Nov 5, 2008
Executives
Barbara Pooley - Vice President of Finance and Investor Relation Mike Pappagallo - Chief Financial Officer Dave Henry - Vice Chairman and Chief Investment Officer David Lukes - Executive Vice President Milton Cooper - Chairman and Chief Executive Officer Mike Flynn - Vice Chairman and President
Analysts
Christy McElroy - Bank of America Paul Morgan - SBR investment Michael Dillerman - Citi Elan C - Credit Suisse William Acheson - Benchmark Mark Biffert - Oppenheimer and Company Jeff Donnelly - Wachovia Securities Michael Mueller - JP Morgan Jay Haberman - Goldman Sachs Jeff Spector - UBS Nathan Isbee - Stifel Nicolaus Rj Milligan - Raymond James Rich Moore - RBC Capital Markets
Operator
Please standby we are about to begin. Good day ladies and gentlemen and welcome to Kimco’s Third Quarter Earnings Conference Call.
Please be aware that today’s conference is being recorded. As a reminder, all lines are muted to prevent background noise.
After the speakers' remarks there will be a formal question-and-answer session. (Operator instructions).
At this time, it is my pleasure to introduce your speaker today, Barbara Pooley. Please go ahead Ms.
Pooley.
Barbara Pooley – Vice President of Finance and Investor Relation
Thank you, Michel. Thank you all for joining the third quarter 2008 Kimco earnings call.
With me on the call this morning are Milton Cooper, Chairman and CEO; Dave Henry, Chief Investment Officer; Mike Flynn, Vice Chairman and President; Mike Pappagallo, Chief Financial Officer; and David Lukes, Executive Vice President. Other key executives are also available to take your questions at the conclusion of our prepared remarks.
As a reminder, statements made during the course of this call represent the company and management’s hope, intentions, beliefs, expectations, or projections of the future, which are forward-looking statements. It’s important to note that the company’s actual results could differ materially from those projected in such forward-looking statements.
Information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained in the company’s SEC filing. During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco’s operating results.
Examples include but are not limited to funds from operations and net operating income. Reconciliations of these non-GAAP financial measures are available on our website.
And finally, during the Q&A portion of the call, we request that you respect a limit of one question with one appropriate follow-up so that all of our callers have an opportunity to speak with management. Feel free to return to the queue if you have additional questions.
I’ll now turn the call over to Mike Pappagallo.
Mike Pappagallo – Chief Financial Officer
Thank you, Barbara and good morning. A word might we considered one of most dramatic and painful three months in the history of the financial results, as ‘01 could be the basic and tackling of our new business.
Once again our action maintain liquidity and a strong balance sheet and aggressively managing our shopping center asset. I would like to comment on three items.
The recent quarter results, liquidity and funding flexibility, and the reduced 2008 earnings guidance. FFO per share for the quarter $0.68 inline with consensus estimate and representing a 90% increase from the prior years third quarter.
The significant increase in quarterly results is primarily driven by certain transactions in our Kimco capital services unit, nonetheless operating performance of our shopping center operation held out quite well in light of the economic environment. Occupancy was 95.4% which is only a 30 basis point decline from the prior quarter.
Same store NOI was 2.6%, rents spread on leasing activity was solid with over 17% uplift on new leases for the quarter and almost 9% on renewal. These results were accomplished despite a difficult retail climate and lower consumer spending.
In a few moments David Lukes will provide some insight into our shopping center portfolio strategy and activity. Similar to prior quarter the market dislocation has limited new business activity with a investment in Mexico shopping center development and internal spending.
The notable transaction in the quarter was the profit earned from our investment and averaging, we sold 49 stores to public as well as disclosing of a number of centers. The result to Kimco was a after tax gain on the transaction of approximately $28.1 million.
The incremental affect of the average contribution from last year was about $0.8 per share to the overall $0.11 per share increase in the quarterly results. With respect to liquidity our primary action in the third quarter was to raise $410 million and 11.5 million share issuance of common equity.
Luckily proceeding the Lehman bankruptcy, the problems at AIG and various other events. We ended the capital to reduce balances on our credit facility.
At September 30 we had a 100 million of cash in a total of 1.3 available capacity from the combination of our US and Canadian dollar facility, and the bank who have underlined the commitment is a strong line. We recognized however that the credit and transaction markets are still gauzy and there is no assurance that will recover anytime soon.
With that in mind we look that the total debt maturities on the balance sheet which totaled $479 million in 2009 and $349 million in 2010 which in total is actually less than the availability under the existing credit facility. I highlight this data point to illustrate the balance sheet flexibility we have not to imply that we are going to fund everything from the credit facility.
We certainly expect the capital markets to refinance our maturing mortgages and construction loan and to satisfy our funding requirements for existing development projects. We have solid relationship with many of the stronger financial institutions and our high coverage ratios and a substantial number of high quality pre and clear property will enable us to access financing at conservative loan which continues to be available, but I bring this point out simply to alleviate any concerns over balance sheet liquidity.
