee - Stifel, Nicolaus & Co., Inc.: Okay. And then just a quick follow-up, do you have any data in terms of small shop leases in the centers, where you have recently replaced dark boxes versus the rest of the portfolio?

Could you restate the question, Nathan?

[indiscernible] how is that helping the small shops here.

Absolutely. The question is if we are filling a dark box, is it helping small space, absolutely. Nathan Isbee - Stifel, Nicolaus & Co., Inc.: Do you have any data in terms of differences between those centers where you've replaced versus that you have not?

Not in our fingertips, no. But just in looking at the small ticket leasing, which if you recall at the end of the year was at 81.6, went down 81.1, now back up, 81.6. A lot of the traction that we gain has actually been at those centers, where they're reopening of the box and choose the box. I don't have specific statistics, but we know that's where the chronic vacancy was for the most part, anyway. So that starts to pick up a little bit. But there's still plenty of room to go.

We'll go to Quentin Velleley of Citi.

Just coming back to the joint ventures, I know in the quarter that Big did another joint venture asset acquisition with you and late last year RioCan bought in the U.S. I'm just curious, could you talk about what -- you're sort of hearing from RioCan and Big in terms of their interest in expanding the existing joint venture relationships in a lot of sort of way U.S. asset values have gone?

Well, 2 very different philosophies, and RioCan can obviously speak for themselves. But they're interested in primarily, Texas and the Northeast, these are 2 markets that they're focused on growing their investment in the U.S. They like those markets, and they look for either portfolios or individual transactions, where they can grow that footprint. The Big Israeli public company is more national scope, and they're probably willing to have just a tad lower of quality in exchange for higher, higher yield, RioCan really is focused on very, very high-quality stuff. Whereas Big has been more flexible in terms of the quality of footprint. But each of the institutional investors we have has a different profile of exactly what they're looking for. Some want leverage, some don't want leverage. Some want certain sections of the country. Some want power centers, some don't. So it's really our job to match the opportunities that we have with the right institutional investor, and that's what we've been trying to do. But both of those 2 in particular continue to aggressively look for acquisitions in the U.S.

We'll go to Christine McElroy of UBS.

It's Ross Nussbaum here with Christy. I have a question regarding Borders. Specifically, did you look at bidding on any of the stores? Was there any value to the leases? I remember back to the days of Kmart and Montgomery Ward and just wondering if there was any opportunity here.

Typically, with Montgomery Ward and the others are lot of fee on properties as well. And Borders is strictly leased properties. And typical Borders lease where landlords put a lot of TI allowance into their coffee shops and things like that. Basically, drove a pretty high rent, that is not a lot of spread. Also, what's going to happen here is because of how [indiscernible] works, really other than another bookstore that wants to buy this location, a landlord will have a right to say, yes or no. So the other user will have some control over who takes our space and some very narrow who can take a Borders' location without having to pool with the landlord to do a deal. Unlike the other leases where there are -- any legal users okay. Here, it's very restrictive. So 2 storeys properties and things like that.

So if you were looking to buy the lease, the lease of Borders, you have to think of all those considerations from a purchaser's perspective and having to deal with the landlords and the restrictions thereon. So all of those factors that Ray just mentioned didn't make it economically viable to do that.

And our history has been driven by buying fee on properties. So if you look at our opportunistic purchases at Albertsons and Montgomery Ward, we were really dealing largely with fees.

And even a user like Books-A-Million, withdrew their bid looking in the complexity.

We'll go next to JJ Habermann (sic) [Jay Habermann] with Goldman Sachs.

Dave, a question for you on Mexico. You sounded much more optimistic I'd say this quarter versus what we've heard in the past. So can you give us a sense of perhaps, timing to stabilize there to achieve the 90%?

A, you're right. I personally, am feeling better as we see some small shop, the leasing activity pick up. That's been the one negative we've been fighting for almost 2 years now, since Mexico is so tied to the U.S. in terms of the economy, while the Wal-Marts of the world continued to grow rapidly in Mexico. And I think I've mentioned several times, they opened one store a day in Mexico, in many different formats. So while that's gone unabated, the small shop until recently was very slow. We have our own internal stretch targets that, that's getting to 90% which is probably within the next 12 months. But more formally, I'd say realistically, 18 months to 24 months away until we get to a full 90% occupancy level. And what we've been doing, you're seeing some of our official stats weaken in terms of occupancy. Because under our rules, we add these newly completed properties into the basket, if you will, and this drag down the occupancy even though our total occupancy for the whole portfolio is now I think [indiscernible].

