Feb 4, 2010
Executives
Barbara Pooley – Senior Vice President Finance & Investor Relations Milton Cooper – Executive Chairman David Henry – President, Chief Executive Officer Michael Pappagallo – Chief Financial Officer David Lukes – Chief Operating Officer
Analysts
Jeffrey Donnelly – Wells Fargo Craig Schmidt – Bank of America Christy McElroy – UBS [Quinton Villalay – Citi Group] Jonathan Habermann – Goldman Sachs Michael Mueller – J.P. Morgan Ian Weissman – ISI Group David Wigginton – Macquarie Research Nick Vedder – Greenstreet Advisors Richard Moore – RBC Capital Markets Paul Morgan – Morgan Stanley Alexander Goldfarb – Sandler O’Neill Ross for Christy McElroy – UBS David Fick – Stifel Nicolaus
Operator
Welcome to Kimco’s fourth quarter earnings conference call. (Operator Instructions) At this time it is my pleasure to introduce your speaker today, Barbara Pooley.
Barbara Pooley
Thank you all for joining the fourth quarter 2009 Kimco earnings call. With me on the call this morning are Milton Cooper, Executive Chairman, Dave Henry, President and Chief Executive Officer, Mike Pappagallo, Chief Financial Officer and David Lukes, Chief Operating Officer.
Other key executives are also available to take your questions as the conclusion of our prepared remarks. As a reminder, statements made during the course of the call represent the company and management’s hopes, intentions, beliefs, expectations or projections of the future which are forward-looking statements.
It is important to note that the company’s actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained in the company’s SEC filings.
During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco’s operating results. Examples include but are not limited to, funds from operations and net operating income.
Reconciliations of these non-GAAP financial measures are available on our website. Finally, during the Q&A portion of the call, we request that you respect the limit of one question with appropriate follow up so that all callers have an opportunity to speak with management.
Feel free to return to the queue if you have additional questions, and if we have time at the end of the call we will address those questions. I’ll now turn the call over to Milton Cooper.
Milton Cooper
Thanks Barbara. A week ago Saturday, I read a Wall Street Journal article that contained a forecast that the U.S.
population would grow by an additional 100 million people by 2050. Let’s think about that.
The 100 million population increase is more than three times the population of Canada and more than three times the population of Australia. This has to mean an increase in retail demand over the long term, and it also helps that there is very little new supply as development has stopped.
It may me reflect on our company and our future. Our shopping centers have a higher proportion of land for total value than other asset classes.
Thank goodness for required parking ratios. Our tenant rent streams permit us to land bank and at the same time provide current cash flow while awaiting the growth of value.
Fortunately for us, our tenants are primarily discounters, warehouse clubs, supermarkets, drug stores and off price retailers that sell non discretionary essential items or cater to the growing consensus of consumers that are trading down. We are in an interesting cycle of retailing.
Conspicuous consumption is out. Value and price are in.
According to a recent consumer survey, the three most popular brands were one, Wal Mart, two, Target, three, none. Department store shares of market have continued to decline.
Off price retailers T.J. Maxx and Ross sales are up double digits.
And if you look at the list of our top tenants, you will see the reason there’s some comfort level on our part. Kimco has developed shopping centers for over 50 years, but what is most gratifying is the team of leadership that we have developed.
My three partners, Dave, Mike and David work together effectively to enhance our value. So without further adieu, let us hear from them and I’m delighted to introduce our Chief Executive Officer, Dave Henry.
David Henry
Thanks very much Milton. I am proud and excited about assuming the CEO role and I’m also very pleased about continuing our nine year partnership.
It is an honor to work with you, the Board of Directors and other members of our senior management team. It is truly wonderful to be part of carrying on a 50 year tradition of retail real estate excellence.
Given the challenges for all of us in the real estate business over the past year, and the numerous questions from a host of analysts, shareholders and institutional partners, I would like to take a minute to clarify our business strategy and address some of the concerns expressed over the past several months. We believe our business strategy is now simple and very clear.
We are going to stay true to our retail roots and our core retail operating expertise. We are second to none in relationships with retailers, retail leasing experience, property management and retail redevelopment skills.
We have the largest and most diversified portfolio of community and neighborhood shopping centers with more than 13,000 individual leases. This size and scale gives us many advantages and provides our company with a reliable and steady cash flow to support dividends and capital investments.
Overall, and in summary, we are committed to equity ownership of quality retail real estate which will provide long term recurring income. In addition to our focus and emphasis on increasing the cash flow of our retail property portfolio, there are three other elements of our business strategy which we feel differentiate us and enhance our future growth and shareholder value.
First, we remain dedicated to building an institutional management business by forming programmatic joint ventures and comingle funds with first class domestic and foreign institutional partners. Joint venturing with strong institutions helps us be competitive in acquiring high quality retail properties and the recurring fee income improves our returns on invested capital.
Second, we continue to believe in the long term benefits of our international investments in both Canada and Mexico. In addition to diversification and synergies with many of our strongest U.S.
retailers, both Mexico and Canada are significantly under retailed when compared to the U.S. Our largest tenants such as Wal Mart and Home Depot have recognized the advantages inherent in both of these markets and continue to expand aggressively.