Now let me turn your attention to maturity debt and investment management programs and other joint ventures. Now let’s stand in the fact that these financing are usually individual non-recourse mortgages.
The 2009 maturities after accounting for available expansion option is about 800 million, and 2010 maturities of about 1.1 billion. These are the absolute amount not Kimco share which is less than 25% of the total.
All the aggregate maturities over the two years, the largest outstanding balance is a $615 million two year term loan facility against the portfolio of 30 pacific assets being marketed for sales. Where loan will be repaid as the properties are sold, but more importantly the loan is proportion of the back staff by the large prudential fund that own the portfolio with us.
The balance of the maturities credit loss about 60 individual properties, and average debt loss of about $21 million per property. To evaluate the ability these property we stress that the asset by haircutting in place and inline of client conservative GAAP rates.
And as result we find that the LTV to replace the existing debt levels over the next year averages about 55%. The point is that the inherent of these assets, the relatively low financing requirements per property, and reasonable loan to values will help faciliate refinancing.
Taken a recent example, over the past four months in a very difficult financing environment we were able to address a $190 million of debt coming to on properties in our Kimco income REIT program. We refinanced nine of the properties with aggregate proceeds of $228 million and interest rates ranging from 6 and 6.5% fully repayment maturing debt and generating excess proceed.
We also obtained another $85 million worth of new debt for maturing mortgages another joint ventures and in one case expended a maturing loans of three year. In sum we believe our debt maturity on a consolidated balance sheet and in the joint venture program for 2009 and 10 are manageable and we will be successful in refinancing these obligation.
Finally, let me cover the fourth quarter numbers. The 2008 guidance range previously offered most of the year has been reduced by a range of $0.25 to $0.50 resulting in a new estimate of between $2.20 to $2.45 per share.
Yes, these are dramatically lower numbers than previous guidance levels and there are two drivers. First, we have reduced our expected fourth quarter transactional income to virtually zero reflecting the dramatic deterioration and credit availability for buyers of our development projects and access from our Kimco capital services unit.
We have been upfront on the dollar levels of transaction gains embedded in our earnings guidance throughout the year as disclosed in prior earnings releases and caution that the payment of the full amounts would dependant in part on outside forces. The deals were there and assets all are were under contract at certainty of closures due to the lack of credit availability for buyers have become the issue.
One approach could have been for Kimco that provide a financing to complete the transaction book the gain. But we are going to be reckless with our available liquidity just to meet clearly earnings expectations.
We sometimes provide such financing but only in very safe and some doses. Although, it’s frustrating that the continued disarray in the market affects one part of our business, it’s the fact and we deal with it.
The absence of transaction income represents that of $0.25 on the reduction in the guidance range. The second component of the reduction relate to the range of possible accounting reserve associated of our portfolio of marketable securities and similar investment.
The market meltdown that took place during the last 45 days has resulted in a significant increase in the level of unrealized losses in the securities portfolio. While we have the ability to hold these securities for a long term there is a great uncertainty at the stock market to make a meaningful recovery in a reasonable period of time.
And as a result reserves may have to be established under the accounting rules to address the underwater position. Therefore, the prudent and transparent to the potential impact on earnings, the guidance range was adjusted further to take the possibility into account.
As you might expect I am bias towards the low end of this new guidance estimate. Notwithstanding the actions of transaction income and the potential of non-cash valuation reserves our ability to fund our dividend from operating cash flow that impact and you know it’s our dividend at risk to be reduced or suspended.
We recognized the importance of the dividend particularly to our retial shareholders. While there seems to be a growing sentiment that company should look to their dividend as a source of capital for other requirements.
We feel strongly that we have more than enough balance sheet capacity and liquidity to handle those other needs and recurring cash flows from operations and learn it’s efficient to cover the dividend. I am referring any specific 2009 earnings guidance at this point.
We’re settling on a rate to see if and when the credit market we established itself to better assess the post holiday impact on retail sales and tenant, and to gain more clarity on the scope of investment opportunities that maybe available in the near term. However, from broad prospectus its reasonable to assume that should there continue to be an absence of meaningful transaction activity, 2009 FFO levels will roughly line up with the low end of the new 2008 guidance range.
All that said, I would like to make one final comment with respect to transactional profit that flow from our business unit. There is no question that we have capitalized on the wide happening real estate markets and robust financing environment from 2004 to early 2007, and I have continue to enjoy the benefits of the opportunistic purchases through the first nine months of this year such as this quarter contribution from average.
Transactional income aggregated almost $675 million over the past five years. That wasn’t a bad thing.
The opportunities were there, we took advantage of them, and as a result our per share FFO growth exceeded the industry average and importantly generated excess cash to reinvest in our portfolio investment management program and international expansion. As many of these transactions were in the CRS, it allowed us to build over a $150 million in retained in that time period.