It's 81%.

It's 81%. So the way some of us are looking at this, we look at all of our shopping centers in Mexico, and quarter-by-quarter, it continues to climb, and we feel good about that. And then as I've mentioned, we feel very good about the long-term prognosis for Mexico. The economy is doing quite well, manufacturing activity is strong related to both auto and aerospace, oil is obviously a big plus for Mexico. Rising consumer demand, less than 1,000 shopping centers in Mexico compared to 100,000 in the U.S. and so forth. So all of those stuff bode well for us over time. And the fact that every single one of our leases has a cost of living increase annually in those leases, is also helping us long term as well.

And we've got the added benefit of the currency lately.

Okay. And then just switching back to the U.S., maybe for Mike. On the space that's been vacant more than a year, where are we in that process? Has most of that been addressed at this point, or just what remains there?

In terms of re-leasing spaces that's has been vacant more than a year?

Yes, the sort of non same-store space in terms of leasing stats.

There continues to be certain boxes that have been vacant for many year. I think you're talking about both space that's been more than vacant, more than a year being absorbed, clearly, not the case.

Again, if you focus on our biggest space, we're 96%, 97% leased. So the bigger boxes are not the challenge for us. The challenge for us is the stuff under 5,000 square feet, and they were in the lower 80% and moving upward, and for us, we think that's great upside. So the big boxes are not the focus.

Maybe, Jay, what's behind your question? So that we can understand it.

The portion of leasing essentially that was non-same-store in the most recent quarter. I guess, the sense of how that's going to trend going forward? If you think about the leasing going -- from here going forward?

I think to Dave's point, there's always going to be some dynamic of that to continue that non-comparable space being leased up. But it's really going to have to be in the small ticket arena. Because as Dave has indicated, you're almost at 97% on the big box.

We'll go next to Samit Parikh of the ISI Group.

I had just a question on pricing power in the small shop leasing. Looking at your supplemental right now, sort of I guess the new leases, signed this quarter look like they're mostly small shops signed in the mid-15s. On your lease expiration schedule, sort of the small shop leases expiring next year are around $20 a foot, how comparable is that space essentially? Is it apples-to-apples? And if that's the case, are you guys sort of that far away from where the market is of your expiring small shop leases?

It's not apples-to-apples. That's the issue because you're just dealing with a different inventory, because it's national. You're going to have different locations maturing at different times and that will change the mix. However, we still know that the small ticket leasing is still more pressured relative to the big box in terms of leasing spreads. And depending on the market, you could still be down 10-plus percent in certain areas of the country on leasing spreads for the small ticket.

Okay. And then just last question, for the remainder of the year, what's baked into your guidance for occupancy for NOI loss from Blockbuster and Borders?

The total NOI point or rent is actually 0.2% of our total rents on an annual basis. So the effect is going to be really de minimis. And we took it out for planning purposes.

And that's Borders. What about Blockbuster?

Same thing.

We'll go next to Jeffrey Donnelly of Wells Fargo.

Just a follow up on the modeling question. I guess, 2 parts. The marketable securities portfolio was significantly cut back in the quarter. Is that a one-way change for you guys? And I guess as a follow-up, can you talk about the interest dividends on the income line in the back half of the year? Because in Q2, there was a sort of a $10 million nonrecurring pop, but I'm wondering if given in light of the direction of that security portfolio, should we expect they'll be meaningfully cut back in the back half of the year?

Yes, well, the marketable securities, the size of the portfolio is only about $40 million today. The biggest item obviously was the Valad convertible note, which is gone. And we had obviously -- in our original guidance, we weren't planning to sell that until sometime, actually having mature back in 2013. So as I mentioned, in the guidance, we had to take that into account. But in terms of where we are, I mean, there's a small amount of securities that's left. So we don't plan to grow that at all. As a matter fact, you'll see it continues to decrease as we go further in the year, as another bond matures later in the year, that we have to take off. And in terms of the interest, there's another investment income. There is a little bit of a pop this quarter from the distribution received on a private equity investment where we had virtually no basis. So that's part of the nonrecurring flows that we pulled out anyway. And so you'll see that number come down a little bit.

And that does conclude today's conference call. At this time, I'll turn the conference back to our hosts.

Thanks, Felicia. And a final reminder, our supplemental is posted on our website at www.kimcorealty.com. Thanks for participating today.

That concludes our call. Thank you for your participation.