Last week, Target joined others in announcing that Mexico and Canada will be part of their long term expansion plans. As a third element of our retail strategy, we will definitely remain opportunistic in purchasing real estate owned by retailers.
Kimco has a long tradition of profitable and opportunistic acquisitions of both vacant and occupied real estate portfolios owned by retailers. Examples include Albertson’s, Montgomery Ward, Venture Store, Heppinger Stores, Frank’s Nursery, Clover Stores and Gold Circle.
Kimco has the relationships, underwriting expertise and leasing skills to make these investments an important part of creating shareholder value. As a summary, our strategy is simple; recurring income from quality retail real estate, enhanced by institutional managements, international real estate investments and opportunistic retail real estate acquisitions from retailers.
On the other side of presenting in simple terms our strategic vision, I’d like to spend some time addressing core concerns mentioned in many of our analyst and investor reviews. First, there remains a question of explicit or implicit guarantees of debt in our retail joint ventures with institutions.
At the beginning of 2009, Kimco had guaranteed debt on behalf of retail institutional joint ventures totaling approximately $685 million primarily in our Prudential joint ventures. Today, through property sales and equity investments by the joint venture partners, this amount has been reduced to $331 million.
By September 2010 this year, we are very confident that the guaranteed loan balances for the retail joint ventures will be completely repaid. With respect to implicit guarantees, all other retail institutional joint venture debt is in the form of non recourse property specific mortgages, and there are absolutely no partnership obligations of any kind to repay non recourse mortgage debt.
Second, the amount and timing of deleveraging our balance sheet has been a popular topic. Mike Pappagallo has repeatedly defined our leverage objectives in terms of a net debt to EBITDA ratio, and as a management team, we are committed to reducing the net debt to EBITDA ratio to six times by the end of 2012 and to five times by the end of 2014.
These are firm goals and should clarify the timing for everyone. Third, the disposition of our non retail portfolio of real estate investments of approximately $875 million has also been much discussed.
It is important to understand that non retail does not mean not earning or not good. Our non retail investments vary widely, generally produce FFO and will be sold on a disciplined by accelerated basis over the next two to four years.
Since the beginning of 2009, the non retail portfolio has been reduced by $150 million to date and we anticipate a minimum of $200 million of additional disposition in 2010. The fourth concern frequently mentioned is the price paid for the PL retail portfolio and the apparent lack of institutional partners participating in the purchase.
As we said last quarter, the transaction came about very quickly and we strong believe that the price paid was attractive in relation to the high quality properties involved. We are actively working with several institutions with respect to various properties in this portfolio and we hope to be able to finalize one or more new joint ventures in the first quarter.
As we place the PL retail properties in new lower leveraged long term institutional joint ventures, we hope investors will have less concerns and we remain very pleased to have acquired the portfolio when we did and with the price we paid. Now I’d like to turn it over to my esteemed partner and CFO, Mike Pappagallo.
Michael Pappagallo
Thank you Dave and good morning all. As reported last evening, we closed out the year with a fourth quarter FFO per share of $0.31.
This was $0.02 higher than the consensus estimates. Comparing the results against last year’s fourth quarter and excluding impairment charges in both periods, FFO per share declined by $0.15 from $0.46 in the prior year.
Substantially all of the decrease reflects the diluted caused by the re-equitation of the balance sheet earlier in 2009. On a full year basis, FFO per share was $0.82 including impairments and $1.33 excluding impairments.
The later number compares to $2.49 per share in 2008. The overall reduction can be attributed to lower transaction activity of $0.53, the dilution from the equity offerings of $0.48 and lower income from our structured investments and non shopping center assets of $0.13.
The decline in contribution from our shopping center business is modest at only $0.02. I offer that blizzard of numbers to underscore that the foundation of the business strategy that Dave just articulated on North American shopping center portfolio, has demonstrated its resiliency and stability during a very tough year.
The move away from reliance on transactions for merchant building, preferred equity kickers and securities, the shut down of our non shopping center businesses, the mark to market on the asset required at the top of the cycle as well as the large re-capitalization of the company last spring, has certainly been painful in terms of short term financial results. But as we move into 2010 focusing our efforts on the four elements of the strategy Dave talked about and dissipating the four clouds that concern investors, I believe the consequence will be much more visibility and priority of our financial results and operating drivers, which in turn will reveal the strength and stability of our shopping center assets.
To that point, the portfolio of idle signs at those shopping centers were solid this past quarter, following through on the positive turn started in the third quarter. Overall occupancy increased by 40 basis points from September to 92.8%.
This increase was driven by lease up at certain of the former Linen and Circuit City boxes. Same store net operating income declined 1.1%, within our expectations and previous guidance offered to investors and while spreads on 467,000 square feet on new leases held by 6.9%, recognize that about 229,000 square feet related to the leasing of ten of those Linens and Circuit boxes at a negative spread of about 25%, a level of decline which we expected.