However, we recognized times are different, and with the capital and trading markets what they are priority and investment approach must adopt as well. With that, I will turn it over to Dave Henry to discuss this strategy.
Dave Henry – Vice Chairman and Chief Investment Officer
Thanks Mike. As referenced by Mike the real estate markets have changed and continue to change dramatically.
Mortgage financing, acquisition and disposition activity and development projects have all been curtailed to an unprecedented degree. As a result and from our new business perspective we have responded by adopting a more focused strategy across our operating businesses.
Given the need to carefully allocate new business capital in a difficult environment, we plan to concentrate on retial properties which will align us with our core strength and expertise neighborhood and community shopping centers. In KDI our merchant building business, we have started to become apparent in 2007 that very few development projects in the US could achieve our historical double digit target return on cost.
Land and construction cost increased substantially while at the same time retailer were beginning to reduce expansion plans and negotiate lower ramps. As a consequence, only two KDI development projects were approved and closed in 2007 and only one KDI project has been approved and closed in 2008.
Given the limited development activity expected for the foreseeable future we decided in early September to significantly reduce our KDI business unit by emerging it with our existing portfolio redevelopment staff. While we continue to aggressively pursued redevelopment projects within our existing portfolio, and while there maybe opportunities that help institutional client with trouble development projects, we do not anticipate much building to be a material part of our new business activity.
In our preferred equity business we are beginning to see an increasing number of attractive opportunities as the capital markets pullback. Traditional mezzanine financing competitors had largely disappeared although our new distressed debt funds are emerging.
On our side, recognizing that the hard of our business remains neighborhood in community shopping center, we planned a largely limit our new business activity to retail investment where we can obtain high preferred return together with a large equity participation. It is important to remember that our preferred equity business has always been focused on equity participation in existing properties which will be provide recurring long term income.
Our preferred equity portfolio today of $460 million is widely diversified among 237 properties with an average preferred equity coupon in excess of 8%, plus an equity interest in both excess cash flow and residual value. We believe our preferred equity business continues to have substantial unrealized gains embedded in its portfolio.
In retailer services our business focused on working directly with retailers on sale lease packs, bankruptcy financing, property dispositions and other opportunities. We think the current economic environment will provide selective opportunities to make profitable investments.
We have longstanding relationships with many retailers which may lead the opportunities to help them dispose of excess real estate and recycle capital back into their core retailing business. On the international front, we remain committed to our substantial equity investment in both Canada and Mexico.
We have been invested in both of these countries for many years and our properties are performing well. In Canada we now have equity investments and a 152 properties and our occupancy in our retail properties in Canada is currently 98%.
Long term Canada remains very attractive given its strong economy, fiscal and straight surpluses, growing population, vast natural resources and a conservative banking system which is limited speculative real estate development activity. In Mexico, despite recent currency turmoil the country continues to have an active and growing housing market with a limited number of modern retial profits.
Off scaling back expansion plans in the US retailers such as Wal-Mart, Cosco, Home Depot, BestBuy, Loews and HEB are increasing their growth plans in Mexico. Our retial anchor sales are holding up very well with sales up 10 to 15% on average through September.
BestBuy as an example recently opened their first store in Mexico, and hope so open up to 80 more over the next three years. Kimco has an excellent base of local offering partners, tenant relationship and experience personnel which will allow us to continue to create value for our shareholders by growing our retial portfolio in Mexico.
Our investment management business which is exclusively oriented to retail properties continues to be an important focus for our company. At the largest owner of neighborhood and community shopping centers in the US, we are uniquely positioned to acquire property manage and operate large portfolios of shopping centers for institutional investors of all types.
We are proud to be listed as one of the largest fund managers in the US with 21 institutional clients and partners. Many of the institutional clients are determined to limit acquisition activity until the credit market stabilized.
And as a result we do not anticipate significant acquisition activity of core retail properties in the near term. Some large investors however do have substantial funds available for large opportunistic purchases if cap rates continues to increase, and we will explore opportunities with these investors as they arrives.
Overall, it is an uncertain and disquieting time for all of us in the real estate business. With capital constraint in many ways we believe it is prudent to plan as if the real estate markets will continue to deteriorate.
Accordingly, although we have made substantial profits in transaction activities outside of the retail effective, it makes sense to stick close to the west and today and concentrate on retail opportunities where we have the best underwriting and operating capabilities. Notwithstanding attractive short term debt and securities investment opportunities we plan to focus on long term equity investment in retial properties which will provide growing and recurring income overtime to our shareholders.
If, as many experts predict, inflation comes back strongly after years of profound deficit spending, quality retail real estate will remain a wonderful inflation hedge and excellent long term investment. Now I would like to turn to David Lukes for an overview of our US shopping portfolio.
David Lukes – Executive Vice President
Thank you, Dave. There has been a long conversation lightly about the sale of the retial environment.
