Filed by Kimco Realty Corporation
Pursuant to Rule 165 and Rule 425(a) under the
United States Securities Act of 1933, as amended
Subject Company: Pan Pacific Retail Properties, Inc.
Commission File No. 001-13243
Date: September 28, 2006
KIMCO INVESTOR DAY PRESENTATION
MODERATOR: SCOTT ONUFREY
EVENT DATE/TIME: SEPT. 27, 2006 / 9:00AM ET
P R E S E N T A T I O N
UNKNOWN MALE #1: The experience to capture those opportunities as they arise.
There will also be risks and unforeseen events that are going to cause market
dislocation. The preservation of a strong capital structure will help to keep
the weather storms. To get a better sense of the future let's first take a look
at where we've come from over the past few years.
For calendar year 2006, the consensus SFO per share estimated $2.18, which is
within the range previously offered by us during the last earnings release.
That's roughly $535 million of SFO. However, internally in assessing
profitability we break our various businesses down by major platform and focus
on the contribution of income before interest costs and the preferred stock
dividend cost. In effect, a modified EBITDA concept, which we expect to total
about $722 million in 2006. There are three main platforms that comprise this
amount. The first is the direct ownership of shopping center properties, whether
owned entirely by KIMCO or held jointly with our real estate operating partner
and whether it's in the U.S., Canada, Mexico or Puerto Rico or anywhere else
that we'll expand to.
In many of our presentations and public communications we've often used such
terms as Aaron (ph) portfolio, the core, or similar designations. It's the
inventory in which we measure and quote the same site and OI (ph) levels in
occupancy changes. In 2006, we expect this platform to contribute about 61
percent of the total EBITDA. The second platform is what we call the management
business. This unit consists of our economic positions in a growing inventory of
institutional joint ventures and the related fees that are earned for managing
those portfolios. The management fee component also includes other management
related outside assignments outside of the institutional programs. This platform
is expected to be about 16 percent of this year's EBITDA. The third component,
generally called our operating businesses represent many of the business
ventures and new products that have accelerated over the past five years. Many
of these activities were precipitated by the creation of the taxable REIT
subsidiary legislation in 2001. And, these units will aggregate to about 23
percent of total EBITDA.
Over the past four years we've experienced growth in each of these operating
platforms. And, are not surprisingly proportionately more of the increase is in
the newer initiatives and operating businesses. But, each component has done
pretty well and has excellent prospects for continued expansion. And, we hope to
demonstrate this through the discussions this morning.
Allow me to spend a few minutes on each of the components. A major contributor
to the earnings space was, is, and will continue to be the ownership of shopping
centers. This is the core holdings of mostly neighbor and community centers
primarily concentrated in the U.S. and primarily still owned entirely by KIMCO.
However, more recently we have acquired properties jointly with others such as
operating partners like the Schottenstein Group, the File (ph)organization in
New York, and the Freed (ph) Group in Chicago. The composite holdings in the
U.S. aggregate about 450 some odd properties with 53 million square feet.
We're in more than 40 states, but a third of the base rents from these - from
these collection of assets are in the states of Florida, California and New
York. Intense asset management and value creation is really the focus here, with
many redevelopment and expansion projects underway and marginal properties being
exposed of. The joint ownership strategy was also the optimal way to enter
Canada, which we did with RioCan in 2001. And it continues today in Mexico
throughout our activities with a variety of development partners as well as our
industrial holdings with American industries. The most recent foray into new
markets was Puerto Rico with the acquisition this year of a seven property
portfolio and over 2 million square feet. The internal growth of the portfolio
for the past ten quarters has ranged between three point three percent and five
and a half percent. At first this growth was driven by occupancy gains after
digging out from vacancies created by the K-Mart bankruptcy in early 2002 as
well as from the disposition of cash flow losers (ph) which continues through
today.
More recently, growth has been accelerated by a more aggressive program of value
creations we're retending (ph) and reworking of existing spaces. We anticipate
continuing this more intense asset management focus in the
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portfolio for the foreseeable future. By the way, not only in this core
portfolio, but also on behalf of our joint venture partners. But more important
than quarterly measures, again, is the prospects over the long-term for
portfolio growth and we feel they're positive because of the below market rent
(ph) nature of our portfolio. Our average based rent in the U.S. portfolio is
about $9.46. We conservatively estimate the market rents on those same spaces to
be about 12 percent higher, and I say conservative because those market value
estimates are for rents on an as is basis. The reality is that many of the new
leases will be assigned at higher market levels to reflect capital requirements
and doesn't even consider the more significant rental uplift from the
redevelopment opportunities down the road.
Another interesting data point is to look at the properties that we've acquired
in the U.S. core since 2001. I use that date since the shift for most
acquisitions towards management programs picked up at that point. Yet, the
differential between the in place and market range for the seven and a half
million square feet of core acquisitions in the past five years is 17.6 percent.
And, these numbers underscore both the need to continue to pursue that dream
portfolio and the real progress that's been made to date.
As Mike Slean (ph) noted in the video, the optimal portfolio is going to have
below market rents, strong demos, retailers that rank high in sales - in sales
productivity, barriers to entry and redevelopment potential. We are striving to
grow the core holdings platform to about a $650 million by 2011. We expect to
see new investment on a selected basis in the U.S., with the primary investment
dollars being allocated to the redevelopment arena to force the strong internal
growth. We will seek to acquire products for the core U.S. holdings to replace
flows from the disposition of property. On the international front we foresee
continued investment and new development opportunities in Mexico and will gain
increased earning as many of the in progress developments come online. Mexico
will grow from about three and a half percent of the core holdings contribution
base today to about 11 percent in 2011.
In Canada, the existing interest in our portfolio with RioCan is expected to
show solid internal growth, and we also hope to expand our relationships with
other local partners in other development and acquisition opportunities. And, in
addition to our focus on our Puerto Rico opportunities, we'll be pursuing other
avenues of growth in Latin America. Now, while Mexico is the best case of an
example of moving outside the U.S. to capture better risk adjustment returns we
have not shied away from our own country if those property acquisitions advance
the dream portfolio.
But, as we've said before, the price of achieving that dream can be somewhat
expensive. The compression of cap rates for these higher caliber centers has
precipitated our aggressive expansion into the acquisition and management of
shopping centers on behalf of institutional capital partners. This strategy not
only enables us to invest for the spread and excess of our cost in capital, but
creates more scale and in earnings stream which is steady. Since the
establishment of the KIMCO income REIT in early 1999, we've focused much of our
acquisition capabilities on this institutional management business. We manage
over 200 center today with over 34 million square feet of GLA.
As many of you know, the Pan Pacific merger has been approved by its
shareholders and we've announced that this transaction will close at the end of
October. Pan Pacific's portfolio consists of 138 properties and over 22 million
square feet. We are currently finalizing an agreement with a large institutional
investor to form a joint venture to fund the entire Pan Pacific portfolio at
closing. We've also agreed that this institution took place about $1 billion
worth of those properties on the market for sale, leaving the highest quality
locations for our long-term venture.
And, as some of you saw this morning, we also announced that we have - we have
under contract to acquire another portfolio as a result of the Crowe holdings GE
Capital's transaction that will add about 16 shopping centers to the fold. Some
of those properties we've already had and have already been positioned in. But,
we're going to increase, again, our assets under management with the new
properties. We have a wonderful group of institutional partners, many that
remain active and seek additional investment with us and I think that holds well
for the future in terms of acquiring properties for these programs. The
investment management business could grow to be a $275 million contributor by
2011 by adding about $4 billion of new assets under management annually.
And, despite compression of cap rates and squeezed margins, this business can
still generate low teens returns depending on the fee structure and the
percentage of equity investment by KIMCO. Recurring fees and cash flow from
one minority position in the venture will remain the most significant
component of this earnings day (ph) comprising about 85 percent plus of the
total income stream. Yet, there's a clear opportunity to capture upside that
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promotes and cash flow participation. The final platform, the operating
businesses is constantly evolving cash rate of opportunities and new activities.
Our ground up development business has primarily been executed with a merchant
building subsidiary KIMCO developers. Increasingly, KDI is becoming a more
generic source of product for our institutional programs. The KDI build and sell
program has been a steady contributor to earnings consisting of both gains on
the sales of properties as well as in an operating income from completed phases
or sections of the project. The unit currently has 38 projects underway. Jerry
Friedman will discuss the business in more detail. But, one point on the
financial side bears mentioning. This business in many respects is more of a
financing business with a significant profit participation in exchange for
delivering our own development and leasing expertise. With the world awash in
money, being a finance here might be considered a low margin business.
So for KIMCO to operate as a capital provider, we need to bring something else
to the table. It takes many forms from providing preferred equity capital, debt
financing packages, lease mitigation services, and also participation in private
equity structures to recapitalize companies and unlock value. The preferred
equity business has grown to almost a $400 million investment from a standing
start five years ago. The juice in this business is the realization of equity
participation from the sale or refinancing of the underlying property. But, the
business itself also generates solid recurring cash flow.
Our final two businesses, retailer services and KIMCO Select investments they
almost defy a label or specific description. Retailer services is focused
primarily on providing capital in services direct to retailers, it's both
healthy and in distress. The activities have taken many forms, from straight
financing, pure fee per service of reworking assets to large scale investments
directly in an enterprise such as the recent joint acquisition of Albertson's or
prior transactions with Frank's Nursery and Montgomery Ward. KIMCO Select is
mostly about investing in the capital structure in a real estate rich
enterprise. Inside the structure run the gamut and includes purchase of
bonds and equity securities in the open market. In other dimensions of KIMCO
Select, completely unrelated to securities purchases is investment in various
non-retail opportunities, usually on a pari passu basis with seasoned
operators and those collateral types. The variability in this business - the
variability of earnings in this business is most pronounced, but nonetheless we
feel that our relationships with existing customers and others with access to
deal flow will enable us to capture many new deals.
We feel this platform can reach an earnings base also of $275 million within
five years. The merchant building team can readily reach a steady state of $1
billion of revolving investment in the corresponding increase earnings that come
from a higher recycling activity. Preferred equity will benefit from larger and
higher realizations of embedded upsides and its existing holdings as well as
ongoing business with repeat customers as well as new ones. Retailer services
has been in the investment build mode with FNC, Realty, former Frank's and
Albertson's investments among others. But, we expect to see the benefits flowing
to the bottom line on these investments over the next few years.
In KIMCO Selects, in addition to the possibility that more folks investing in
securities can benefit from its holdings in the Blue Ridge company as well as
repeat transactions with operating partners outside of retail as has been
recently experienced in transactions with Westmont Hospitality Group. Each of
the areas I touched upon are part of the ingredients to get to the final
product. For the core shopping center holdings, the primary driver is internal
growth spurred by intense management of the assets, driving roll over of below
market rents, tenant retention to sustain occupancy, and redevelopment in mixed
use strategies unlock that value.
Growth outside of the U.S. will continue, particular with Mexico's development
projects and pipeline coming to fruition. The management business will be
characterized by increasing volume and scale. Our acquisition capabilities and
structuring skills will also allow us to fuel the engine and build on existing
portfolios while establishing new programs. The operating businesses will be
driven by relationships and brazing (ph), quite frankly opportunity on a down
cycle. The panels that follow are geared to bring some perspective as to what's
in place today and to hear from the people who are charged with making all this
happen. I hope you take from the discussions the depth that the potential to
source these opportunities and the incumbent skills to execute. Thank you for
your attention and now I'd like to introduce Dave Henry and move to our first
panel.