Excluding those leases, the balance of the new signings showed a 2.1% increase. As our earnings release indicated, the tremendous increase in the GLA of new leases signed over the last year in face of a very tough environment, says a lot about our leasing organization and our asset quality.
One other point about the reported leasing spread; our population of leases reflect new leases signed on spaces vacated over the past 12 months. We limit the comparable time period to a year in order to capture what the effect of roll over will be for the upcoming year for a specified amount of square footage.
If a space has been vacant for over a year, the new lease income is pure upside in the projected estimate of NOI. Others might compute leasing spreads on a different basis, and there’s no single right answer, but the spreads quoted on leases for shorter cycle businesses such as apartments and sub storage may mean something different than spreads reported on long term leases in the shopping center business.
So we just report those roll over’s over the past year to help focus on the immediate forward financial statement impact. All that said, we will continue to provide you with information with regards to the leasing activity on the junior box vacancies from Linen, Circuit and a few others regardless of the time period as we suspect that’s information you’d like to gain insight on.
Our fourth quarter results did include additional impairment charges amounting to $34 million. However, this charge was almost completely offset by associated tax benefits recognized against those impairments and against the impairment charges taken earlier in the year in which tax benefits were not recognized at that time.
Primary reason why we are now able to accrue the tax benefits is two fold. First, the recent change in carry back rules that extend the carry back period by an additional two years, and in addition, the establishment of certain tax planning strategies for our taxable subsidiary going forward which will generate additional income and will allow us to utilize these tax benefits in light of changes in our strategy including holding our development assets longer term and reducing leverage.
With respect to the balance sheet, Dave mentioned our long term targets to resize the debt levels relative to our EBITDA and along with that, a gradual improvement in fixed charge coverage. We have also mentioned that it will not be a straight line at each three month measurement period.
We cut the overall net debt to EBITDA 8.1 times and 6.8 times over the past 12 months. The uptick from the prior quarter was reflects the remaining debt assumed from the PL retail acquisition after we cleaned up the January 2010 maturities prior to this year end.
And we continue to be comforted by the very manageable and well staggered debt maturities on the corporate balance sheet and joint ventures. We all recognize we will have to wait until August or September for the cloud of the guaranteed debt from Prudent/Kimco joint venture to lift, but we’re very confident that it will.
Finally, we provided initial FFO per share guidance for 2010 in the range of $1.07 to $1.15. Underscoring these estimates is a cautious view of the retail environment.
We expect occupancy to move up somewhat as we move through 2010 up to 50 basis points. As in the past, we will most likely see some fall out in the early part of the year, but build back as we move through 2010.
Same store NOI is targeted to be flat to a slight roll back of minus 2% driven by what we expect to see in further short term pressure in leasing spreads. Also, our estimates included limited gains from transaction activity.
Or on the flip side, any impairment charges. One research analyst suggested that companies either take the position of either being cautious or optimistic, but not both.
We prefer to start cautious. That’s the right mindset to have along with the disciplined focus on the key elements of the strategy that Dave articulated.
I’d now like to turn it over to David Lukes to give you his report on the shopping center portfolio.
David Lukes
Good morning. With the close of 2009, I’d like to give you some thoughts on a tumultuous year, results of the fourth quarter and what we’re doing in 2010 to focus our operating staff and execute our strategy.
The short story on operations for the fourth quarter is encouraging. New leasing is up.
Vacates are down. Operating expenses are down.
Renewals are strong and the risk of tenancy violations has been considerably mitigated. As Mike mentioned, our total occupancy role is 92.8%.
When we look at the U.S. portfolio, we executed 204 leases, representing 1.1 million square feet.
The vacating tenants decreased substantially from the prior quarter to 780,000 square feet, therefore achieving a meaningful positive absorption of 50 basis points in the U.S. and settling our occupancy at 92.4%.
Although vacates continues to be a heavy weight on our shoulders, strong new leasing has continued now for two quarters and I’d like to comment on how we’re achieving these results and what we’re doing to work hard at keeping our shopping centers vibrant. In this light, I think it’s best to describe the current state of our operations staff with two strategic viewpoints; that as a tenant and that as a landlord.
Over the course of 2009, we strategically moved staff into a tenant relations department who supported our regional leaders in marketing our portfolio to national and regional retail chains. This team framework now has a year under its belt and successfully worked through 97 portfolio reviews with national tenants last year.
During our time with these tenants we learned some valuable insights as to their temperament during a period of tough sales and came away with a few guide posts that is why we saw such positive absorption late last year. Firstly, tenants today whether large format or shop users, are following the consumer.
The simple fact is that sales follow foot traffic and the sites with the best line up of tenants are tending to draw more leasing activity. This is particularly apparent in markets like Florida and the Northeast where abundant unanchored centers simply cannot keep pace with our anchored centers that show full parking lots and recognizable retail is bringing the sales volumes.
Secondly, tenants are shying away from risk. Risk had a very high light shot out today from many businesses and the primary risk is whether people will be in the trade area to drive unit sales.