The consumer is at a center stage, and in Kimco we feel like busy set designers. How we choreograph in this environment is a question to handle, I would like to give you some insight to our vision and how we plan to get there.
In a nutshell we are focused on two things locations and lineup, our locations are in the soft market, but in general we are continuing to see that the consumers staying close to their home and their work, and that convenience is king. It is a positive fact for us that was over 90% of our GLA is located in interbeltway communities and almost half contain a grocery component.
No small advantage, considering that over 40% of employment in the country's top cities is within five miles of CBD. We are seeing the direct benefit of having a portfolio in a mature market.
Location, though, is only half the puzzle. So let’s consider tenant mix.
We are continuing to see higher tenant churn over the last year. As we look into the details behind this rate case, it’s clear that those driven services that were supporting a growing housing market have hit a rough patch on the road.
Flooring companies, design centers, mortgage offices, furniture retailers and housewares are clearly reducing in number. On the other hand new lease production is at an all-time high for the company, an encouraging fact considering that rents spread were a healthy 17%.
Grocery, personal service, apparel and convenience categories continue to be active and taking space and are strong in most parts of the country, particularly in Texas, Puerto Rico, California and the Northeast. With all of leasing activity and all of this work on the treadmill, the question is how do we stay focused on strategy?
And the answer in part is to remember that unless other asset classes such as multi-family or office, the tenants at our centers play a very important role in the long term success of our properties. We are in a period of transition.
The tenant mix is shifting with the economy and consumers’ preferences on where and how they spend their dollars. Nothing is more important to us than carefully managing our asset so that a combination of stock and anchors make our centers more desirable site in the trade area.
Our goal is to ensure that we remain dominant in the local market where we can achieve the highest rent growth and stable occupancy over the longhaul. So it’s more important than quarter by quarter occupancy, more important than taking the highest rent payer, and more important than providing incentives to weak retailers simply to stay in our centers.
Because of this we do expect occupancy to be under pressure while our properties shift tenancies but more importantly we expect these changes to yield opportunity. Consider the following facts.
Most of our properties are situated in older suburbs. Our center is generally immature and contain significant below market rent.
Approximately 75% of our rent is parking. And lastly when large tenants vacate, they also release control of common areas.
All of these give us the ability to reposition our properties and create value in changing markets. With this in mind, as Dave has mentioned, it’s not surprising that we have chosen to bring experienced staff from our ground-up development team into our core operating divisions and we continue to shape, refine, and position our properties with higher density and improved tenant mix and higher overall sales volumes, right card for us as managers.
After all, if you were a tenant in today’s market, there is great appeal in a proven property, with low cost of entry, and certainty that competition is unlikely to challenge you due to high barriers of entry. Our properties are always changing and our enthusiasm to create value will make use of this changing market.
With that, I will turn it over to Milton.
Milton Cooper – Chairman and Chief Executive Officer
Well, thank you Dave. I am very well aware that our revised guidance may disappoint many of our constituents and I believe it’s important to deal with reality of the environment and to be concerned.
I think it’s also important to point out that the revised guidance does not offset cash. While there were no sales development properties to record profits, the value that was created by development is still there to be husbanded when markets return to a more normal time.
The marketable securities is similarly not a cash item and we believe the value will return over time. At this point in time, shopping centers are being hit with a double whammy.
We have had the sharpest drop in consumer confidence since records of consumer confidence we first recorded in 1937. And this is in couples with a severe restricted credit market.
For the first time in many years, we are hearing the D word, deflation. We will not be exempt from the consequences of this environment.
But on a relative basis, we have five very positive defensive attributes in our portfolio. One, we have a substantial portion of our portfolio occupied by tenants with good credits under long term leases.
The value of this income stream with unlike characteristics should increase in the deflationary environment. Two, our supermarket, drug stores and warehouse clubs, all sell items essential for the consumers such as food and pharmacy items.
Three, in times such as these, the consumer trades down and shops at discount stores and off-priced retailers, both categories are among our largest tenants. Four, Kimco has been in business for close to 50 years, and leases ended more than 25 years ago have rentals that are lower, and rents -- and leases, say, 10 years ago.
Low rates, rental rates are not only defensive, but are the basis for future cash-flow growth. Five, in times of stress, there will be a need by institutional owners, except for a manager with great skill in creating value, a manager expert at controlling costs, a manager with capital with skin on the gain, a manager with integrity.
In a word, Kimco. By history, shows in times of difficulty, we have found opportunities to create value.
We've been through many cycles in our company's history. You all know that creating value and maintaining our dividend our in our DNA.
With that, we would be delighted to answer any questions.
Barbara Pooley – Vice President of Finance and Investor Relation
Thanks Michelle we can take questions now, please.
Operator
(Operator Instructions) And we will take our first question from Christy McElroy with Bank of America.
Christy McElroy
Hey guys this is Rob Salisbury with Christy. Just had a question on the guidance.