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DAVE HENRY: (INAUDIBLE), program today will be a series of three panels
highlight various KIMCO business leaders in different aspects of our portfolio
and our business units. Our first panel will cover our four operating businesses
which Mike (ph) described briefly. KIMCO's operating businesses all share a
common opportunistic investment culture and our complementary with our core
expertise of owning and operating retail shopping centers. Each has a business
leader that is experienced, successful, and accountable for their own
businesses. These operating businesses collectively provide KIMCO with
incremental profits and growth opportunities.
Our distinguished panelists this morning include Jerry Friedman, President of
KIMCO developers, also known as KDI. Jerry has led our development efforts for
eight years and has been in the retail development side of our business for more
than 30 years. After starting out as a lawyer, Jerry earned his stripes
developing shopping centers for price REIT and Freedman Core (ph) (INAUDIBLE).
JoAnn Carpenter who leads our preferred equity business has been with KIMCO for
five years and helped us start our preferred equity business in 2001. Prior to
KIMCO, JoAnn spent 15 years with GE Real Estate at the head of the miss west -
Midwest region and later as the business leader for GE real estate equity
program. Our third panelist is Ray Edwards. He joined KIMCO in 2001 after a long
career with Keen Realty and Shottenstein Real Estate. Ray has extensive
experience working with retailers on sale lease backs, excess property
liquidation, bankruptcy financing and corporate restructuring. We'll start with
each panelist giving a brief overview of their businesses, Jerry.
JERRY FRIEDMAN, PRESIDENT, KIMCO DEVELOPERS: Thank you, Dave. Welcome everybody.
KIMCO developers, KDI is the merchant builder, which means we build and sell.
Historically we build from raw land, vacant land, and still shopping centers and
sell them, as we say, before the paint dries. Where, now, reasonably as Mike
(ph) alluded to, some of our products we also sell into the KIMCO co-investment
program.
Our program is to build with local developers that have proven track records. We
utilize the local developers for the local expertise for their intilement (ph)
and to reduce our risk in development. Now, these partners take the risk of
intilement (ph) and some with initial anchor leases before we put our
investment into it. We currently have 20 local partners, 80 percent of which we
have done over two or more deals with. We have repeat business with them and
they have been successful as you'll see in our results. With our partners, each
partner is tailor made separately how we handle our relationship with them. But
we - in every deal we see the preferred return on our capital and our capital
prior to sharing the profits with our partners.
Since 2001, KIMCO developers has had the ability to show increase sales and
gain each year totaling now over $130 million. We've also managed to have a
return on our investments in excess of 20 percent. We currently have 38
developments with those partners, whichever has noted in excess of 11.8
million square feet. These projects take between two to four or five years
to develop and we develop them in phase. Thus, in effect, we have the
ability and we have the platform to project our sales and our gains subject
to certain mark ins (ph) in the conditions for the future two to five years.
In addition, with our current partners, we are investigating a pipeline of
approximately $1.5 billion with the purcherdo (ph) and that is our game plan
for today. Thank you.
DAVE HENRY: Thanks Jerry, JoAnn.
JOANN CARPENTER: OK, good morning everyone. KIMCO's preferred equity program is
really a swarm of navanese (ph) financing. We provide limited partnership
capital to strong owners and developers of real estate in the - on the local
basis. And, KIMCO's investment is senior to our partner's capital in that we
receive our return on and return of capital prior to theirs. Different then,
KIMCO's other businesses, our partners actually are handling the day to day
operations of the properties which is an incentive for them to do business with
us. But, we have approval rights over all major decisions.
The program, although it just started up a few years ago is very synergistic
with KIMCO corporation and we can leverage off of KIMCO's existing network and
abilities to underwrite properties up front and also it gives us the ability to
invest in properties that KIMCO wouldn't be able to acquire. Since conception,
we've had very strong growth, but as we move forward we're seeing very - a very
steady earnings stream and growth and it's a much more predictable stream than I
think we saw over the last two years. To date, we've closed over 450 million in
investments and our outstandings (ph) are close to 400 right now. The
differential being sales of properties and also where properties have been
refinanced and capital has been returned to the partner.
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Currently we received preferred returns from cash flow in the eight to nine
percent range, and then the deal frostructure (ph) until (ph) that we share in
the residual proceeds and typically our receiving 25 to 40 percent of the upside
in the field. Our exposure is 1.5 billion, which is the first mortgage
indebtness in KIMCO's investment in the properties. We have 15.3 million square
feet of gross leasable area and the portfolio itself is around 93 percent
occupied and relatively low base rents of $11.60 a square foot. The portfolio is
diversified, which is something when you start out is not always that easy to
accomplish. But, we've done around 81 transactions, our average deal size per
property is around four to five million and we're in 23 states and seven
provinces in Canada. The projected population growth in the portfolio is around
four point five percent between 2005 and 2010.
So we're looking to invest in high population growth areas along with insole
(ph) locations and when we look at the portfolio on average, we have around
89,000 people living within a three mile radius of each property. In addition,
we have diversity on a tenant basis. Our top ten tenants only represent around
11 percent of our total base term (ph). We feel that our success to date has
been primarily by picking very strong local partners who combines with KIMCO's
expertise can maximize the property value. And, with our investments to date
have been done with people that we have repeated deals with and that's - and
that's totaling 85 percent of the amounts of the dollars that we have
outstanding. In addition, we've sold around ten properties from the portfolio
and we've achieved over 20 percent IRR on all of those deals.
DAVE HENRY: Thanks (INAUDIBLE), Ray.
RAY EDWARDS, KIMCO: Hi, good morning all. KIMCO Select and retailer services
like KIMCO developers and preferred equity is really based on the knowledge and
experience that KIMCO's had for 40 years as a shopping center owner. For
retailer services, the focus as it deals directly with retailers, the retailers
with approach KIMCO, really for three major reasons. For - one is that they are
a start up company that's been successful, looking to grown and needs capital to
do so.
Secondly, what more people hear about is with its core performance or bankruptcy
and then they have a need for capital because they have no working capital to
turn around their business. The third area is where there's a sale of a retailer
is acquired by a third party and they're looking to change the balance sheet and
leverage it and looking for someone financing on the real estate.
And, those are the three main areas where KIMCO can provide service to the
retailers. And, we do that in a number of ways. One is that we could provide a
sale lease back to those retailers to take their own properties and provide them
cash for that, long-term cash or we could provide financing to them based on
their real estate. KIMCO, unlike many other lenders will look at the lease hold
interest and be able to potentially provide value to a retailer that other
lenders could not do. A third area where we handle and help them is through
their excess properties. So if they have a property that are poorly performing
we can come step in and either on a fee for service basis handle their
distribution of the real estate or buy their real estate and let the company
focus on their business of operating their stores.
A couple of examples of recent deals that we show here is when Shopco went
private in January, they were looking to the equity part was looking to leverage
the real estate and came to KIMCO along with other lenders to provide a
financing package until they went out in the market for a sale lease back which
they have to chewdit (ph) within six months then we're paid off. (INAUDIBLE)
sort of a company files a bankruptcy in August and KIMCO is the only lender that
they went out, they were able to get out to that would lend them money on a high
value on the real estate value and their leases because of their understanding
of the bankruptcy and how we can turn those lease holds into value in the event
they have to agrade (ph) the company. K-Mart is another example of where during
their bankruptcy we'll hire on a fee for services basis to handle their excess
property during the bankruptcy and ultimately outside of bankruptcy there were
about ten owned properties we handled for sale for them after emergence (ph).
One of the beautiful things about retailer services is that it leads many times
to opportunities for the core of KIMCO. To and Campbell's noted here was that
Montgomery Ward, through the ar (ph) marketing of sale of the 300 assets of
Ward's there were two malls that were - needed to be repositioned and de-malled.
And, KIMCO and its partners were able to acquire those malls, we have - we have
already redeveloped them and have leased them now and they are now core holdings
of shopping centers that we own that are 85 to 100 percent leased. In K-Mart,
based on our relationship with them we have now entered into agreement, very
formal, but they have offered us a required and
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joint ventured with K-Mart and Sears now on the performing assets that they have
and a REIT to maximize the value on those properties.
Now, moving onto the KIMCO Select, while KIMCO Select use a lot of the same
skill set that we need for retailer services and understanding the real
estate and the operation of the company and the retailers, the focus there is
to make optimistic real estate focus transactions on the debt and equity side
of the - of the company's balance sheet. We have done equity investments as
old people have heard in Albertson and Atlantic Realty was another example of
where KIMCO realizes a company's asset was a shopping center had an issue
regarding a tax problem with the IRS that was delaying any movement on the
company, accumulated some of the stock and sits in an excellent position
seldomly by the company and own a terrific shopping center in Sand Island.
Also, what we do as a secondary market we will look to buy a secondary market
debt that is secured by a portfolio of retail properties, and typically like the
examples the a Rite Aid, K-Mart, Winn-Dixie, the bar is credit is low and some
institutional investment in that debt not comfortable holding it and we were
able to buy those positions at a discount. Every once in a while, because of our
activities in this market with this debt and the equity market we come across a
number of partners who come to us and see if we're interested in non-retail
opportunities.
We are very, very limited in our scope of doing these type of transactions. They
come to us because they know we're going to move very quickly, we've got a full
on balance sheet to help them execute on a deal. But, for us what we look for is
a joint venture partner that is very full on (ph), has a tremendous expertise in
the sector that we're looking at and we feel comfortable that we're buying into
this position at prices, this real estate at prices are below what we feel is
inflation of value.
DAVE HENRY: Thanks Ray. Jerry, our development model is very different than our
peers in the sense that we rely on local operating partners. Can you talk a
little bit about the advantages and the disadvantages for that model?
JERRY FRIEDMAN: Certainly. We believe in utilizing the local expertise and
knowledge of local developers who are - with proven track records. They take the
initial risk of development for us which is advantuant (ph), they acquire or
contract to acquire the land, they seek to get the entitlement and the contact
initially at the tenant, the anchor tenants. They come to us for our capital,
our development expertise and our leasing into retailer contact benefits. By
using them, we can one, avoid the initial acquisition and entitlement risks. We
can also maintain lower corporate overhead.
We also have the ability utilizing the whole KIMCO organization to one, analyze
a project very quickly, and two, know practically every real estate project in
the United States. That's why we have projects from Florida to Alaska. These
benefits like when we tailor our projects with every local developer to meet
their needs, that the Rockefeller Group we share equally both capital and
expertise. With other developers we - they might have - we've greater needs for
capital and we therefore increase our return on them. So - the only disadvantage
of this program is of course we share the profits with them.
DAVE HENRY: Thanks, Jerry.
JoAnn, the world is awash with capital today and you have all kinds of
competitors for - with methanie (ph) and capital. How are you able to generate
business?
JoAnn Carpenter: Well, it is competitive and it's not getting any easier out
there. But, I think that what we try to bring to the table for our partners is
really a number of intangibles that by doing more business with us they come to
realize how important it is to have this relationship and because of that,
they're sending us every - they're showing us every yield that they're looking
at and we're working with them up front. By working closely with them up front
we have positioned the process, we can provide them with these and they know
that and they need that because it's a very short time fuse in the acquisition
markets today. The sellers are only giving buyers 30 days to do their
do-diligence and 30 days to close.
And, if a partner is working with someone who at the last minute decides they
don't want to do the transaction, they haven't moved quick enough, then they
can't close.
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And so, I think our partners know that we move quickly. Our investment committee
meets once a week and if we need answers in between or even over on weekends,
over a weekend, we can - we can get that.
We try to keep our transaction cost very low. We also can help our partners with
the debts (ph) that they're putting on the properties to get the lowest rate
possible. The lenders love having KIMCO in the partnership.