When we looked through our portfolio, where 92% of GOA is in the trade area bound by the first ring highways, it’s no surprise in retrospect that leases are getting signed at centers in older, mature neighborhoods where the demographics department of a national retailer can measure and count on existing households to be active in the site. During my travels over the past quarter, I became reminded again that the closer the property is to the people, the better the occupancy and sales volume in the shopping center.
To this end it’s one of our top goals to bring our large portfolio of mature properties and national retailers and show the strength of the trade area as they make choices about where they want to grow their businesses. From a landlord perspective, we’ve been heavily focused on the fact that 2009 and surely 2010 have a large qualitative component to our deal making.
When supply is tight and demand is high, the last spaces to get leased at a shopping center are all about the rent. This is not the market today.
Instead, we’re competing heavily with other centers in the trade areas and what we’re doing now is setting the table for growth by activity selecting the right tenants so that the line up in foot traffic is the first choice for future leasing. In the fourth quarter, we signed an enormous number of anchor and junior anchor leases, 29 in total.
In most cases, the rent spreads on these deals was negative, anywhere from 10% to 30% less than the prior tenant. On the other hand, the tenants were strong; Lowe’s, Target, Bed Bath & Beyond, Nordstrom and Marshall’s are among those executed.
In several cases this quarter we added a grocery component to a former power center, thereby adding consumer traffic with more frequency and the seeds for future rent growth in the shops. When SITEL Census last year presented an unusual number of junior anchor spaces, the choice from the landlord is simple; wait for a better day, sign the highest rent payer or sign the best tenant.
We’ve been choosing the later because the shopper always follows quality tenants and the faster we can secure the best tenant lineup, the better the prospects for growth on remaining vacancies. Merchandising is often a subject reserved simply for retail conversation, but it also applies to the landlord and we will remain acutely focused on correctly merchandizing our properties.
Our portfolio review process has taught us that this is the strategy that tenants want, and we’ll continue to selectively lease to the best tenants. Lastly, I’d like to comment on how our strategy is producing results for shop leasing and it’s been a very popular subject throughout last year.
Although demand is still tepid in many markets, we’re seeing that this category is again searching for the best tenant lineup to use as a customer draw and reduce their risk. We saw a large uptick in shop leasing in the fourth quarter, a total of 175 new leases that account for almost half a million square feet.
Rents for these spaces are wildly divergent by market, but in aggregate they’re still 8% higher than the previous tenant was paying. Tenants follow traffic and rent goes up with sales.
As we look forward to 2010, we believe that the current trend for our first string properties will continue. A stable but not exuberantly leasing market, high but growing vacates, high renewal rates and a significant pressure on junior active leasing spreads while maintaining shop spreads to the positive.
Our operating staff worked very hard in 2009 as half of our leasing agents completed more than 40 new deals per person. Most of our property managers squeeze recurring rates down and our redevelopment and ancillary income departments added new programs every quarter.
We’ll continue in 2010 to be very focused on our fundamentals of our shopping center business and creating value for our shareholder. And with that, I’ll turn it back to Barbara.
Barbara Pooley
Thanks David. In just a moment we’ll move on the question and answer portion of the call.
Please respect the limit of one question. Operator, we’re ready to take questions.
Operator
(Operator Instructions) Your first question comes from Jeffrey Donnelly – Wells Fargo.
Jeffrey Donnelly – Wells Fargo
I want to direct a question toward Mike Pappagallo and your comments on leasing spreads. Maybe I missed it in the filings, but what specifically were the leasing spreads on the junior boxes and can you give us the 2009 leasing spreads regardless of downtime or size?
Michael Pappagallo
I made reference to those specific junior anchor leases that were referred to in our press release. They were 10 for the quarter and 21 for the full year.
That was approximately a 25% roll down on those leases. I don’t have available in front of me leasing spreads regardless of down time.
The reason why I made that point was to clarify how Kimco computes it and we traditionally use that 12 month time frame.
Jeffrey Donnelly – Wells Fargo
Can you talk a little bit about the market that you’re seeing out there for acquisitions and how that’s been shifting and whether or not you’re going to see growing opportunities in the coming quarters.
Milton Cooper
We’ve mentioned it before. The market in our opinion is tightening up.
The cap rates are drifting down and they’re not going up and there is a shortage of quality retail real estate for sale. There is definitely much more capital looking for opportunities to purchase good shopping centers than there are shopping centers available.
We, like everybody else are looking over our shoulders at the mountain of debt maturities and wondering whether that will trigger a lot more supply, but for the moment, we can definitely say that cap rates are going down, and if there is a good quality shopping center placed on the market, it had numerous, numerous bids and cap rates in our opinions are in the low sevens for a good quality product and may break through that soon.
Operator
Your next question comes from Craig Schmidt – Bank of America.
Craig Schmidt – Bank of America
I’m continuing with Jeff’s questioning. Where do we stand in regard to the vacancies of the junior anchors given your 21% relief?
How many more vacated spaces need to be leased and do you think that 25% roll down gets better or worse going forward?
David Henry
We’re dealing with two sets of numbers. One is the total junior anchors in the portfolio which I would categorize anywhere between 10,000 and 60,000 square feet is traditionally a junior depending on the site.