I was hoping you could walk us through some of the assumptions that are kind of underline the new 2008 guidance. I guess specifically we were trying to figure out what your expectation was for occupancy and promote some operations and common all those other moving pats kind of in the fourth quarter?
Dave Henry
Well as indicated earlier, that we are expecting, from a transactional standpoint virtually nothing. So as it relates to promotes, development sales, Albertson's income, etcetera, you could just put a zero in your budget models.
As to occupancy, again, it's very difficult for us to predict what a specific occupancy level would be; but as David had mentioned in his prepared remarks, you know, that we expect to see ongoing pressure on occupancies, but I don't think its going to be a material reduction. I mean, I think the true test will really be after the holidays in the first quarter to see where things shake out.
Christy McElroy
So is it fair to say that you're probably a little bit more from an occupancy perspective, you're a little bit more conservative on 1Q than 4Q? Is that fair?
Dave Henry
That's fair. I think that's part of the natural cycle that occurs in the retail environment.
Christy McElroy
Okay. Thanks.
Operator
And we will take our next question from Paul Morgan with SBR investment.
Paul Morgan
Hey good morning. You know, Milton, as I call you want down, down the investment management routes when cap rates fell below 9, and a half for shopping centers and you felt you couldn't creatively vie for your core.
I'm interested in your thoughts going back that far about where you think we'll get back to that nine cap and how that changes your view about acquiring for the core versus the JV route?
Dave Henry
Well, fundamentally, if cap rates increase to a point where they're in excess of our cost of capital, we'll vie for our own account. That's what we did in the earlier years of our public history in '91 etcetera, '92 etcetera.
What will happen, I'm not sure. Certainly what we'll do is look, analyze where the cap rates are, and if they are not adequate for course to capital, will put the properties into a joint venture.
Again, we'll have to see what markets are and how strong the interest of the joint venture markets are.
Paul Morgan
You know, related to that, on the loan to value, 35% that you mentioned, you said that's based on stress tested NOI and Cap rates. Do you have any kind of color on what kind of levels of cap rates or in what NOI reduction you used to get to that 35%?
Dave Henry
Yes. What we did, Paul, is we essentially took the in place NOI and cut it by 10% and then used an 8 or higher Cap rate on the asset to stress test that LTB.
And the other point to recognize is that in looking at many of the assets in question, or the maturing that many of these loans are older loans that we in place when we had acquired the assets, whether it was the Pan Pacific portfolio or other joint venture assets. So you certainly had the benefit of amortization over the years.
So the hurdle, the dollar hurdle and refinancing is not significant relative to the dollar amount of the asset even when you use more conservative underwriting assumption. That’s why we feel comfortable that we will be able to get through this credit crisis and find adequate mortgage financing to refinance those obligations.
Paul Morgan
Thanks.
Operator
And we will take our next question from Michael Dillerman with Citi.
Michael Dillerman
Hi, (inaudible) here I am with Michael. With respect to the guidance running into the fourth quarter, I mean if we look at it, you had $0.68 in the third quarter, how much transactional earnings were in there?
Mike Pappagallo
A little bit of difficulty in hearing you. But in terms of the transactional amounts in the third quarter I think is what you are asking for?
Michael Dillerman
Correct.
Mike Pappagallo
It was probably about, let's take a rough cut and say about 70 cents for this third quarter versus about 40 cents for the prior year's quarter.
Michael Dillerman
Okay. So there is none in the fourth quarter.
So to get to the new implied guidance for the fourth quarter, what are you assuming? What's the assumptions for the mark down on your security?
Mike Pappagallo
And looking at that separately from a cash charge perspective….
Michael Dillerman
Yeah.
Mike Pappagallo
….or non-cash charge perspective I mean it literally goes from 0 to 25 cents a share, As you'll recall, my prepared comments, I had indicated that the total range now is 25 to 50 cents lower than the $2.70 consensus number and the low end of our previous range and about half of that is due to the actual absence of transaction. So another way of say we had planned it out 25 cents were the transactions in the fourth quarter.
The balance -- that’s the variable in terms of where the mark to market will be on those security and it could be in our view up to 25 cents. That’s why we have provided the wider range.
Michael Dillerman
Okay. And just in terms of markdown, I mean, I just wanted to ask about your investment the $200 million investment in Valad and given that their share price has gone from think, over $1.30 when you invested round about, can you just give us an upside in terms of what’s you are seeing there?
Mike Pappagallo
Yeah I would like to take a minute and go back over to the history of Valad, because I personally am feeling a little dumb about that one. But I would like to go back a year.
The equity market cap of Valad had decreased after they purchased a very large money manager in Europe called Scarborrow. The equity market cap had decreased from almost $4 billion to about $2 billion at the time we negotiated our convertible bond investment.
