Kimco Realty (KIM)

Kimco Realty Corporation (KIM), together with its subsidiaries, is the nation's largest publicly traded owner and operator of neighborhood and community shopping centers. As of June 30, 2008, the company had interests in 1,928 properties with 180 million square feet of space in 45 states, including Puerto Rico, Canada, Mexico, Chile, Brazil and Peru. The company s portfolio breakdown is as follows: 415 properties (consolidated), 339 (investment management), 137 (other JVs), 221 (preferred equity), 55 (development) and 761 (other investments). The company also operates complementary businesses that include merchant buildings, private preferred equity, and real estate capital and advisory services. The company s top five tenants (mainly "big-box" anchor retailers) on the basis of percentage of annualized base rents are Home Depot (3.2%), TJX (2.8%), Sears Holdings (2.4%), Kohl's (2.1%), and Wal-Mart (1.8%).

Despite challenging market conditions, 2Q results were relatively good. FFO for the 2nd quarter was $0.66 per share compared to $0.71 per share in the prior year period and $0.64 per share in 1Q08. 2Q numbers were $0.03 below our estimates, which was due to lower other and partnership income than we projected. The year over year decline was primarily due to higher transactional activity in 2Q07. Overall net operating income increased 7.9% in the quarter, due to revenue from acquisitions. Same store NOI increased 2.4% in the 2nd quarter, compared to the same period last year. SS NOI increases have moderated although positive results are good in this type of retail environment. We expect SS NOI increases in the 2%-3% though the end of 2008. The company's shopping center portfolio (including international properties) was 95.7% leased at quarter end, a 20 bps decrease from 2Q07 and 30 bps decrease from last quarter.

Releasing spreads are still high at the company's international and domestic properties over the past four quarters, in the same space U.S. portfolio, KIM signed 354 new leases (850,000 sq. feet) and 680 renewals/options (2.8 million sq. feet) at base rents which were 15.7% and 10.6% higher than prior rents. In the Canadian portfolio, new leases and renewals/options in the same store portfolio were 15.7% and 10.8% higher than in place rents (trailing four quarters). In Latin America, new leases and renewal/options were 4.0% and 7.0% higher over the same time frame. Average rents per leased square foot now stand at $12.24 at the U.S. properties, 2.7% higher than 2Q07 and 0.8% higher than last quarter. In the Canadian portfolio, average rents were $14.92 per foot in the 2nd quarter, 8.3% higher than the year ago period. In Mexico, average rents increased to $13.23 per foot, up 13.1% from the previous year quarter.

In the 2nd quarter, the company booked $88 million in NOI from the JVs, up from $72 million in 2Q07. KIM's share of JV FFO in the 2nd quarter was $48.1 million, down from $62.7 million in the year earlier period. Fees from the company's investment management programs decreased to $11.2 million in the quarter, down from $13.7 million in the same quarter a year ago.

Kimco continues to expand its portfolio in Canada, Latin America and South America. The company expects to have $1 billion invested in Mexico by year end. Expected yields are in the 14% range on its current Mexico developments, which are significantly higher than US projected yields. The company entered into a 50-50 joint venture with RioCan, in Canada, to acquire 10 properties for $153.4 million. The properties are over 97% occupied and are anchored by large Canadian retailers. In Mexico, the company completed three new development projects and added two new land parcels to the Mexico retail land fund. Also, in another JV, the company acquired a 107,000 square foot shopping center in Monterrey, Mexico. During the quarter, the company made its firs investments in Brazil and Peru. Year to date, the company has approved 23 new deals in Latin America, 16 in Mexico and 7 in South America. The company recently finalized its $500 million South America fund which will invest in Chile, Brazil, and Peru. We like the company's continued expansion into growing international markets, particularly Mexico, as development and acquisition returns are generally higher than in the US.

The company maintains an active development and redevelopment pipeline in an environment where companies see yield premiums on development versus acquisition of 100-300 bps. As acquisition cap rates are still near historical lows, having a large, diversified development pipeline is critical to long term growth. Kimco has a large base of older properties all over the country so redevelopment will become a larger part of the company's pipeline, with yields on invested capital competitive with ground up development. KIM currently has about $1.7 billion of projects in various stages of development. Of this amount, approximately $600 million will be sold upon completion, most likely to a fund where Kimco has a stake. Approximately $214 million of the US development pipeline will be held after completion. Approximately $823 million of projects are under development in Mexico. Average US development yields are expected in the 9%-11% range. The redevelopment pipeline of wholly owned and JV projects now stands at $254 million with expected yields on invested capital in the 10 -13% range. With spreads still profitable, KIM should earn attractive gains on sale of merchant developments in addition to generating fee income.

Kimco has a diverse array of other businesses including preferred equity placement, a retail restructuring business, 3rd party property management, mortgage financing, and other investments in marketable securities. In the 2nd quarter, income from other real estate investments was $32.4 million, in line with 2Q07. At quarter end, the company had 136 preferred investments in the U.S. and 85 in Canada with gross book value of $451.6 million. These business lines create a predictable stream of fee earnings that helps mitigate downside risks if core rental operations deteriorate.

Since the company's inception, annual dividend increases have averaged more that 9% and FFO increases have averaged more than 10%. KIM recently increased its quarterly dividend by 10% over the previous payout. The FFO payout ratio is now about 66%. Debt service and fixed charge coverage were solid at 3.8x and 3.2x respectively at quarter end. The company has plenty of cash and availability under its line of credit ($1.0 billion) at quarter end to take advantage of acquisitions and development opportunities as more highly leveraged owners and developers get into trouble in the face of sagging retail sales and retailer bankruptcies. We expect operations to deteriorate in the coming quarters as consumer spending continues to decline. In this type of environment, Kimco with low comparative debt levels, adequate dividend coverage, and a geographically diverse portfolio will fare better than peers.

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