What Mike’s been mentioning is how we’re doing on specifically the Linen’s and Circuit City bankruptcies. When you look at Linen’s and Circuit together, we started with 58 total vacancies.
We’re re-leased, executed 29 of those. Eight more have a guarantor and so are dark in paying.
Five are under letter of intent today, but we’ve got 16 left as we go forward throughout the year. So we’re making good progress.
I would say that the rent spread trend when you look in aggregate, anywhere from a 10% to 30% roll down is just really depending on which space it is you lease, and as you can imagine, the better spaces lease first and the spaces that are tougher take a little bit more time. So I certainly wouldn’t expect the rent spread on the junior anchors to improve.
Having said that, demand has improved substantially from what it was three or four months ago and a lot of retailers are now submitting NOI’s on junior anchor spaces that four or five months ago had no activity. So those two might start to cancel each other out and we might start to see a little bit of stabilization from the junior anchor rents.
Operator
Your next question comes from Christy McElroy – UBS
Christy McElroy – UBS
Continuing on the line of questioning, are some of the leases that you’re waiting to sell with the right tenant but doing it at a 10% to 20% negative spread, are you signing shorter leases than you’ve done in the past to potentially to see more upside down the road or are these typical long term leases for these tenants?
David Henry
They’re typical long term leases. Frankly, if you look at the tenant perspective, a tenant is unlikely, if it’s a really good high quality tenant, they’re unlikely to sign a three or five year lease.
They want time to invest capital and start growing their business. When you’re going to see shorter term leases is if you’re trying to do temporary tenants or pop up stores or something just to keep activity in a site, but in general we have not gone down that strategy simple because when you look at the tenants we’re securing, we’re happy with the credit.
Of the 10 Florida cities that held Linen’s and Circuit City’s, we’ve got virtually all of them with good credit and they’re good strong retailers that I mentioned during my remarks, so we’re pretty happy with the tenants there looking to expand in our markets and we’re kind of continuing on that traditional 10 year base term.
Christy McElroy – UBS
What kind of re-leasing spread assumptions are implicit in your same store NOI for 2010 both in terms of the space that’s been vacant less than 12 months and greater than 12 months?
David Henry
Hard to forecast specifically but we do expect roll down. We do expect negative spreads but within the single digit range.
Operator
Your next question comes from [Quinton Villalay – Citi Group]
[Quinton Villalay – Citi Group]
A question on the Prudential joint venture, I think there’s $370 million of debt maturing in the joint venture this year. Can you give us an update on where you are in terms of refinancing that debt?
How much equity might be needed to re-finance it and whether or not you’re looking at potentially buying additional assets out of the joint venture to assist in the refinancing?
Milton Cooper
The lion’s share of the debt that’s maturing is the balance of the unsecured debt that matures in August and that amount today is $319 million is due August of this year. And both Prudential and Kimco will pay their proportionate share which is 85% and 15% respectively at that time.
In the meantime, we continue to sell certain assets out of the venture and the proceeds will be used to further chip away at that $300 million plus unsecured debt. We’ve made that process is accelerating.
I’d say the sale assets are beginning to accelerate a little bit. As we have announced, we have bought a number of the assets at 85% interest at what we think are opportunistic prices.
The balance of what we formerly called the sale bucket does not have interest to us at this time and they’re out on the market and beginning to get some traction in selling those assets. So it’s difficult to project exactly how much equity will be needed to clean up that unsecured debt in August, but Prudential assures us they are prepared to write their check and different funds that are in the ventures with us have plenty of liquidity, so we really honestly are not concerned about that.
In the other ventures and some Prudential debt I thing there are some mortgages but we’ve done a good job and we continue to be attractive owner of properties for life companies. Life companies have plenty of liquidity now and as long as you can live with relatively conservative loan to values, mortgage refinancing is available out there.
[Quinton Villalay – Citi Group]
I think you mentioned there was $331 million of debt guaranteed in the Prudential joint venture, is that related just to the unsecured facility or how does that work?
Milton Cooper
Exactly. In the very beginning of the venture we guaranteed approximately $650 million.
Glen is clarifying. So the $1.2 billion of debt was whittled down to $650 million at the beginning of 2009 and has been further whittled down to a little over $300 million.
And this was guaranteed by Kimco but Prudential, turned around and indemnified us and guaranteed 85% of that amount which they have honored. In this past August, there was a partial payment due and Prudential wrote a check I think well over $100 million as part of that.
So again, we’re hoping that investors and analysts concern about the guarantees that Kimco has outstanding here will go away, especially in August when it’s completely cleared up. As a management team, we’re committed going forward in our investment management business to keep the mother ship completely separate if you will, from joint ventures.
So we will not guarantee debt on behalf of partners going forward. We do have some to clean up and we will clean that up in short course.
Operator
Your next question comes from Jonathan Habermann – Goldman Sachs.
