Life Time fitness center in Ardmore, Pennsylvania and David Jamieson of Kimco Realty
The stock market hasn’t been kind to REITs lately, and open-air shopping center operator Kimco Realty is no exception. Shares have fallen about 36 percent over the past 12 months, according to its Q1 2018 earnings report.
Yet other metrics show that the New York-based company, which owns interests in 475 open-air shopping centers in the U.S., is otherwise doing quite nicely. Occupancy rates of its holdings — comprising about 81 million square feet — are at 96.1 percent, and the rental rate for the company’s new leases increased by more than 10 percent for the 16th consecutive quarter. “If you look at their results, they are in no way shape or form at all consistent with the selloff in the stock,” says Alexander Goldfarb, senior REIT analyst for Sandler O’Neill & Partners.
One could argue that Kimco saw the retail struggle coming before many others in the field, considering that the company began selling off large swaths of space as a part of its “2020 Vision” initiative, a massive sale of nonstrategic properties that began around 2010. The goal? To focus on premium assets in major metropolitan areas on both coasts after years of acquisitions in a wider variety of retail markets in other parts of the country. In just the last quarter, Kimco ditched 21 shopping centers spanning 2.3 million square feet of space to the tune of $219.5 million. Since the initiative began, it’s sold about $6 billion in assets and plans to sell as much as $900 million more by the end of 2018.
But the company isn’t focused on divestment alone. The REIT has a planned development pipeline of six projects totaling $800 million in assessed value, and it plans to redevelop about $2 billion dollars’ worth of existing properties. At the same time, the company is trying out new retail formats and services. Its Pop It Up Here! database, launched in March 2018, lists available pop-up sites in its portfolio. For now, that’s focused on six markets — Denver; Dallas; San Francisco; Phoenix; Bellevue, Washington; and Wilton, Connecticut — with 34 pop-up units available across 13 Kimco shopping centers.
To delve into Kimco’s strategy, The Real Deal talked to the company’s COO, David Jamieson.
This interview has been edited and condensed for clarity.
Tough questions first: To what do you attribute Kimco’s continuing drop in stock price? Equity retail REITs, including Kimco, have seen their share price underperform the broader markets due in part to challenges in the retail industry. A number of retailers have either filed for bankruptcy or announced store downsizing plans, and on the surface, it has created a pervasive negative sentiment. While we acknowledge there is a clear evolutionary shift happening in the retail environment, many of these retailers were highly leveraged entities and weren’t able to adequately reinvest in their own stores to keep up with this shift. The other missing element is that open-air shopping center companies like Kimco tend to own the best properties in the best markets supported by strong demographics. Retailers want to remain in our properties because they are close to the consumer.
How do you plan to improve stock performance? We may be able to influence the share price by executing on the items within our control, like continuing to incrementally reduce overall leverage through sales of assets and cash flow generated from a number of our development and redevelopment projects by the end of this year.
How do you determine what you’re selling off? We have an active selling program and that means selling where we see risk to our cash flow or where there are longer-term leases with flat growth. That has helped us refine the core portfolio we want to own longer term and, within that portfolio, where we want to reposition real estate to make it as inviting and accessible as possible within the community it serves.
Can you discuss how much more of the portfolio you’re planning to sell off and which properties you might sell? Our plan is to dispose of $700 to $900 million of properties this year. While the magnitude of our dispositions sounds high, it represents less than 5 percent of our total portfolio.
What features must a property have in order for you to keep it in the portfolio? Where we see the most resilient real estate is where income growth is, where population growth is, where the highest pockets of job growth are occurring. So, there are insulating factors around the markets themselves. Despite all the macro events and concerns about retail in general — and they’re all very real — as a real estate company with properties in specific markets, it’s imperative you understand the local dynamics. Are there municipality restrictions that will inhibit new supply from coming online? Is there the opportunity for job growth from, for example, tech companies, that will drive further demand for retail or other uses, like multifamily?
And it seems you’re putting emphasis on redevelopment? That’s where we see the longer-term opportunity … In the top markets, the cost to acquire is very, very high, but our cost basis in these existing properties is low, because we’ve owned it for an extended period of time. We’ve been around since 1958. That affords us the opportunity to invest in and reposition properties without the burden of having to newly acquire land in very dense markets.
What kinds of properties are you targeting for redevelopment? A lot of times, we’re taking on portions of centers. For example, we just had a grand opening at the Suburban Square site in Ardmore, [Pennsylvania], just outside Philadelphia. We retrofitted a 90-year-old Macy’s building to become an 80,000-square-foot multi-level health and wellness facility for Life Time Athletic. We’re tapping changing consumer tastes; health and wellness is top of mind.
What are your thoughts about the future of retail? I see tremendous opportunities from new retail concepts coming to market …offline and online.
Really, we’re at a point where it’s unclear what the future will bring. But it’s critical for us as a landlord to be adaptive, so we stay relevant and continue to build long-term value.
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