In addition, KIMCO's relationships with tenants goes far beyond typically what
the capabilities that our partners have. And so when they're looking at buying
partner's properties or are leasing, people can call the tenants and can find
out how that tenant is performing in the property which often not reported from
an anchor (ph). And also if they plan to renew on that property.
The other intangible that we really haven't addressed today that I think a lot
of our partners have found out is that our partners are doing business with -
across everybody that's sitting here on the panel and some of the other groups.
We have partners who have done joint ventures on new development with Jerry's
group an also are buying existing properties, and are doing joint ventures with
my group.
In addition, I think they know that down the road, if there's a downside in a
property and you lose - they lose an anchor tenant, KIMCO will be there to help
lease the property back up, and with their relationships or even if they need to
raise groups (ph), if an anchor goes bankrupt, Ray knows how to work through
that process, so it is very beneficial.
UNKNOWN MALE #1: Ray, same basic question, more and more people are getting
into retailer services. How are you able to compete?
RAY EDWARDS: Well, we're able to compete, really there are two fundamental areas
where we're very strong that the retailers look to and (INAUDIBLE). First is
particularly with the distress of core performing retailers or even the
acquisitions, that it is a very fast moving transaction. They need the money
quickly. They need to look at someone like KIMCO that could underwrite the
properties quickly and have the balance sheet, the close on multi-million dollar
transactions and sometimes two weeks to two months to do that.
Secondly, because we're just not a bank that does lending, we have the
flexibility to do a sale leaseback for the company or to take over, pay for
their surplus property. We give the retailer some more flexibility in working
with them about what's the right way to restructure the balance sheet to move
forward. And those were the reasons why retailers would come to us.
UNKNOWN MALE #1: Can you give a good example?
RAY EDWARDS: An example, a very good example would be with Montgomery Wards.
Montgomery Wards was a company that came out of bankruptcy in '99, early '99,
then by the end of 2000, goes back in bankruptcy. Usually in your first
bankruptcy, you'd clean your slate with all your debt, and make sure you have a
pretty good cash flow, at least for more than 18 months. But not only did Ward
file for bankruptcy 18 months later, they had no cash to carry the properties.
They had 100 owned properties with debt on them, and probably 100 leases with
substantial value, but they had no way to achieve that value because they would
have to fire sale (ph) and sell the property in 30 days.
What KIMCO did with the partners, is go and underwrite these 300 properties and
structure a deal to provide a guarantee to Ward and their creditors, far above
what the fire sale would be, provide for us to pick up the carrying costs and
sharing arrangements with Ward and the creditors if we got over a certain in
KIMCO's investment, and it was a win-win for all of the constituencies in that
matter. Thanks.
UNKNOWN MALE #2: JoAnn, can you tell the audience a little bit about how you
leveraged the rest of KIMCO's organization to help you underwrite new
transactions?
JOANN CARPENTER: Well, when one of our partner calls or potential partner calls
on a deal that they're looking at, with KIMCO's vast knowledge of properties,
I'm talking about United States really at this point in time in Canada, there
really isn't a property that someone in KIMCO doesn't know. When you wake (ph)
up,
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the acquisition group and purchasing $6 billion of property this year or leasing
and management group that we have offices right out through (ph) the country and
managing 1,100 properties, is very easy to find someone that will know that
particular property or maybe even they even lease that property at some point in
time in their career.
So we've got the local market knowledge, the dynamics of what's going on in that
marketplace that helps us. And then we've also worked very closely with
acquisitions group because they're pricing deals every day. And so we can
structure a deal with our partner quickly because we know what market is and
what position KIMCO wants to have in that - in that particular property.
UNKNOWN MALE #1: Jerry, you've been developing shopping centers for 30 years now
in good times and bad times. What are the key factors you look at in analyzing a
new project?
JERRY FRIEDMAN: Well, the key factors we really look at first is, we would start
with the demographics and location which, as everyone said, we've got the
benefit of all the KIMCO associates around the country to help us with. We also
rely heavily on our relationship with retailers. I would much rather have a
retailer tell me he wants to be at a location rather than me think the
demographics deserve him there. And that is one of our best points; the
retailers will tell us what locations are good.
The other point on retail construction, our construction is relatively a simple
construction. It's one story, easily built, and it can be constructed in four to
six months. The other thing, we do not commit capital until we have tenants
available. We deal within phases so that we can control our leasing up and our
construction cost. Those are the primary reasons for us to do it.
UNKNOWN MALE #1: I think the forum in San Antonio is a great example of a KDI
deal. Can you take the audience through that project a little bit?
JERRY FRIEDMAN: Certainly. That was the center that we joint venture with a
partner at the end of 1999, the beginning of 2000. Our partner is UCR, a
prominent brokerage firm in San Antonio, and three developers there. They had
the property under contract and they had Target and several junior anchors
committed to the project. We came in, finalized the deal with the junior
anchors, had Steve (ph) to take them to the close because they had short term
dues. We built the first phase, this is ultimately going to be a 1.200 million
square feet development. It has three-quarters of a mile frontage on Highway
I-35 and 1604 from San Antonio. We built the first phase and sold approximately
1,600 square feet in December 2002. We then continued to build and sell in
phases. The final phase is just being completed and will be sold this year of
approximately 200,000 square feet.
UNKNOWN MALE #1: JoAnn, we're often asked about pricing in terms of structure of
preferred equity deals. Can you take us through a typical preferred equity
transaction?
JOANN CARPENTER: Sure. We've structured the deals so that our position is prior
to the capital that our partner's put in the deal. And what that means for us,
is really on a downside scenario, which we hope we'll never be there, but if
there is a loss of - should there ever be a loss of equity in the deal, our
partners are taking the first test (ph). So we're protected on the downside.
What we really focus on, though, is the upside in the properties, and the way we
structure the deals is that we get out returns on capital first, and we get a
return of capital first. But because of that, we obviously need to give our
partners something in return. And what we do, is that we give them a promote
(ph) in the transaction so that on the back end of the deal, once we get our
capital back end (ph) from return, let's say, of some (INAUDIBLE) return, then
we start splitting the upside, and we'll give them a bigger percent of the
upside because we are in that safer position.
But really what it creates is an incentive for our partners to create as much
value as possible because if the return increase on the property, obviously
they're benefiting from that, and we are, too. But they are on a more
incremental basis.
So, and in many of the transactions that we've done to date, the reason that
we're looking at higher returns, much higher returns than what we originally
projected is that our partners, I think combined with our expertise, but are
8
able to lease the properties to higher than what we projected. They're able to
achieve higher rents form the local tenants and also with cap rate compressions
over the last couple of years, too, we've seen a tremendous increase in value in
the property.
UNKNOWN MALE #1: Ray, as a final question in turning back to KIMCO Select, can
you describe some of the opportunities we're looking forward today in KIMCO
Select?
RAY EDWARDS: Sure. As I mentioned earlier, KIMCO Select is focused on looking at
debt and equity that is real estate secure, and two examples I'll give; one
retail and one non-retail just to give a flavor of this, was when K-Mart filed
for bankruptcy back in the mid-90's, K-Mart, to avoid bankruptcy had done a lot
of fairly (ph) fast (ph) a lot of debt on their property. So there were a lot of
portfolio loans out there secured by K-Mart real estate and K-Mart leases. When
K-Mart filed for bankruptcy, many of the holders of that issue were concerned
and the price of those issues would go down.
KIMCO was able to underwrite and feel comfortable that the real estate that was
securing those - that debt more than covered the pricing where that debt was
trading at. So it was an opportunity and we bought two or three different
issues. One we liquidated and the other two, we're getting very nice current
returns on and we continue to maintain.
An example of the non-retail transaction, again it was a loan that was stressed
because the borrower who operates the hotel was in bankruptcy and had emerged
from bankruptcy basically because of the balance (ph) in the hotel business in
2002, 2003. The holder of the note was very uncomfortable with the operations
and was concerned about it.
KIMCO was approach by a joint venture partner that operates hotels throughout
the country, and together we looked at and underwrote the hotel, felt we were
buying debt at a price that was below replacement cost, acquired the debt and
within six to nine months, we negotiated with the borrower a payoff of that
at a substantial profit for KIMCO.
UNKNOWN MALE #1: Thank you, (INAUDIBLE).
As Scott mentioned earlier, we'll take questions at the end of this morning's
session.
UNKNOWN MALE #2: Our company would no be where we're at and the size we are
without the relationship we've made with KIMCO four years ago. We (ph) know (ph)
(INAUDIBLE) step up and talk to lenders and say, KIMCO's coming on as the
partner with us, it just made doors open, things happened quicker. I like what
they do; they like what I do, and it's based on a good team spirit, and it was a
common goal for a quick success. Developers love quick success.
UNKNOWN MALE #3: You can probably tell just by looking at me that I'm not your
typical business man. I think that KIMCO knows that I have a passion for
shopping centers, probably more than the ordinary person who just likes to shop
at them, and that's probably why they enjoy investing with Dunn and Parkers.
They know that we love (ph) our properties. We don't just buy them and mothball
them and then forget about them. We know that buying the properties is the
easiest step. Once you bought it, you have to create the value, and that is -
that is daily hard work. That is working with tenants, bringing in new tenants,
lowering rates, taking lease rates up.
So when people buy a shopping center, it's really not a time to high-five each
other. It's time to do that after you've worked it, and then can sell it, and
have your exit strategy completed, and KIMCO understands that. My best days are
when I'm sending KIMCO or wiring KIMCO a big check or a big wire because I know
they're going to be real pleased, and the next deal is going to be even easier
to do with them.
UNKNOWN MALE #4: We put our venture with KIMCO and (INAUDIBLE) 18 months ago,
and in that period of time, we've acquired some 30 plus assets in 11 states,
totaling over five million square feet, and expect that portfolio to continue to
grow in the U.S., certainly abroad as well. KIMCO has a depth of experience both
in respect to operating retail assets in the retail sector that we like, as well
as with respect to originating transactions on that space.
9
That, in addition to their creative push to problem solving, the collaborative
approach to decision making with their partners, makes them an ideal partner for
us given our business model. To throw in the long-term approach to the business,
to investing, to partnerships - managing partnerships, and the fact that they
take the fiduciary responsibility quite seriously (INAUDIBLE) important to us.
And again, it's an ideal mix from our perspective.
UNKNOWN MALE #1: (INAUDIBLE) we'll give you a more detailed information on our
portfolio of properties, our redevelopment initiatives, our acquisition program
and our growing institution of portfolio management business.
With respect to our property portfolio, we hope that everyone has taken note
that the quality of our portfolio has improved significantly over the years. We
have moved aggressively to sell the bottom of our portfolio while simultaneously
teaming up with institutional partners like UBS and Prudential to purchase top
tier properties in California and other densely populated areas. We've also
increased our focus on asset management, and have identified dozens of strong
redevelopment opportunities within our existing portfolio.
Our panelists this morning on the second panel include Howard Overton, our
Executive Vice President of the Western Region. Howard is previously with
Western Properties prior to its acquisition by Pan Pacific. He became Director
of Acquisitions with Pan Pacific after its merger with Western, and he was
instrumental in Pan Pacific's purchase of Century Trust.
Our next panelist is David Luke, head of our newly formed Redevelopment Business
Unit and Executive Vice President of the Northeastern and Southeastern Region.
David began his career in architecture and project management and worked for
both Myers Development Company and Petersen Fox Associates as the project
manager on numerous large projects in both the U.S. and London.
Our third panelist is Tom Caputo. Tom has been with KIMCO for six years and is
in charge of both our Acquisitions Department and our Institutional Portfolio
Management Team. Tom spent 17 years with (INAUDIBLE) Advisors (ph) as a partner
and came to KIMCO after REEF (ph) was purchased by Rodamko (ph) and after his
wife said she didn't want him home after retirement.