Jonathan Habermann – Goldman Sachs
You’ve given explicit guidance for deleveraging now over the next two to three years, 2012 which would imply about $1.5 billion reduction in total debt, about half of which comes from the sale of non core assets, but that would seem to indicate that you’ve got issue equity of somewhere around $600 million to $700 million over the next two to three years. Can you walk us through because it sounds like most of that will be used toward deleveraging the joint ventures?
Milton Cooper
I cannot answer or agree with your specific calculation at this point. Recognize this is a net debt EBITDA calculation which will mean there will be debt reduction which will be driven from this position of non shopping center assets.
There will be an increase in EBITDA which will be driven from the portfolio and as we’ve mentioned before, it will be Mexico’s lease up over the next two to three and is an important part of that overall calculation. To the extent, and I’ve said this before, to the extent that there is an equity issuance, to the extent that there are, we are certainly focused on acquiring assets accretively with the use of equity.
So it’s a triangulation of increased EBITDA, reduction of debt from the disposition of non shopping center property and potential equity raises in connection with value enhancing transactions. So if you put all those pieces together, and that’s the formula for us to get to the number.
But to imply because of those statistics that we are going to issue diluted equity for debt reduction is incorrect and I want to re-emphasize that in this telephone call.
Jonathan Habermann – Goldman Sachs
In terms of getting to the five time net debt to EBITDA, should we take that as you’ve got a fairly cautious view on the retail climate for the next four years?
David Henry
I think it’s more initially that you’re going out in effect to five full fiscal years, to the end of 2014, a lot can happen. Let’s rewind back to where we were in 2005 to 2010.
So the notion of approaching or targeting that number is again, to bring the ultimate capital structure of Kimco back to, and I like to use the phrase, back to 1998, 1999, when we were essentially a pure shopping center company with a modest and conservative capital structure, and essentially a flow business with shopping centers. That’s our ultimate target.
But underneath that is not any particular economic assertion about were leasing, where retail, where flows will be.
Operator
Your next question comes from Michael Mueller – J.P. Morgan.
Michael Mueller – J.P. Morgan
On the $1.5 billion of non core assets, what is the current NOI yield today that’s reflected in the guidance? Is it 6%, 7% or higher?
Michael Pappagallo
I guess if you’re grossing up for the debt, the yield to Kimco on its balance sheet investment of just under $900 million, somewhere in the $800 million to $75 million, rough order of magnitude is between 5% to 6%. As Dave indicated in the prepared remarks that many of these assets produce FFO.
The two most notable are the Velot convertible note which yields 9% plus and our In Town Suites investments still generates positive FFO offset in part by certain pre development assets that we put into play, most notable the urban assets. So it pencils into a 5% to 6% handle when all is said and done.
Michael Mueller – J.P. Morgan
Is that a 5% to 6% FFO yield after debt service or is that a NOI number? If we’re looking at the 1475, just thinking of it like we would going out and buying a shopping center for $100, what’s the yield on that?
Michael Pappagallo
It’s a return on our investment so it is a FFO yield on the $875 million or so.
Michael Mueller – J.P. Morgan
On the development pipeline, can you quantify particularly for the assets that are operating but not yet stabilized, I think it’s about a $600 million pool, how much NOI is currently being thrown off today from that pool that’s in the numbers just to get to the delta between what’s to come when it’s stabilized?
Michael Pappagallo
I would suggest for that you would use about a 6% handle because they are not stabilized. I think that’s probably the best number for your modeling purposes.
Michael Mueller – J.P. Morgan
So about 6% in place today and the target is about a 10%?
Michael Pappagallo
Between 9% and 10%.
Operator
Your next question comes from Ian Weissman – ISI Group.
Ian Weissman – ISI Group
In your comments you talked about going back to your roots and looking for opportunistic opportunities with buying distressed retailers. Maybe you could talk a little bit about that landscape, number one.
And number two, I would say one of the only areas we’re seeing a little bit of distress right now is in the books and music stores with the announcement of some major store closings at Movie Gallery. How do you think that plays out?
What is your ultimate exposure to that business group?
David Lukes
The exposure in both categories is not that great. I don’t have it in front of me the Borders and Barnes and Noble, but they’re certainly on our supplementals.
In both cases, those were traditional retailers in some pretty good markets and some pretty good locations because they were desired tenants for the last decade or so. So my concern is not all the great and certainly that business is still hanging in there but struggling also on fundamental.
As far as Movie Gallery goes, we’ve got 12 right now. Three of them are in the REIT and another nine are in joint ventures and the total share of income is fairly insignificant.
So again, that retailer would probably fall into my category of not overly concerned about it. As we go forward, it just depends.
Certain retailers struggle and move in and out of operating. Some of them are going to be positive for us in terms of rent spreads and ability to recapture space and some of them will be negative.
So we’ll see over time which if any of those start to give back space to us.
David Henry
In terms of the opportunity, I think the point I was trying to make is embedded in the nature of Kimco and the history of Kimco, is we have the relationships with the retailers and we have done a lot of work over the years to try to identify opportunities where the retailers own outright a lot of their real estate. Now the number of retailers that own a lot of their own real estate has been declining somewhat so I’d say the universe of opportunities has gone down somewhat and the number of people that would also like to take advantage of those opportunities has increased.