And at the time it looked an opportunistic and safe way to invest in Australia, which had at the time a strong economy, resource rich and lots of reasons to invest long-term in the country. The company itself had a strong money management business and a solid portfolio of Australian real estate.
So we felt good about the safety of our bond investment and the fact that it had a convertible feature to it gave us upside, if the stock were covered to its former levels. So there was a way for the company to make a quite bit of money, if Valad returned to its former levels.
Now fast forward to today. Valad like most Australian reach have been tremendously damaged in terms of their stock price.
Starting with the publicity surrounding Centro, rising Cap rates, the falling Australian dollar, and in Valad's case a clear market perception they had overpaid for the money management business and problems in some of the their preferred equity development deal, all had combined to clearly reduce their stock price. Now in addition to our $200 million convertible bond, we purchased equities straight stock equity of about $45 million as the stock was declining and a large portion of the securities write down that we may take in the fourth quarter is attributable to the stock investment we have in the last and not particularly the bond.
The bond we still feel is very secured after taking a harder look, we together like most analyst in the community feel that the NAV or the liquidation value of the asset within the lot are substantially above $0.8 to $0.10 per stock is this trading as. So, at this point in time we feel that the bond itself is at risk.
We are not sure about the stock of our investment.
Michael Dillerman
Are you – like it doesn’t like you are going to take a lot to bond at this time?
David Luke
No, not at this point we have done a thorough analysis and we feel good about the realization of the bond that its base value.
Michael Dillerman
Thank for lot.
Operator
And we'll take our next question from Jay Haberman with Goldman Sachs.
Jay Haberman
Hi. Good morning.
You know, Dave you mentioned some comment on Mexico, I am just wondering if you can provide some updates on the leasing of the current development pipeline. And then also specifically on the capital market there you know, in terms of caprate as well as the lending environment?
Dave Henry
I will take quick step and we also have Mike Nelson who heads up our entire Latin American division here who is prepared to jump in as well. But from a high level, on the property side activity is still strong although it has stop a bit and Mexico will not be a immune from a severe rescission in the United State as people have pointed out, remittances are down.
So there is some softening on consumer spending, but as many of our retailer pointed out, especially some of the food retailers they are actually seeing increasing sales that our Mexican stay in the border shops of all centers and don’t go across to now higher price store in the US. So some activity has benefited from the back of pay so has declined in value against the dollar.
In addition, some of our tenants like HEV or CUS residential drive across the border and shop at their shopping plazas in Mexico. So, for now, its holding up pretty good, Mike will tell you little bit about sale.
In terms of the capital market it remains an active place or invested a lot of money has been raised to invest in Mexico. Some of our competitor has brought shopping center as well as an 8 cap which represents quite a reduction in cap rates.
But I think overtime those cap rates will probably increase unless the US economy turns around in some substantial fashion. We still feel strongly that the long term debt on Mexico retail makes a lot sense because there are such a shorts supply colony retail product down, there is a growing middle class, there is growing demand for housing there, and our tenants like Home Depot and others are increasing their investment and portfolio in Mexico and then may be Mike you would like give a little t more detail.
Mike Nelson
Serving Dave. Now our experience on the ground reveals that both our occupancy and our leasing effort that are development properties remains very strong.
In addition, as Dave mentioned in his remarks the sale that we have reported back on our anchor spaces through out portfolio are still coming in at 10 to 15% year-on-year increases. We are cautious and expect some degree of slow down in the market, but we are not seeing yet Mexico is forecast to continue growing this year, although growth were slow and then rebound in 2010.
Jay Haberman
And just a followup, can you comment on the update or in terms of the Latin America fund you were talking about before the $500 million fund in the takeout vehicle?
Dave Henry
Yes. We are still very optimistic notwithstanding most investors are very nervous today.
They have remain strong interest in Latin America. We have a -- what I would call speed investors that Scott Onufrey who is sitting to the right I mean, I just finished finally negotiating the final terms.
So we now have a negotiated final document that we can try to build around this seed investor and try to fill out the $500 million. We expected it will probably take another two to three months to get that done, but we are still optimistic about it, as an example Brazil, which will be a large piece of the fund given the size of the country, remains a strong area of interest for not only investors but for tenants.
Wal-Mart has told us that’s their #1 international target. We have an agreement to try to help them develop some of their smaller format in Brazil.
So there is still notwithstanding the turmoil of the Brazilian stock market and the currency and so forth, there is still great long terms prospects for the country. 10th largest economy in the world.
It’s got natural resources. It as well has a growing middle class.
I think the numbers are – they are something like 27 cities, over 200,000 people without a single shopping center. So that’s the reason we feel good about it.
Jay Haberman
And just back to Milton on cost of capital. How much do you think your cost of capital has increased?
And therefore, how much do you think cap rates needs to adjust, I guess, from current levels? And then ultimately, where do your joint venture partners, where are they looking to cap rates move to come back into the market again?