Again, we'll start with a brief overview from each panelist. Howard.
HOWARD OVERTON, EXECUTIVE VICE PRESIDENT OF WESTERN REGION, KIMCO: Good
morning.
We've assembled an exceptional portfolio full of assets located in major markets
around the country in excellent demographics with a high barriers (ph) to entry.
What we have additionally is a situation where below market rents enable us to
enhance the tenant mix and increase the rental rates over time which gives us an
above average cash flow growth that we combine with our redevelopment
opportunities were able to provide both a stable cash flow from our properties,
but above average NOI growth over time. So when we're looking to invest in
centers, these are the criteria we might be seeking.
The flip side of that is when we have an asset in our existing portfolio that
may not meet these criteria, we would look to recycle that asset out and
perhaps target it for disposition.
Turning specifically to the western region which we define as Colorado and west,
you can see an example of the execution of this strategy here. Upon completion
of the Pan Pacific transaction next month, our western region will consist of
230 properties, 36 million square feet of an A-quality shopping center
portfolio. And as Mike (ph) has alluded to earlier, we are going to be selling
some of the Pan Pacific assets out of that portfolio.
But to give you an example of the western region's growth in our focused
acquisition strategy, just five years ago, the value of that portfolio would've
been pegged around $700 million, and later next month, it will be roughly $7
billion, which is substantial growth in key west coast markets.
So the portfolio out west exhibits all the characteristics that we're looking
for. We've got substantially below market rents over time with near term
expirations, and we feel that we can continue to execute the discipline -
disposition strategy and acquisition strategy to grow earnings over time.
10
DAVE HENRY: Thanks, Howard. David.
DAVID LUKE, EXECUTIVE VICE PRESIDENT NORTHEASTERN AND SOUTHEASTERN REGION,
KIMCO: The goal of our Redevelopment Program is quite simple, it's to create
value through asset repositioning. To give you an example of that, our business
plan is fairly simple. Picture a property built in the early 60's, a lot of
post-war growth in the America maybe near a rail line or near a highway
intersection, and it's built a traditional method which is one-third of the
property is a building, more than two-thirds is parking, surface parking. Over
time as the housing increases and demand increases for varying (ph) asset
classes, you fast forward 40 or 50 years to today and we have a substantial
number of properties that have very high dense surrounding (INAUDIBLE),
communities that have matured, in other words the family growth, the amount of
empty nesters have increased, immigration have increased in these first string
suburbs. We have properties that literally contain the only open available land
for development in a local jurisdiction. And the counties, the cities and the
people that live in these communities all need to have other type of services
that many times can't be met. In addition to the fact that many new retail
concepts and newer retailers simply are not in these high density markets.
So from a redevelopment perspective, that situation gives us incredible
opportunity to create value. We have a dedicated team of people on both coasts
that work on redevelopment assets, and at this point, we have around $250
million currently in our execution phase with another $250 million right behind
it that's in a pipeline under entitlement.
DAVE HENRY: Thanks, David. Tom.
TOM CAPUTO, KIMCO: Thank you, David.
KIMCO's always been known as one of the leading acquirers of open air shopping
centers in the sector. We've been very busy when our acquisitions came in 2006,
as you can see. We plan to close on approximately $6 billion in new acquisitions
in 2006. And this is a combination of one-off (ph) transactions, which range
from (INAUDIBLE) to as small as $10 million up to $100 million, small private
portfolios from 100 to $200 million range, most notably the FHK portfolio in
Northern California, and the public's (ph) portfolio, which is (INAUDIBLE) of
high volume public anchorage (ph) centers in Florida. And then, of course, our
MNA activity with our announced merger with P&P for $4 billion closing in late
October. And then just this morning, we announced the acquisition of the Crow
Holders (ph) Retail Portfolio for 920 million. So it's been a very busy year.
We have a very experienced acquisitions team and we're now located across the
country with Ed Teddiman (ph) based in New York, who's been with KIMCO for 17
years. Howard Overton joined us a couple of years ago after being the Head of
Real Estate for Pan Pacific, so he's based in our San Francisco office and we
just hired this summer Matt Golden (ph), who used to be the Head of Acquisitions
for First Washington to spearhead our acquisitions efforts in the central
region, and Matt (ph) is based in Dallas, Texas.
We are supported by an incredibly talented, and I must say energetic, team of
associates and analysts who have not seen the light of day on the weekend in
about three months based on all of their activities lately.
KIMCO's always emphasized the off market transactions as the preferred group
rather than competing with 100 or 200 investors with (INAUDIBLE) sent out by
real estate broker (ph). This is particularly important when you get in a
competitive market and we've been in one for the past four years. Many people at
KIMCO have been in the business 10, 20 and 30 years and have developed
long-standing relationships with developers, institutions and private investors,
and we have been harvesting the fruits of all those long-term relationships over
the past few years particularly this year. And about five percentage of our
volume this year is going to come from negotiated transactions.
We've been very focused on upgrading the quality of the portfolio, particularly
since we've started our joint venture program in 1998 with KIMCO Income REIT. So
our main focus is looking for centers that are very well located with strong
demographics, strong anchor line ups, with strong sales. And this helps us build
up our assets under management with our joint venture partners, and on a
selected basis, we are also able to (INAUDIBLE) to our core portfolio, which
brings us to our Investment Management Program.
11
Most of our joint venture partners are institutional investors who have an
enormous amount of capital to invest, and most importantly, they have a much
lower cost of capital than we do. These joint venture partners invest 80 to 90
percent of the equity in most of our deals, leaving KIMCO to invest 10 to 20
percent of the remaining equity. KIMCO is able to earn double-digit returns on
our investment through the return on capital on our equity investment on the
properties as well as a variety of fees (ph) that we receive from these
co-investment partners.
I think institutional investors are attracted to KIMCO first of all because of
our reputation and scale. We have an incredibly good reputation in the
investment community and we'd be glad to talk to people who are buying and real
estate. KIMCO has a really good reputation which helps us get these transactions
that most of our institutional investors would never see.
We also have a very good talented leasing property management group that helps
us when we're acquiring properties and makes it a much more efficient process.
And I think at the end of the day, we have a lot of repeat business from our
institutional investors, many of whom have invested with us in the earlier
programs like here (ph) and have chosen to invest with KIMCO in vehicles that we
have subsequently come out with in the last few years.
As Mike discussed earlier, we've had a significant growth in assets under
management since we started the KIMCO Income REIT in 1998. By the year 2001, we
had $2 billion under management, most of that was in KIMCO Income REIT. Today
we're $8 billion under management before the Pan Pacific closing, and we'll be
at 12 billion in a month or so when we close on that merger.
We are very proud to be associated with a number of very prominent institutional
investors. I think you can see from this slide that this is a who's who of real
estate investors and we're proud to be associated with them and grateful that
they have entrusted so much capital with KIMCO in our co-investment program.
DAVE HENRY: Thanks, Tom.
Howard, you've been on the front line in acquiring properties in the west, can
you tell the audience a little bit about the current market out there?
HOWARD OVERTON: To Tom's point that it's been pretty aggressive out there for
the last four years. This is a broken record answer. The investment opportunity
for (INAUDIBLE) continue to be challenging. Interest rates, as we know, have
stayed favorable, demand has outstretched supply, and we continue to see cap
rates staying around the six percent range lower from high quality assets.
Despite that, we've been successful as Tom alluded to, in performing multiple
off-market transactions and lining (ph) our relationships out west to do over a
billion dollars worth of deals in just the last 24 months and roughly 50 percent
of those were not widely marketed.
So, it's challenging but there are still opportunities out there and we believe
we can continue to find them.
DAVE HENRY: Howard, you've also spent countless hours on the Pan Pacific
acquisition, can you comment about the portfolio and (INAUDIBLE)?
HOWARD OVERTON: I can. I've spent countless hours on the acquisition, but also
as you pointed out while at Western and Pan Pacific, in my prior jobs, I
participated in roughly 50 percent or acquiring 50 percent of these assets that
we're buying next month. So I'm intimately familiar with them, and I can tell
you we're very excited about the quality of this portfolio, which is a critical
mass of assets located in Key West coast markets. We have excellent demographics
in this portfolio. Retailers are performing very well, they're highly above
their averages. And probably most importantly, we think there's stability
through our Intensive Asset Management Program to really enhance the tenant mix
and increase the rents over time to deliver both stable cash flow but above
average NOI growth through this portfolio.
And not to mention, although nothing is entitled or permitted, and David will
discuss it later in detail, we suspect and hope that there's some redevelopment
opportunity also inside of this portfolio.
12
DAVE HENRY: Great. Tom, can you comment on our (INAUDIBLE) Strategy for Pan
Pacific?
TOM CAPUTO: Let me just take a step back and talk a little bit about the
process. We had a six-week jump on our institutional partner on this portfolio,
and we had six analysts locked in a room for 21 days, and this was out in
California in a hotel, and they underwrote 138 properties with the help of our
acquisition team, the help of our - and with the help of our leasing people.
So in that three or four week period that they were locked up, we put together a
book that was 138 pages long, one page for every asset. And we put our scribble,
our hand written scribble on each one of those pages, the pro's, the con's, a
letter grade, maybe hold, possible sale, definite sale.
And so when we introduced our partner to the transaction in our offices here in
New York, Howard Overton spent two days standing up in front of the group for
the acquisition team from (ph) our institutional partner going through property
by property identifying which ones we thought were very strong, and which ones
we thought we should possibly sell.
By the end of that two-day period, we pretty much had our institutional partner
in line in terms of our strategy in terms of the holding (ph) and sale buckets.
The following week, Howard returned and we just had another down (ph)
considerably, and Howard stood in front a portfolio management group, because
this is being broken into three buckets as we call them, in a - and one
institutional investor, three different separate accounts. And we went through
the remaining properties that we were going to hold and the reasons why, and let
the portfolio managers fight it out as to who was going to get the whole
property.
So this is a long-term investor with a 10-year horizon or longer and this is
something that I think will be very good for both parties, but it's a very
interesting process to go through.
DAVE HENRY: Great. David, with respect to Pan Pacific, can you talk about how
you and your team will take a look at redevelopment opportunities within that
portfolio?
DAVID LUKE: Yes, though after hearing Tom talk, I'm a little nervous that I'm
going to be locked in that room for 21 days.
So, what I would like to do is - we will use the same process we use on all of
our other assets, which is to go through a three-step process. The first step is
what we call (INAUDIBLE) Best (ph) Use Analysis and, you know, it's partially
art and partially a science, but for the most part, we're trying to get to the
bottom of what a local market is like at a snapshot in time around the property
and where it's going. What's the office vacancy rate? Are there any major
employees coming or leaving? Are the schools expanding or are they contracting?
You know, how are home sales doing? Are there condos being built? All of these
things that feed off and provide some insight as to whether there's underlying
value in a property that's not being maximized. There's no question you can
collect rent for decades, but there may be points in time where we can release
what we have on anchor coming (ph) vacant (ph) that we have an opportunity to
expand the center, or change or add a use (ph).
So the High (ph) of Best Use (ph) Analysis is the most important piece of the
puzzle. The second is assuming we've pulled out from the P&P project deal, a
number of assets that we believe have substantial upside value will go through a
process of trying to secure our ability to execute on those.
And primarily this is a process of trying to get back an anchor or it's a
process of trying to get an anchor to release some of their control rights (ph).
Most of the shopping center leases, certainly written a few decades ago, have
pretty substantial control rights given to the tenant. But over time as other
things become important to the tenant, there are sometimes synergistic reasons
why they might allow an out parcel (ph) or allow an land sale or allow more
density if they want to expand. So getting control is the second piece of the
puzzle.