And this is very lumpy. Albertson’s was a huge deal, 600 some grocery stores acquired all at one time, a very lumpy deal.
Montgomery Ward which was a signature deal for Kimco was always very lump. So it’s very difficult to predict.
So we’re just trying to tell you that we’re committed as part of our strategy to enhance value. We will continue to mine those opportunities, those relationships and we’d like to structure a win/win with these retailers.
For instance, if a struggling retailer needs capital we would do a sales lease back with them at a very high rent. So if they make it, it’s very profitable to us.
If they don’t make it, we’ve backed into some very good real estate at a low basis.
Ian Weissman – ISI Group
So you wouldn’t say though that over the next 12 months you see a lot of distress across the retailers where it would create opportunities I guess is my point.
David Henry
I’d say it may be more limited than you would think because a lot of these are leased real estate.
Operator
Your next question comes from David Wigginton – Macquarie Research.
David Wigginton – Macquarie Research
You mentioned your expectation of some fall out among retailers in the early part of the year. Barring any major fall out do you show your portfolio as already bottomed from an occupancy and NOI standpoint and if now, where do you expect the additional down side or weakness to come from?
David Lukes
Barring any bankruptcies, I think it’s pretty clear based on last quarter in terms of a shift in demand and a lack of new product that I would say yes, that the occupancy has stabilized and you’re seeing the NOI, same store NOI this last quarter represent that as well as the occupancy going up. So I feel pretty good about the next year with the one caveat being, we just don’t know.
As tenants start to downsize their own formats or they start to shut stores in certain markets, what if any effect that will have on our portfolio. To date, the retailers that have decided to shrink their market has traditionally been in the housing growth areas and not in the older suburbs, so that’s been encouraging for us and it hasn’t been a big issue year to date or even last year.
So we’ll see as it goes forward, but barring any unforeseen bankruptcies, we feel pretty confident that we’re bumping along the bottom and we’ve got some good volume going forward.
David Wigginton – Macquarie Research
Even in the midst of retailers downsizing are there not some retailers that are looking to expand as a means of growth given the weak comp sales growth that they’ve been experiencing and does that offset some of that downsizing?
David Lukes
Yes, it certainly has. If you look at last quarter, in a three month period at least 29 junior anchor spaces it was about 700,000 square feet and the quarter before, we leased about 600,000 square feet.
So you’re talking about an enormous amount of square footage being eaten up by the junior anchor categories that seven months ago was my top concern. So that has been very encouraging.
And you’re right, they have a true footprint growth from a number of chains. Nordstrom, Marshall’s, Ross, H.H.
Gregg, a lot of them are actually growing their footprint and the only way to do it right now is to fill vacant space in existing shopping centers because there is no development pipeline. So that’s been a very positive force right now and if the continues even at a modest pace, that’s going to help us a lot on occupancy.
Shop space has been fairly stable as well and that’s an encouraging sign given where the economy is with small shops. So all of those things are adding up to some fairly positive momentum.
We just have to remember that every year you’ve got junior anchors also rolling and expiring, and given the fact that our centers were developed 10 years ago, you do have some roll over of tenants and that’s a risk we have to be aware of in trying to get these tenants to stay in their current format and their current location.
Operator
Your next question comes from Nick Vedder – Greenstreet Advisors.
Nick Vedder – Greenstreet Advisors
I understand some of the assets you acquired from the Prudential joint venture were originally marketed for sale so I’m just curious how you determined the purchase price at which you bought back those assets and how that compared to the highest bid.
David Henry
David you might speak a little bit about the Portland asset and why we decided to step up there.
David Lukes
I guess the best way to attack that is to also mention that we did buy some properties out of the Prudential sale bucket but we also sold a lot of them. So the ones that we chose to buy late in the game last quarter were primarily because we got to a stability of occupancy and a price per square foot that made it very positive for us to make the investment in a specific market.
Specifically it was Portland where we bought six properties. We spent a lot of time in the market.
I believe we’re the largest institutional owner of shopping centers in Portland. We’ve got an office there and we’ve got a pretty good handle on where the market is going.
So when you look at the occupancy level and the price per square foot which is I believe was around $69.00 a square foot, it was a very positive investment for us to stay in that market. It’s fairly supply constrained.
They have a specific way of not having suburban sprawl by an urban growth boundary. Retailers seem to do well there and those properties for us are a good long term way to create value because we’ve got vacancy that came for free that we can lease up.
The second reason that you’ll see those assets being positive for us is that some of them have shorter term leases and therefore a private investor, even though they like the center and they like the tenants, had a hard time six months ago financing those properties. But from our perspective, they had a very good set of grocery stores and junior anchors.
So for instance, a Safeway we’re going to have maybe six years left on their base term, not very financeable, but since we have a huge portfolio with Safeway they convinced us that they’ve made investments in that store and they’re going to stay. So those are reasons why an order to combine all cash to do a lot better or did last year when a buyer looking for a finance property couldn’t quite make the acquisition.