Milton Cooper
I think it’s 100 basis points, just a rough cash. And I am really not sure where the expectations, the joint venture partners are as of today.
Dave Henry
Yeah, well, I want to just add, nobody wants to let their cost catch up falling knife. As long as cap rates keep rising, there is a great deal of nervousness.
Nobody can pick a bottom and they rather invest on the way up than invest on the way down. And given changes in their securities’ portfolios and other things that are happening there, there is just a huge degree of caution on the fact that pension funds and insurance companies and others about investing today in a substantial way.
Milton Cooper
As we proceed if we could ask you folks to just limit to one question because we have substantial number of people in the queue and we’d really like to get everyone’s question answered. So if we can proceed with the next caller.
Operator
We will take our next question from Elan C with Credit Suisse.
Elan C
Hi, thank you. What have recent LTVs are you getting in your most recent mortgage refinancings and were there any excess cash proceeds from the refinancing?
Mike Pappagallo
Well, as indicated earlier, we generally add a 55 to 60% loan-to-value range on the new financing and the most material of those the Kimco Income REIT refinancing, we are able to extract about $30 million of excess proceeds from those refinancings.
Operator
And we will take our next question from William Acheson with Benchmark.
William Acheson
Okay, thank you very much. This one is for Dr.
Cooper. In hindsight, it’s not really clear that residential builds – built to a false sense of credit reduced demand and it’s not going to a structural in addition to a cyclical correction?
And in the sense that retail follows the rooftops and KDI being folded into Kimco proper notwithstanding, to what extent does retail need to go to a structural correction as well? Whether it will be the continuing rise in cap rates or perhaps in the leasing spreads?
Milton Cooper
Well, in retail, the action of housing has dramatically curtailed new development. You’ve heard Dave’s remarks, we really had one slow development in ’08 that was this and there is nothing new we are thinking about for ’09.
That’s curtailing it. Insofar, is the retail as a concern, their destiny will depend on a consumer and the consumer is in pain and lacks confidence.
Well, I think retailers will have pretty tough 2009 unless there is a normal resume in our economy and the housing market comes back when the supply is exhausted. That’s just the way I see it, Bill.
Operator
And our next question comes from Mark Biffert with Oppenheimer and Company.
Mark Biffert
Good morning. I’m curious as to what your view is in terms of development and more important redevelopment.
You had mentioned that this is the time in the US that you would look to reposition some of your properties as retailers move out. I am wondering what kind of targeting you’d expect to get on both redevelopment and development in the US given that your cost of capital is rising?
Mike Pappagallo
Mark, the retail in US historically for us have been low teens, which is so far above cap rates a year ago that cap rates can rise pretty high and we still are going to see a creative return on re-bucking our own properties. I think what you have to remember is difference about redevelopment and development ground-up is that a lot of development is driven by the need for square footage and specifically return on cost hurdle.
The need for redevelopment or the opportunity is driven by whether you have a record site because either you like the redevelopment site if you got a 100% occupancy and tenant long term leases you really have nothing to do. And that’s why it’s a good time for us to focus our energy even more so on redevelopment not because it’s a new agenda for us that we have been talking about for years, but because of some of the newer anchor bankruptcies and new house provide liquidity and the liquidity gives us the opportunity.
And so therefore, as long as we are still 200, 300 basis points above cap rates, we are happy investing in that capital. Primarily the happiness to that investment is because you don’t have a long period of no cash flow.
Most of the time redevelopments are very short nature, they are less 12 months and the downtime is less. So when you move tenants that would go in that will be pretty short because you go in for entitlement and you come out with a plan and each one still have the existing site, the existing site still in configuration.
So it’s not as big of a worry about investing capital on a 13% and not knowing where cap rates will go in 24 months because the period is much shorter.
Operator
And we will take our next question from Jeff Donnelly with Wachovia Securities.
Jeff Donnelly
Good morning guys. Just a question, I guess a follow-up on Westmont InTown portfolio.
I saw you adjusted the cap rate you are using determine the book value of the asset, but you are still employing about a 79 NOI estimate which hasn’t changed from Q1. And the way there has been no deterioration there or are you just – are you conservative originally earlier in the year?
And I guess the follow-up, can you share with us the details of the capital structure of that JV specifically equities but and the leverage is in place?
Dave Henry
The performance of InTown has remained relatively consistent, so we have been pleased with the performance of the underlying rental flow. We changed the cap rate on that particular schedule.
We are attempting to be more conservative in providing financial information and valuation assessment to you folks. There is no magic about that number.
But we recognize that there is impression in the environment and the credit market, so it was prudent for us to change the cap rate from the standpoint of the valuation estimates that we put in there on the upside potential. I mean it really was really as simple as that.
With respect to the capital structure, we are about 75% of the equity in that joint venture. I don’t have the loan to value handy but it’s about probably in the mid 70% range.