And lastly, probably the most time consuming, is entitling a zoning change. Any
property that we add density to, for the most part, requires a zoning change.
And in areas like California where you read in the papers that development is
difficult, there's a lot of anti-development groups out there, there's a lot of
environmental issues.
13
The good news for an asset repositioning team is that a site that already has 70
percent asphalt is normally seen as a good thing by a community or local
government change especially when it can add a lifestyle component or a
live/work/play environment or an entertainment complex. So in many ways, when we
come in to talk about a property that we own or recently bought, you know,
sometimes we have an aging center that most people would like to see changed.
So that entitlement process is certainly the most lengthy, and the reason we
undertake it is that the yields are very high if we can get it approved, and in
the meantime, there's very little risk because unlike a ground up development
where you may have to buy a piece of land and hold for long periods with no cash
flow, these properties of cash flow is just fine. And so it's just investing in
time capital from our team (ph).
DAVE HENRY: David, one of my personal favorite redevelopment projects that you
oversee is the Factoria Mall. Can you describe that a little bit for us?
DAVID LUKE: Sure. In fact, Factoria Mall in Bellevue, Washington, the property
we bought about a year-and-a-half ago is a - is a classic 1970's, late 60's
interior mall. It does not have the high-end regional mall tenants. It has more
of a discount tenancy list. And I would probably summarize it by saying it's an
A plus property, an A plus location and an A minus, B plus asset. In others
words, there are a few things that are holding back a property from really being
a five-star.
One of those is a site plan. A site plan is right up against an intersection of
two major highways. It has a tremendously good visibility but the circulation
within the site is poor, and because of that, certain retailers have had low
sales historically while other ones with better visibility and access have had
very strong sales.
The second is a retail mix itself. When we acquired the property, two of the
major anchors comprising of 150,000 square feet were really struggling failing
concepts. So our strategy for turning the asset around is fairly simple. We have
spent at least a year now working with the city government and local community
groups to try and entitle and change the site plan.
From a financial perspective, consider the following regarding that property.
The first is, we have negotiated termination agreements with 150,000 square feet
of anchors. The average rent is around 20 percent of what the current market
value is on those - on those spaces. Secondly, we're in for entitlements on
additional 150,000 square feet of added retail square footage, and we're in for
entitlements on 450 housing units that all plays in the back corner of the
property that was underused even as a parking field.
Simply, the sale of the residential units that will get entitled will reduce our
acquisition bases by 15 percent, and over our whole period, we expect the NOI to
double. So it's an exciting project. It will be a couple more years before we
really get through the entire construction project, but at this point, we're
excited to have a stabilized five-star asset in the market.
DAVE HENRY: Great. Tom, you might comment on our institutional partners, how
they can benefit from David and his team's expertise on redevelopment.
TOM CAPUTO: So I think having a dedicated Redevelopment Team is one of the
highlights for our joint venture partners because when we're buying an asset,
whether it's a one-off (ph), or a portfolio, or a merger like Price Legacy, for
instance, we have the Redevelopment Team go through the entire portfolio and
look to see if there's an ability to create any density.
One of the properties that we purchased from Price Legacy in the merger is a
Costco anchor center (ph) located very close to Reagan National Airport across
from the Pentagon City Mill, which is anchored by Nordstrom, Macy's and Ritz
Carlton, normally not someone you think as an anchor.
Costco is extremely successful at this location, because the nearest Costco is
probably 10 or 15 miles away and the density in that area is incredible. The
strange thing about this property is we're the only low-rise property in the
area. Everything else is either office, high rise apartments or this multi-level
shopping center.
14
So our redevelopment team came in and identified these opportunities to develop
about 500,000 square feet of high rise office space in two towers. And we're
well down the road there in terms of entitlements on the office space, which
will be an incredible incremental addition to value through that joint venture.
And then turning back to Mid-Atlantic REIT, which is a company that we bought in
2003, that was a variety of high quality assets, but also some value-added
opportunities, and our development team in the Mid-Atlantic region has harvested
a lot of value-added opportunities there by recapturing junior (ph) boxes and
building, in one case, a brand new state-of-the-art 72,000 supermarket. And then
in another case, just simply out-rating the retailer who was underperforming, a
supermarket anchor center that we owned in Columbia, Maryland. The supermarket
just wasn't renovating, wasn't the right size, wasn't performing and they ran
out of all of their options on June 30th of this year. And their building is now
torn down and the (INAUDIBLE) will be constructed on that site. So that's just a
couple of examples as to how our redevelopment team can enhance value to our
joint ventures.
DAVE HENRY: Howard, we've commented how we've improved the quality of our
portfolio by not only acquiring properties but disposing of properties. Can you
comment on some of the disposition activities in the West region?
HOWARD OVERTON: Certainly. We're focused out west on executing the disposition
plan as we (INAUDIBLE) acquisition effort. We've recently over the last 12
months sold eight properties, a handful of which came out of the existing KIMCO
portfolio and another portion that came from a portfolio acquisition similar to
the Pan Pacific transaction where we targeted some non-core assets immediately
for disposition.
We totaled about $90 million of sales in non-core properties, we continue to
always look at our portfolio for opportunities for disposition and candidates
that we should list for sale. And we believe that combining that with the
acquisition strategy and executing on both will provide us with that what we've
called the "Dream Portfolio". And out west, I think we'll soon will be the
"Reality Portfolio".
DAVE HENRY: Great. David, are there still redevelopment opportunities within our
own portfolio?
DAVID LUKE: I believe there are. We are certainly enthusiastic about it. I
wouldn't be sitting here if we didn't think there was an opportunity.
DAVE HENRY: And I wouldn't be asking that question.
DAVID LUKE: From a developer's perspective, we own a thousand properties, if you
multiply that times how many acres per property, we have a tremendous land bank.
And the properties that we own provides my group with a constant stream of
opportunities and possibilities.
Mark Twain once said, buy land that's not making it a long time ago. And from my
perspective and certainly the view of my team is that we've got a tremendous
amount of properties that will eventually become available for redevelopment.
Some properties we're looking at five, seven, 10 years out knowing that there's
an anchor that expires in a very high demand area and we've got that on our
pipeline knowing that that's an asset for years out.
So in terms of how much is left, there's a lot left, and as long as we have this
pipeline of land, it makes it much easier to hire talent and to get the best
talent to work on those products.
DAVE HENRY: Great. Tom, as a final question, what do you see out there in terms
of investor appetite for further acquisitions?
TOM CAPUTO: Well, Dave, you and I spent a lot of time talking to potential
investors, and I think of - I think back to the beginning of the summer, when we
announced Pan Pacific and we were working on Crowe (ph) but couldn't disclose
it, and we met with this investor and we referred to Pan Pacific as the whale,
and Crowe (ph) not (ph) identified as the baby whale. And the investor said to
us, well, just let us know when one of those baby whales goes swimming by again.
We really would like to add it to our program.
15
So I think that most of our existing joint venture partners would like to do
more with us and will be doing more with us in the very near future. And we have
a host of new opportunities out there for investors who would like to do more
with us as well and would like to join with us and are coming (ph) back to the
program.
DAVE HENRY: Thank you, panelists.
UNKNOWN MALE #6: We've never really looked for an equity partner. Until our
relationship with KIMCO, it was our first time to ever deal with a public
company on an equity project. And Dave and I sat in my office, and on the back
of an envelope designed a deal and that was the deal.
It was a fairly large transaction. We bought well over a million square feet,
and we closed about three months later.
KIMCO's stunning in speed, flexibility and reliability and certainty to close,
and that's just a wonderful relationship to have.
UNKNOWN MALE #7: KIMCO looked (ph) at in the retail business, and more
specifically in REIT business (INAUDIBLE) the best (INAUDIBLE). We started with
KIMCO at zero in 2001. We've acquired over $800 million of assets in the U.S.
since that time. In addition, we started a venture with KIMCO in Mexico where we
have eight shopping centers either under development, in lease up, or
stabilization (ph). It's a 1.150 billion in total assets under management by GE
and KIMCO, and dollars invested over a five-and-a-half year period. That's a
pretty impressive record.
Words aren't enough to express, you know, the things that I've learned from the
KIMCO's senior team and even junior team that is so well (INAUDIBLE) the
operations of retail real estate. KIMCO is a large organization that has an
entrepreneurial fabric that is woven in and around it that is and very valuable
to us, because that brings the (INAUDIBLE) that brings the creativity, that
brings the agility to work in today's market with speed which is really
required.
DAVE HENRY: Our last panel is our international business panel, with the
business leaders from Canada, Mexico and Puerto Rico.
Beginning in 2001, KIMCO identified opportunities to expand internationally,
following many of the existing U.S. tenants into both Canada and Mexico. In
addition to leveraging existing tenant relationships, KIMCO has been able to
take advantage of higher yields, limited competition and strong local partners
to build a large and profitable portfolio of retail properties in other
countries. These international markets continue to be an excellent source of
future growth for our company.
Our first panelist, Ed Boomer, is our business leader in Canada. He joined KIMCO
in 2003 after spending nine years with GE Real Estate in Toronto. Ed has
extensive experience in Canada working for GE on both real estate debt and
equity transactions.
Richard Elwood (ph) is our Managing Director of our Mexico operation and has
been with KIMCO approximately four years. He was born and raised in Mexico and
spent 14 years with HAB (ph), a large Texas base grocery store operator. HAB
(ph) extended into Mexico in 1996, and Richard led the company's development
program in Mexico. HAB (ph) now has 25 stores in Mexico with 5,000 employees.
Tony Eslatado (ph), our Puerto Rico Managing Director was born and raised in
Puerto Rico and also comes to us from GE Real Estate. Tony spent 15 years with
GE with real estate responsibilities and tax exempt bonds, section 42 housing
and property underwriting and acquisitions. Again, we'll start with a brief
overview from each of our panelists. Ed.
ED BOOMER, CANADA BUSINESS LEADER, KIMCO: (INAUDIBLE) with this format is that I
get to come down and talk to all Canada, which I'm passionate about, and I think
it's one of the hidden gems that's out there in the international community. It
makes sense for KIMCO to be in Canada for a number of years, and you can the
stats on the board. I'll just give you a macro feel for Canada.
16
There's 32.5 million people in Canada and it's growing by about one percent a
year largely through immigration. It takes in - the City of Toronto alone is
growing by over 100,000 net people annually, which is startling. This 32 million
people are spread in over five or six different urban areas with concentration
in almost all of which are growing. You can see that it's the 11th largest
economy in the world, and I'm not sure people realize that, but a more
compelling figure about Canada is that, and it's sad it isn't there any longer,
but it's the fifth most efficient workplace in the world.
And so just - the first point is just that it is a great economy and opportunity
for KIMCO to move into another area. But the second is, it has tremendous
economic, political and social safety that has a triple down effect on your
businesses. It's landlord friendly, it's creditor friendly, there's a very
stable legal system, very stable political system, and importantly, there's a
very stable social economics safety net in Canada.
So when you see dips and pitfalls in other economies around the world, you tend
not to see them in Canada. For instance, I was (INAUDIBLE) a couple of days ago
that it improved consumer spending, for instance, which I know we're all
watching closely, falls off in other areas of the world, tended not to fall off
as dramatically in Canada simply because the danger of unemployment and other
difficult things that happened to people aren't just dramatic in Canada. And so
it tends to plow (ph) along without (ph) feeling (ph) these dips. You can see
the slides, there's the 6.4 percent unemployment rate which is the lowest in 30
years, which again highlights the stability of the economy.
Interestingly and from KIMCO's perspective right now, there's some interest rate
and cap rate arbitrage. I think our five-year (INAUDIBLE) Canada rate is about
75 basis points lower than that in the U.S., which provides some opportunity.
And for a long time, there was some cap rate arbitrage and there still is some,
but it's not as dramatic as it was for instance five years ago when we compiled
the RioCan Portfolio.
And that cap rate compression has driven us into other highlights that
highlights another valuable characteristic in Canada. And as we've moved from
being able to buy stabilized properties at a nine-and-a-half or 10 cap rate,
which that market seems to have largely evaporated, we've moved into a fair bit
of development and redevelopment de-malling type ventures. And the
characteristic of the Canadian economy (INAUDIBLE) that it's very difficult to
get through what you call the entitlement process, the zoning process of those
tremendous barriers to entry, which gives us through our partnership structure,
a three and four-year head start option (ph) in these development projects.
So what have we done since 2001? We've compiled a portfolio that's put a 150
properties and 14 million square feet, invested about $470 million in
transactions in Canada, primarily in a preferred equity structure that was
described by JoAnn. But we have done a variety of other things. Interestingly we
have preferred equity deals with partners that we've done balance sheet
restructurings with as well. So we've moved into a variety of areas, and we have
a couple of secured credit facilities which don't look that glamorous to you
necessarily, but there's an equity piece to it where we've got some options that
are in the money and very deeply into the money in a number of instances.
So that's what we've been doing in Canada.
DAVE HENRY: Thanks, Ed. And by the way, it's coincidental that many of our
business leaders come from GE. Richard.
RICHARD ELWOOD (ph), MANAGING DIRECTOR MEXICO, KIMCO: Thank you, Dave.
Buenos Dias to everybody.
I'm going to talk a little bit about Mexico. It's a wonderful country. Today
Mexico is the 11th most populist and the 12th largest economy in the world.
Mexico has a population of 106 (ph) million people and is growing at 1.2 percent
on an annual basis and has a (INAUDIBLE) middle class. Mexico is a very young
country. Today, 50 percent of the people are under 20 years of age.
The country has also had very compelling macro and micro economics. Mexico has
over two decades of positive structural reform under its belt. Its trade, it's
reaping the benefits of NAFCA (ph), it has very sound monetary and fiscal
policies which have resulted in historical low interest rates very stable
currency and stable inflation rates.
17
In our environment of retail, it's fascinating to see that in 1999, Wal-Mart
executed and implemented their every day low price program in Mexico virtually
impossible to do profitably in an inflationary economy. Mexico also has an
underserved retail market. The square feet per capita in Mexico is only four
percent of the United States, and formal retail, which we're used to and
accustomed to in the United States, controls only 50 percent of the potential.
Retailers are also helping us by leading the way and we're following the
retailers. Wal-Mart will open 120 units in Mexico this year alone. The number
two grocery retailer, Soriana, is opening 38 units throughout the country.
Wal-Mart in its report states that it has identified over 371 markets where
there are little or no retailing in a formal sense occurring in those markets.
So Wal-Mart has an aggressive growth program.
The fundamentals of our shopping center business are very attractive when we
compare them to the United States and other developed countries. First, the
returns are higher. Second, the scales are tipped more favorably to the landlord
in Mexico. Some examples, we don't pay any tenant allowances to our tenants. We
have built in inflation adjustments in our lease agreements that provide over 20
years built in increments. And we have shorter terms, hence we can raise rents a
lot easier over time. And, from the anchors, we still today get percentage rent
break points over natural break points, much different than the United States.
Lastly, KIMCO, one of the best owners and operators of shopping centers in the
United States, is using its expertise and its relationships one, to provide
know-how in a young developing real estate market and two, leveraging its
relationship with retailers to get the deals. And we are a friendly face to the
U.S. retailers doing business in Mexico and those to come.
About our portfolio, we own interest in 23 shopping centers in Mexico, totaling
six million square feet. We have 17 projects today in our pipeline of closing.
We're one of the largest donors of shopping centers in Mexico today. Our
stabilized assets are returning from 12 to 16 percent on cost, and our first
(INAUDIBLE) advantage in Mexico having been there over four years, is allowing
us to be the go to - go to company for retailers and developers in Mexico.
DAVE HENRY: Thank you, Richard.
Tony, tell us about Puerto Rico.
TONY ESLATADO (ph), PUERTO RICO MANAGING DIRECTOR, KIMCO: Buenos Dias
(INAUDIBLE).
Why Puerto Rico? Puerto Rico is a high demand market that is driven by a
four million population and is 100 by 35 miles island. Coupled that with a
consumption oriented culture and you get a great environment for retail.
We also have limited supply, limited land and there's also a difficult
permitting process. That, together with a stable economy, we have seen about a
2.4 percent growth over the last three years and we are the number one
(INAUDIBLE) from (INAUDIBLE) in the world.
The opportunity for retail in Puerto Rico is tremendous. We have about seven
square feet in capita verses 20 in the United States. We have a long list of
retailers wanting to go into the market, but because of high occupancy, there's
no space for them to go into that market.
That demonstrated - the real estate market has demonstrated the strength by just
looking at store sales on some of the retailers, JC Penny's, K-Mart's,
Wallgreen's among others have (INAUDIBLE) store sales located in Puerto Rico.
We recently entered the market in Puerto Rico back in March 2006. We acquired
seven properties, about 2.1 million square feet, and we currently own about
seven percent a share of the 31 million square feet (INAUDIBLE) market (ph).
We're going to increase our penetration by two things, dedicated resources. I
was born and raised in Puerto Rico. After 20 years in the United States, I just
relocated down there. We're going to - I'm actively seeking local partners to
start bringing some of the breadth of products that KIMCO provides into the new
market.
18
DAVE HENRY: Thanks, Tony.
Ed, we started in Canada in 2001, outright buying properties at relatively high
cap rates. Where do you see the opportunities today?
ED BOOMER: Well, since 2001, our strategy was to expand the partner base that we
utilize in Canada, and the slide went by that said we have eight preferred
equity partners in Canada. Now what we've managed to do was give great
geographic disperse all of those partners. We have a partner who lives and works
in Alberta and BC. We have partners that work in the maritime province, Ontario
and Quebec, and they know that their local (ph) market is tremendously well.
So we now have people on the ground in every region in Canada, and I would
suggest to you there's not a major deal that goes by in Canada that we don't
hear about. And so for the future, we'll continue to be (INAUDIBLE) I think
JoAnn said that 85 percent of our customers are repeat customers. And of those
eight partners, I don't think one has not brought us a second deal, and some of
them were up to four and five. So we will see every deal in Canada.
On a macro level, the real estate world has changed as it has changed in many
areas. It's difficult for us to buy stabilized assets, of course - the returns
don't seem accretive to the shareholders. And so we are doing different things
like looking at development, as I said before, and some redevelopment
opportunities where the yields are higher. And again, who would know those
assets better than these partners who are in this partnership structure.
Although I said that you can't tell a Vancouver who lives there every day and
drives past these sites. And so, they will help us build out portfolio on an
going basis, and so far, they've been fairly successful in feeding our pipeline.
DAVE HENRY: What advantages do we have in trying to generate new business in
Canada?
ED BOOMER: Well, we have a number of advantages. Canada is characterized by a
tremendous amount of capital. There's a huge pension fund group that will just
drive you into the ground with their money if they can. And you have to
distinguish yourself, and what (INAUDIBLE) do it in two ways. One is, that we
aren't just the capital provider in Canada. We have expertise, we are operators.
And that strikes a chord with all of these local operators when they call you
with an issue with a tenant, or a tenant dynamic, or a clothing dynamic as JoAnn
spoke about, we get it. We're not just building a model in an office tower. We
get it. We're able to react very quickly to it and we've seen it before. That
strikes a real chord and a real affinity with our partners.
The second part is that we (INAUDIBLE) very fast. I think Joel (ph) is up on the
screen telling everyone how striking (ph) we are in our quickness, and we are.
It's very rare that we can't get an answer back to our partner in 24 or 48
hours.
So between that affinity, and the speed, and - because it matches the speed they
have to work at. We've been able to distinguish ourselves and it's reflective in
the repeat business and the new opportunities we're getting in Canada.
DAVE HENRY: Richard (ph), tell the audience a little bit about how we've evolved
in Canada - I'm sorry, in Mexico.
RICHARD ELWOOD (ph): Absolutely.
We entered Mexico in 2002 with the acquisition of two HEB (ph) anchored shopping
centers in Northern Mexico. Since then we've developed a considerable amount of
traction throughout the country. Today we're proud to say we have 13 various
development partners throughout the country who are geographically dispersed and
specialty. And we also have great relationships with partners that have strong
tenant relationships as well with bringing this opportunity.
We've also brought with us and developed strong relationships with the
retailers. Home Depot, for example, our number tenant on our portfolio calls
on KIMCO from the U.S. to help them with projects in Mexico as does HEB (ph),
whom we have a very strong relationship with and even Wal-Mart Mexico as well
calls on us to help them.
19
So, today we're proud to have a great number of partners, a large pipeline with
advanced (INAUDIBLE) throughout their country. Excuse me.
DAVE HENRY: Can you point out some of the differences between retail in Mexico
and retail in the U.S.?
RICHARD ELWOOD (ph): Absolutely.
I start out by maybe perhaps highlighting some differences in the consumer part
of the market. Food sales in Mexico represent about 40 percent of total retail
sales. In the United States, they only represent slightly below 20 percent. The
shopping trip is still an event in Mexico. It's a family event with an average
household size in the country of over 4.2 per household, you have large
families. So when the household goes to shop, they take the whole family. So
there are more frequent trips.
Some of the socioeconomic levels in Mexico spend roughly 80 percent of their
disposable income in retail shopping center sales. So the amount of money they
spend is very important, much different than the United States. Hence, our
shopping centers are a hybrid I would say of a U.S. center and perhaps a
European center. They're typically enclosed. There's a grocery anchor, typically
a hyper market, large big bucks supermarket. And a theatre perhaps on one end,
and then a mix of medium and large size sub-anchors and small tenants
throughout.
Wal-Mart, for example, has taken a 180 degree turn in Mexico just recently. They
were building three standing super center stores in Mexico. The leader of the
company went to (INAUDIBLE) and said, we - in our stores where we're in a
shopping center with the theatre and with other tenants around us, our sales
volume is 32 percent higher than an enclosed shopping center.
So they're a bit different, a lot of customers. But weekend trips to the
shopping centers. It's very exciting.
DAVE HENRY: Great. Tony (ph), basically the same question, can you contrast
retail in Puerto Rico verses the U.S.?
TONY ESLATADO (ph): Retail in Puerto Rico, the form is very close to the U.S.
format from the standpoint of you have your strong U.S. retailer as an anchor.
But the winning part of the equation is how you mix your local - your local
tenants into the center. You need to have the local flair in the center in order
to have a successful center. Specifically in a neighborhood, you're trying to
serve a specific market, you got to make sure you put the correct tenant, local
tenant in that center in order to compliment the large reach of the - of the
anchor.
DAVE HENRY: Given that Puerto Rico is an island, is still there room for us to
grow there?
TONY ESLATADO (ph): Well, there is a lot of room to grow if you really think
about it from the standpoint, we want it and we have a seven percent share of
the market right now. But the opportunity comes with the new products and the
local partners that we are going to - I'm actually seeking right now. I'm
looking to bring preferred (ph) equity and start looking for those centers that
are neighborhood oriented and is KIMCO does best. I'm going to try to bring the
strength of KIMCO to the local partners. Just as (INAUDIBLE) has been said
before, some of the benefits that they're seeing is, well, the strength of
KIMCO, the relationship with tenants, their long list of tenants that want to
come to Puerto Rico but they can't sign (INAUDIBLE). And we have a laundry list
of (INAUDIBLE) our capabilities, and we're just trying to identify, what is the
space that we can bring up those new tenants into the (INAUDIBLE)?