Michael Pappagallo
And to the other part of your question, Jeff, so far it is held up very well. Occupancy and rents have held up, maybe because it’s the low end of the extended market and it’s residential alternative for very inexpensive housing, same way Wal-Mart is doing well now, InTown Suites is doing okay.
Operator
And we will take our next question from Michael Mueller with JP Morgan.
Michael Mueller
Hi. My question about your comment on ’09 guidance, the rough estimate.
It doesn’t have any transactional income in it. And then to that point as well you are talking about the range of $0.25 to $0.50 being down, I think you said you were more comfortable with the low end.
Was that the low end of the revised guidance or into that?
Dave Henry
Yeah. What I am trying to get at, Mike, is recognizing we don’t have the specifics and sort of the ground-up financial analysis to give you a clear 2009 guidance framework.
What I was trying to get at is we are taking a look at that low end of the new guidance range, of this year’s guided range of 220. When I look at the next year and you say there is a continuation of the environment where we are not going yet really any transaction volume or significant amount of new business activity and roughly our adjustments just as where do you think you are going to be and that’s why that low end range, that 220 is probably going to be reason going on a steady state activity with somewhat of new activity but certainly not substantial, not a substantial level of transactional activity of what you have seen over the past three-and-a-half, four years.
So I was just trying to put almost a line on the sand to kind of say what the future might look like if transaction volume continues to be very myriad and how that would play out in terms of a broad scope of earnings.
Michael Mueller
Okay. So you think it’s a reasonable statement to say that the level of transactional income is there is some in there but relative to what you are going to book in 2008 is significantly lower.
Dave Henry
I would say it’s dramatically lower.
Michael Mueller
Okay. Thank you.
Operator
And we will take our next question from Jeff Spector with UBS.
Jeff Spector
Good morning. I had a similar question on the ’09 comments.
Mike, can you then say that I guess the core shopping center portfolio, does that make up most of that steady state you are talking about?
Mike Pappagallo
Yeah, what I would say, Jeff is that when you think about the recurring slopes from our business, the substantial component of which is our neighborhood and community shopping centers. That really represents the lion share of what that steady state low end number is.
Jeff Spector
Okay. And then just one follow-up on detail.
The reserves you said you are taking against some assets, are those assets current in terms of income?
Mike Pappagallo
Yes. To the extent that those securities to pay dividend and certain of our securities do not, but to the extent they do, they are all current.
This is currently a market valuation question.
Jeff Spector
Thank you.
Operator
And we will take our next question from Nathan Isbee with Stifel Nicolaus.
David Fick
Hi. It’s Dave Fick with Nath.
Can you take about – I guess this is for David, how much of the current deferred equity business was written over the last few years and how do you look at LTV as well as rollovers in that business in terms of getting taken out?
Dave Henry
Well, the nice thing about the deferred equity business is a lot of the existing business was originated beginning in 2001, 2002, 2003. So I don’t have the exact numbers for you, but I’d say a minority of our 460 portfolio has been originated over the last two-and-a-half, three years.
And as I try to say in the talk, it’s very granular, very diversified, small that there is substantial first loss equity BHIENLTD on the deal and they originated generally at much higher cap rates and there is room for those cap rates to rise. And as we go through these deals, one by one by one, it looks like there is still quite a bit of equity upside.
So that’s one area of a concern at least today.
David Fick
Great. Thank you.
Operator
And our next question comes from Rj Milligan with Raymond James.
Rj Milligan
Good afternoon. Good morning guys.
I had a couple of questions just in terms of the portfolio where you guys are going to take some unrealized losses next year, can you give a view from 30,000 feet exactly what’s in that portfolio?
Mike Pappagallo
Well, there are a variety of stock positions in different public companies, one which you are familiar with because we have talked about in different quarters this years Holdings. The largest position that Dave Henry had mentioned earlier is our equity, our common stock equity investment in a lot and we are thinking about potential range of reserves that’s remaining to be established in this fourth – upcoming fourth quarter really with a lot securities is really the majority of the potential reserve adjustment.
So there are a whole series of stock items but that’s really the key driver.
Rj Milligan
And there isn’t a large focus on any other particular securities?
Mike Pappagallo
Not particularly, not to extent of the lot adjustment.
Rj Milligan
Okay, I appreciate it. Thank you guys.
Operator
And we will take our next question from Rich Moore with RBC Capital Markets.
Richard Moore
Hi, good morning guys. Maybe this is for Mr.
Lukes. Is there any optimism out there among the retailers and is there any optimism, who might be the retailers that I think are opening stores in the near term?
David Lukes
,
Richard Moore
Okay great. Thanks Dave.
Operator
We have no more questions in the queue. I would like to turn the call back to our presenters for any additional or closing remarks.
Barbara Pooley
Thanks everybody. As a remainder, our supplemental is in our website at www.kimcorealty.com.
Thanks everybody for participating today.
Operator
This concludes today's conference. We thank you for your participation and have a great day.