DAVE HENRY: Ed, we recently closed on a very large development project in
Montreal. Can you tell us a little bit about it?
ED BOOMER: I'd love to tell you about it. I'm like a proud father for this deal.
We recently closed a deal in Montreal that came to us about 18 months ago from a
group called Cherokee, and Cherokee Business Fund. (INAUDIBLE) in the U.S.,
there's been over 300 deals in the U.S. But their business plan is to take
ground field (ph) type sites, usually formerly occupied by a fortune 500 company
or something like that, and remediate them often (ph) in conjunction with the
former owner of the property. And then redeveloped (INAUDIBLE) use (ph).
20
And there's a personal (ph) (INAUDIBLE) in the intersection of two major
highways in Montreal that was formerly owned by GM. They built Camero's there.
And Cherokee bought it, remediated the land, insured off the risk and all of
that sort of stuff and then came looking for an equity partner about 18 months
ago. And we worked hard to get into a deal where at the last round, and on the
Friday night before a long weekend, we were told that they were going to go with
another institution, a notoriously different institution. And I told the broker,
who I know very well, I said, you know, you'll be back. I won't put anything
away.
That deal ultimately failed, and a year later, they came back and said, would
you still do it? And we agreed that we would revisit it.
So we had since closed that deal. It's a tremendous opportunity for us, but the
real estate it's a 1.4 million square foot development that's anchored by Costco
and (INAUDIBLE) which is a very powerful brochure (ph) in Canada. The brick - we
were able to structure what I think is a tremendous deal we have. We have cost
guarantees below I think nine percent threshold. They pay 100 percent of the
cost. And it's extremely well structured. By the time we go into the deal, there
was a significant pre-leasing done and a significant amount of the
infrastructure work was done, as we all know, is a tremendous risk. It'll take
about 30 months to complete. We have had some tenants opened already so we
should be getting some people (ph) coming back to our June (ph). So, I think -
and it's had a tremendous profile in Canada, so it's a deal that I'm thrilled
about.
DAVE HENRY: Terrific. Richard (ph), Guadalajara is the second largest city in
Mexico, and we've been particularly active there. Can you make a comment or two
on that?
RICHARD ELWOOD (ph): Absolutely, Guadalajara is a great study to see the
potential for Mexico. Our friends at ATV have asked us to help them expand in
that city, and they shared an interesting fact with us in the City of
Guadalajara. Roughly four million people, the second largest city in the
country. It only has 50 formal grocery stores in the entire city. Compare that
to Monterey, the third largest city in Mexico, with roughly 3.4 million with 100
formal grocery stores in the country. So the opportunities from the viewpoint of
the retailer are fantastic. And it's a great study.
In Guadalajara, we have two terrific projects that are coming out of the ground
in Guadalajara. One is our central sewer project. It's about 500,000 square foot
Wal-Mart Super Center anchor project, theatres. In all of the major national
tenants in Mexico are coming in the project. It's very exciting; it'll open in
December. We have another project that we fought very hard for. It's a Motorola
project, which is in a middle high income part of the (INAUDIBLE). Land is very
hard to get in Mexico, so we were able to secure probably the best location in
that part of town, and we have over 600,000 square feet coming out of the
ground.
And the exciting thing for us right now in that project, is that we have two of
the top grocery anchors in the country and most of the other (INAUDIBLE) two of
the major grocery anchors are fighting over this site. So we're having to - we
have a great problem. We're trying to decide which one - which one to take.
So Guadalajara is a great city. It's only an example of the opportunities we see
throughout the country.
DAVE HENRY: Terrific. Tony (ph), as a final question for you, can you comment on
the protocol climate in Puerto Rico today?
TONY ESLATADO (ph): Yes. Back in May, there was a political debate in Puerto
Rico that brought - created a government shutdown all around tax reform.
Basically today that's all behind us. Everybody in Puerto Rico is really focused
on the (INAUDIBLE) of the new sales tax that's going to be implemented on
November 15th. And I really believe and the government really believes that this
is the way that we're going to be able to sustain the (INAUDIBLE) that I
referred to in my presentation.
And going forward, after November 16th, the implementation on the sales tax, we
should be able to push forward, and I think there's going to be great
opportunities for investments - real estate investments in Puerto Rico for a
long time.
DAVE HENRY: Thank you, panelists.
21
As Scott mentioned, we'll take questions at the very end of the presentation.
And now I'd like to introduce Milton Cooper for his comments.
MILTON COOPER: Thanks, Dave. Now, I must make a confession, I was not happy with
the expense of this investor meeting, and I try to avoid the version of time
(ph) making money, but I really enjoyed listening and watching the team, and now
you know why I feel so young and energetic watching and listening to them and
being with them.
There were a few KIMCO, very important KIMCO people who were not on the video or
on the panel that are here and I mention them. We have wonderful Bruce
Rubenstein, wonderful Glen Carl (ph), Ed Setamen (ph), Mike Nelson, and Dan
Slattery. They're a fabulous part of the team. We also have some directors, good
friend Dick Gooley (ph), Richard Salsman (ph) and my friend and partner of close
to 50 (ph) years, Marty Temo (ph). We also have present, my friend and partner,
for over 56 years, my wife, Shirley Cooper. So with that, now permit me to spend
just a few minutes discussing the three principle businesses we have, our
shopping center ownership, our investment management business, and the
opportunistic businesses.
First, our shopping center ownership, one of my earlier dreams was to be a land
(INAUDIBLE), but there were two obstacles that were impossible for me to
overcome, money to acquire land and money to carry the land. Land and cows have
to be fed.
Now KIMCO overcame these obstacles by developing open air centers and the
tenants leases were the source of financing to buy the land, and with the source
of cash float and service to debt to pay the expenses and have a cash flow. What
a neat way to own commercial land on major (INAUDIBLE) throughout the United
States.
Now KIMCO now, who's ownership of shopping center interest, has over 500 million
square feet of land. Now the land is incumbent and the press in many cases with
those tenant leases, but it's the form of security from the long range point of
view that really will produce stability and an income stream.
Now I love our shopping center portfolio. I love that our portfolio has over
300 unencumbered properties, highly marketable, highly financeable, highly
liquid. And just permit me a sidebar on that unencumbered properties.
I believe unencumbered properties are worth more and have greater value than
a property that is subject to a fixed rate first mortgage. People may have
missed that in our evaluation.
First, there were buyers who want to own free and clear. There are buyers
who want 80 percent leverage, 70 percent leverage, 60 percent, 50 percent.
And the mall buyers the great demand and price is a function of supply and
demand, so the value is greater. And as a separate sidebar, I think on July
5th, the 10-year treasury was July 26th, I think now it's 455, the decline in
interest rate creates greater value on an unencumbered property. So much my
side bar.
I love that our shopping centers have had steady same-store growth and I think
it will continue. I love that the properties are geographically diverse,
(INAUDIBLE) diverse and no single property
(AUDIO GAP)
DAVE HENRY: We have announced that previously that we've approved our first
transaction in Chile, and we'll be closing on a joint venture in Chile with four
shopping centers in Santiago probably in December. Chile for us represents a
very logical next step for us. It's a very stable country. It's got 50 million
people. It's actually got a higher investment grade rating than Mexico. Very
similar to Mexico in terms of opportunity for more of our style open air
shopping centers to be developed in Chile. We've identified a good partner in
Chile that we'll be trying to grow with.
There are other countries in South America and Central America that represents
attractive opportunities for us to look at, and I think that's probably where
you'll see us expand in due course. Each one of these investments are
22
done after a careful study of the country and the political risk, and we do a
very thorough business plan, which we take to investment committee and all of us
sign off on our approach to that country.
UNKNOWN FEMALE #1: Also, is KIMCO looking at the End Win (ph) retail real
estate portfolio, if you could comment on that transaction.
ED BOOMER: I think we, like many people, are looking at that transaction.
SCOTT CROWE, UBS: Hi, this is Scott Crowe at UBS. I got a question for Milton,
how do you incentivize your people to take advantage of the synergies across the
different business groups? I mean, how is the acquisition (INAUDIBLE)
incentivize to help prevent equity (INAUDIBLE) which ultimately go throughout
the (INAUDIBLE) of the (INAUDIBLE)?
MILTON COOPER: That's a very good question, and it's something that I keep
thinking about, and revisiting, and talked to our board about. Thus far, the
incentives - 75 percent of our compensation has been in stock options. We've had
a reluctance that have separate incentives based on separate accomplishments.
I'm not sure we're revisiting it. But thus far, with stop options have been
wonderful, reward ,et cetera. I have cause - concern that we may have the time
when the - no matter how well we do, and achieving double digit multiples can
(INAUDIBLE) interest rates rise.
So your question, Scott, is right on and we've been thinking about that, what we
can do from a point of view of keeping the spirit (ph) in addition to a culture
that people could be proud of - people have to make money. And it's something
that we're giving a great deal of thought about. That's far two (ph) stock
options.
JOHN PERRY: Good morning. John Perry (INAUDIBLE) and Capital, with the cheap
cost of capital per private enterprise and the low financing cost, we're seeing
a lot of public to private mergers and acquisitions in the REIT sector. Milton,
could you comment as you see no the pluses and minuses of the public company
format?
MILTON COOPER: Well, at this point in time, the private equity groups have an
awful lot going for them. First, before we get to the cost of money and the
ability to lever, every public company, I think senior management has to spend
25 percent of their time because they're public. Look at this, the expense, the
time, et cetera. In addition, decisions are made as a public company that you
wouldn't make if you were private. In the Albertson's case, just as an example,
I know it's not real estate. Albertson has 661 stores, 125 of them were losers,
I mean over 100 million of loses. They should've been closed and a public
company just couldn't take the losses. A private company can.
So that the amount - so you have that background and also, in the public
markets today, Sarbanes-Oxley is a difficult compliance issue, expensive.
Compensation is a (INAUDIBLE) term. So that the tendency for (INAUDIBLE)
companies could wrap it up is there. It won't happen with us because we will
never be negotiating with our shareholders or our partners, so that it's
something that we would not never do voluntarily. But I can see many
companies who will be very seductive. And the amount of money available,
drowning in liquidity in the institutions, the amount of capital. So I think
you're going to see probably more public to private.
I don't know if I've answered your question, but that's how I see it.
DAVID HARRIS: Yes, David Harris, I have a couple of questions for Mike
(INAUDIBLE) on joint ventures. Mike (ph), could you give us an idea of what the
returns investors are looking for on the levered and unlevered basis?
And my second of the question is, when you structure these deals today, is it
possibly to incorporate wording whereby you can harvest the promote before the
end of the structure?
MIKE (ph): In terms of the investor return, it really does go across the board,
and a lot will depend on the particular institution or the fiduciary that we are
doing business with and what their investor returns are.
23
As a general trend, and I use the word "general" very carefully, is the high
single digit return is where most of the institutions are looking to find their
returns before they're willing to share or participate in an balance or profit
participation to us.
Our returns, because of the fee structure that Tom talked about, are going to be
over double digits because of leveraging the fees and our already investment.
But that is a general rule that's kind of where we were, and obviously it was a
lot higher back in 2001.
In terms of your question about realizing the promotes beforehand, again, using
a general statement, we have two types of participation generally on excess cash
flow on a current basis and on residual profits when properties are disposed of.
More often than not, on both portfolios or joint venture programs where we have
multiple properties, it's generally a cross pool so that we won't receive our
promotes until there is a significant amount of investor - of disposition
activity. And that's again (ph) been a general rule so far.
So our, you know, if there is a situation where we want to go into individual
property analysis of a particular property that was disposed of and looked to
obtain some promotes ahead of time, I don't think that would be out of the
question if we wanted to bring that up with our partners.
SCOTT CRAIG (ph): Hi - Scott Craig (ph) for (INAUDIBLE). Mike (ph), a question
for you, you gave an estimate of about 550 million of EBITDA in 211 (ph) from
the investment management and the operating businesses. How should we think
about how much of that is likely to come from your interest in real estate
assets, how much from recurring fees, and how much from one-time or
transactional fees.
MIKE: In terms of the investment management business, I'm thinking somewhere in
the 80 to 85 percent range of the dollars that you see projected for the
investment management program will be the combination of what I would call our
recurring fee base, which is the general property management fees and leasing
commissions and things like that, as well as our economic interest, our minority
position in each of those institutional programs.
With respect to the operating businesses, which was the combination of those
four - those four business units, that's a little bit tougher one to handicap in
terms of how much is recurring. But I think if you look at, say the preferred
equity business and the KIMCO developer's business in merchant building, I
realize it's transactional oriented particularly the KBI business. But I think
as a general matter, we see a great degree of visibility in at least 75 to 80
percent of the dollars that we are looking for from those business lines to be
achieveable. Achieveable because it's either current cash flow on the investment
in the case of preferred equity, or in the case of Jerry's, business, that a
sufficient number of projects are underway and are near completion, and because
of the market to be able to dispose of properties, and we feel very comfortable
that we can deliver and recycle projects.
The most variable, admittedly is going to be on the retailer services side
because that is, I think, the most opportunistic business of all where we're
putting money in for major development and recapitalizing retailers, and that
may be a two or three-year timeframe where we're not going to get any
profitability, and we expect that, but looking for the payback at the end.
CRAIG SCHMIDT, MERRILL LYNCH: Craig Schmidt, Merrill Lynch, in hearing your
presentation on - the panel on Mexico and Puerto Rico was interesting. You sort
of used a gap analysis serving an uncaptured need. Here in the inner cities of
the United States, are relatively understored (ph) for supermarkets and major
(ph) department (ph) stores. Is that a potential area for development
opportunity for you as well?
TONY ESLATADO (ph): It is, and we have just one example we bought in
Metropolitan, New York, in the burrows (ph) I think eight (INAUDIBLE) all with
leases that have less than eight years to go. Almost every one of those would be
a major redevelopment within the burrows (ph) and will be a change. It's a
wonderful market. Very tough to be able to get it, but if I had my brothers
(ph), that's where I would put our money in redevelopment. We will try to do it
by acquiring properties where leases were buried (ph) off, other than that it's
very tough to do.
24
GREG ANDREWS, GREEN STREET ADVISORS: Greg Andrews of Green Street Advisors,
Mike, with the addition of revenues from these other sources, investment
management fees and the opportunistic businesses, at what point do you run into
any constraints imposed by (INAUDIBLE)?
MIKE (ph): The issue, Greg, is that with respect to taxable REIT subsidiary
activities that you have a certain limit on the amount of your investment in
those - in those activities relative to your total balance sheet. But it is a
net investment exercise, so that's the extent that the individual investment
itself is leveraged. It's only the company's investment on a relative fair value
basis.
So whereas, that constraint or restriction is always something we keep track of
and monitor. We feel that relative to the absolute growth of the company, that
we can manage that. Also, the other thing I'd point out if it's certain of the
activities even though we put them in institutional, management or operating
businesses, many of the flow and income from those activities are, for a lack of
a better term, good read assets.
For example, is the Preferred Equity Business, they have been structured such
that the flows coming from our investments are considered for tax purposes and
read purposes, a partnership interest.
So the underlying income is good income. Certain of the deals that Ray does
where he's providing debt capital to retailers. We structure as the first
mortgage loan, and generally, those transactions if they're secured by real
estate, are good read assets.
So, it's an exercise that we're always mindful in trying to keep the right
balance. But with the absolute growth of KIMCO's generic portfolio base and our
proportionate interest in joint ventures, preferred equity and things of that
nature, the denominator, so to speak, for that compliance, I think is very
manageable.
GREG (ph): Hi, Mike (ph), a question for Milton, the JV business, the investment
management business is clearly, you know, a very big goal for the company. It's
a great business when things are going well as they have. How do you think about
the business in terms of concerns in the future if things aren't going quite so
smoothly? Is that an issue in your mind?
MILTON (ph): It is, but let's analyze it. In - first, from the point of view of
the investment management business, the need for a good manager with skin (ph)
in the game is far greater than times are tough. And when times are wonderful
and retails expand and rents are growing, when times are tough, probably the
need is greater. So that I don't view if there were a downturn that it would've
affect the demand.
Now, we've said that they could be changes in the cycle. If there's a
substantial downturn and there's (ph) been (ph) capital constraints and there
are wonderful investment opportunities for our own balance sheet, we might look
again at our strategy and do what we do to 91 and 92 to invest our own balance
sheet. That's the flexibility we have to keep.
But I don't see - I see in many ways, the (INAUDIBLE) might be all (ph)
(INAUDIBLE) with respect to not only managing joint ventures with respect to
what we can do with capital, and what we can do with our veteran position and
bankruptcy business.
DAVE HENRY: I think it's also worth commenting, Greg (ph), that the number of
different joint ventures and the product offerings we have with those joint
venture partners is now a full reach (ph) of activities. For instance, we now
have a Mexican Land Fund. These are long-term patient investors that are going
to look at sites in Mexico but are not this next year but five years ahead. We
have an investor that would like us to help them buy shopping centers in low to
moderate income census tracked areas to help them meet their community
reinvestment needs. So, for instance, that's more of a long-term play.
We have joint ventures in other international areas, so as we expand those
product offerings, I think we'll be less vulnerable to a specific downturn in
the U.S. in a specific property type or category center.
25
NED OSTER (ph), MORGAN STANLEY: Ned Oster (ph) from Morgan Stanley. I guess I
saw growth in the REIT industry thinking perhaps naively that ownership will
start to consolidate in the hands of the public players. We talked about some of
the private pieces.
What seems to be a more important trend that you highlighted (INAUDIBLE) these
long term trends, that the JPP's obviously present this model where public
owners or real estate own (INAUDIBLE) interest in our money managers.
I guess I have two questions. One, is that it? Is that how ownership in shopping
center real estate is really going to consolidate in your mind over the next
five, 10, 15 years, sort of public money managers? And two, I think I guess
interesting trend to overlay on that is what appears to be a very significant
decline in the Define Benefit Pension Plans. And how do you see sort of
reconcile a business when it seems very dependent on that source of capital for
growth and what appears to be an acceleration in the decline in that source of
capital.
MILTON COOPER: Well, let's first start with why the joint ventures?
Fundamentally any public company has to take the money that investors and
shareholders trusted with, an invested with sprint.
Reality, whether the demand for real estate, the way it is today, we cannot
(INAUDIBLE) yield on, invest our capital in shopping centers today. There may be
some extensions, but buy and large, we can't - because we can't deliver the
returns as a public company. So we can't sit on our hands and do nothing, so the
resolution is to add the investment which may be anemic for us but adequate for
(INAUDIBLE) trust (ph) with our cost per capital, and have added to that, the
fees that set this so that we can get the return.
So that - how long that will last? I don't know. But while we're in that phase,
we really have almost tomorrow imperative to our shareholders, to function that
way.
What was the second thought?
NED OSTER (ph): Well, I think that - comment on the pension trust, whether the
defined benefits are going to take a bite out of that, but if you look at our
investor base, it's not only pension funds, it's life insurance companies, it's
private wealth groups, it's an endowment fund.
So there's many - the world, as you know, the wash was liquidity, whether it's
define benefit or other plan. So I think we'll always have a stable of investors
across the board to help us grow this investment management business. So it's
not dinstcintly tied to the defined benefit plan.
STEVE SACK, MERRILL LYNCH: Hi, Steve Sack with Merrill Lynch, Milton, could you
comment maybe on Wal-Mart's announcement from last week about its prescription
drug plan to kind of knock the price down. And kind of its impact may be on the
supermarket industry and the drug store industry.
And secondly, does that - I know it's kind of earlier, it's only a few days in,
but does that kind of change your thought about where you want to own properties
or perhaps accelerate disposition plans given that program.
MILTON COOPER: Well, let's back up and talk about Wal-Mart for a moment. Just
when we talk about public companies having - spend 25 percent of being public.
Wal-Mart not only has that, but they must spend a fairly large proportion on
that - of their time to prove that they're not the evil empire.
Now as the drug - the price of he drug is maybe a combination of proof that
they're not the evil empire, maybe really hoping to generate traffic. It
certainly ain't good for the drug stores, let's face it. What it means from our
perspective, fundamentally what we have to do, Steve, is focus on real estate,
vocations, barrier to every - and recognize that the (INAUDIBLE) can change that
will affect differing retail formats, and always watch the real estate, because
I don't know what will happen or all the different concepts, and it doesn't
change our basic strategy about owning the dream portfolio. Because the purpose
of the dream portfolio is to insulate your sense against the changes in retail.
And that will come and they come faster than we think if there's a downturn with
the number of retailers that have gone private very large debt.
26
So I don't think it changes our fundamental strategy.
UNKNOWN MALE #7: I'll also comment that Target has announced that they're going
to match it, and I think you're going to see (INAUDIBLE).
MILTON COOPER: We can eat.
DAVE HENRY: Well, we thank you for coming and joining us. We're going to have
lunch upstairs in the James room. You'll be directed. There is an elevator
across the hall of you need assistance.
Thank you very much for your participation.
END
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Forward-Looking Statements
This filing contains "forward-looking statements"within the meaning of Section
27A of the Securities Act of 1933and Section 21E of the Securities Exchange
Act of 1934. All statements other than statements of historical facts included
in this filing are forward-looking statements. All forward-looking
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statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance, achievements or transactions
of Kimco, Pan Pacific and their affiliates or industry results or the benefits
of the proposed merger to be materially different from any future results,
performance, achievements or transactions expressed or implied by such forward-
looking statements. Such risks, uncertainties and other factors relate to,
among others, Kimco's right under the merger agreement to revoke its
election to include stock in the merger consideration, and the satisfaction of
conditions to the closing of the merger. Additional information or factors which
could impact the companies and the forward-looking statements contained herein
are included in each company's filings with the Securities and Exchange
Commission. The companies assume no obligation to update or supplement
forward-looking statements that become untrue because of subsequent events.
Additional Information and Where to Find It
This filing does not constitute an offer of any securities for sale.
In connection with the proposed transaction,Kimco and Pan Pacific have filed a
definitive proxy statement/prospectus dated August 23, 2006 with the
Securities and Exchange Commission as part of a registration statement
regarding the proposed merger. Investors and security holders are urged to
read the proxy statement/prospectus because it contains important
information about Kimco and Pan Pacific and the proposed merger.Investors
and security holders may obtain a free copy of the definitive proxy
statement/prospectus and other documents filed by Kimco and Pan Pacific with the
SEC at the SEC's website at www.sec.gov. The definitive proxy statement/
prospectus and other relevant documents may also be obtained free of
charge from Kimco or Pan Pacific by directing such request to: Kimco Realty
Corporation, 3333 New Hyde Park Road, New Hyde Park, New York 11042-0020
Attention: Investor Relations or Pan Pacific Retail Properties, Inc., 1631B
South Melrose Drive, Vista, California 92083 Attention: Investor Relations.
Investors and security holders are urged to read the proxy statement, prospectus
and other relevant material before making any investment decisions with respect
to the merger.