David Henry
A part of your question was to inquire whether Kimco paid a higher price than what the market was offering just to get the asset. The answer is no.
Operator
Your next question comes from Richard Moore – RBC Capital Markets.
Richard Moore – RBC Capital Markets
The base rent and the average base rents and the leasing spreads in Mexico seem like they were down this quarter and you’ve talked about getting some $60 million of NOI from that portfolio going forward. Are we going to capture some of that this year do you think or what’s happening to the portfolio in Mexico?
David Henry
Let me just talk in general. As an example of the potential upside, we opened seven new shopping centers in the fourth quarter in Mexico.
These are situations where I think nine different anchor stores opened up in Mexico more so than the United States. Opening the anchor stores triggers the rest of the leasing.
So until you get the Wal Mart and the theater and others actually opened, it is very difficult to lease the small local stores in Mexico, with the exception of our large project in Hermosillo which will come on in April of 2010. Almost everything else, the construction is now done.
So we do see upside. With respect to leasing spreads and rents, Mexico just like the U.S., dropped dead early in 2009.
The retailers, even the most successful retailers like Liverpool in Mexico just suspended all new leasing as they held their breath about the world economic crisis and what was happening in the U.S. As you know, remittances from Mexicans in the U.S.
were way down. So a lot of retailers just simply stopped.
There was a fear that was pervasive similar to the U.S. As David explained, when the U.S.
starting in the third and now the fourth quarter leasing is picking in Mexico. So we expect rents to resume there with growth upwards and I think you’ll see some much more positive numbers coming out of Mexico.
The sales are good. We’re starting to get some nice percentage rents.
The theaters and many of our grocery stores pay percentage rents which is different than the U.S. We feel good.
Every time I go down there, the quality of the centers we have down there is first class and I would encourage all of you on the phone to just go take a look at one or two of ours down there. We feel very good.
Richard Moore – RBC Capital Markets
As you look beyond Mexico for Latin America, is there a reacceleration with regard to Latin America or is that still quite a way out do you think?
David Henry
We’ve pretty much determined to concentrate on the North America footprint. That’s where our retailers are really focused.
What we have in South America has actually done very well, places like Chile and Brazil have held up. But for us, we just have so few properties down there and it’s not the time to ramp up.
The economics are not compelling because it is a development game in Latin American and there’s certainly better opportunities we have in our own North American footprint.
Operator
Your next question comes from Paul Morgan – Morgan Stanley.
Paul Morgan – Morgan Stanley
If you look at the junior anchor leasing, the success that you’ve had recently, what’s the mix of opening dates? How far off are some of these when they’ll actually start income producing?
You mentioned 2010, 2011 and 2012, beyond that?
David Henry
Normally the rent commencement date is going to be inside 12 months. Remember that there is not a whole lot of work that has to go into these.
We don’t have to get entitlements. We don’t have to build new buildings.
It’s most an interior renovation and then the tenant opens and starts paying rent. None of that has extended periods of free rent.
They were primarily $20.00 to $30.00 work letter and a ten year term and they usually start paying rent sometime in 2010. So we’ll start to see that partial year 2010, full year in ’11.
Paul Morgan – Morgan Stanley
If you look at what’s left, can you characterize the difference between the big box spaces that you got back in ’08 that you’ve resigned and those that are left? Can you characterize the resiliency of the demand and entering suburbs?
What’s the mix of what’s left? How much of it is entering suburbs versus weaker markets, housing growth type sub markets that could have a much longer tail to find a taker.
David Lukes
That’s a tough question to give a specific answer to because it’s going to be dependent entirely on the markets. For example, even if you’ve got a pretty good space right now in Las Vegas or Phoenix, you’ve got virtually no activity in those markets.
Very difficult for the retailers, a lot of product on the market. So even though the dirt may be an A, you probably have demand of a C, and that will just have to work itself out over time.
There are other markets where the box is an A, but the market itself is maybe secondary or tertiary and I would suspect as we go through this year we’ll start to see that the junior anchors, where they were six months ago were only focused on the top 20 MSA’s, they’re going to start to move into the next 20 or 30 MSA’s because those sub markets still have a lot of population. They’ve got stability in the population in the spending and when you’re in footprint growth, you’re going to be looking at secondary markets.
We’ve already seen that where we’ve been leasing junior anchor spaces outside of the five largest cities. Unfortunately, it’s just going to be time.
There are a portion that I think are just in over supply markets but I can’t really give you off the top of my head a break down of which ones are which. We’ll probably know more in the next quarter or two.
Operator
Your next question comes from Alexander Goldfarb – Sandler O’Neill.
Alexander Goldfarb – Sandler O’Neill
Going to the write downs, the ones that you took this quarter, did you apply the same valuation metrics that you used in prior quarters or have you been tightening up and taking a harsher stand on the write downs?
David Henry
No, it’s essentially the same methodology and structure that we have done historically over the past couple of years. You really need to do that to maintain consistency from an accounting and audit point of view.
Alexander Goldfarb – Sandler O’Neill
So all the target returns and all the thresholds etc., they’re all the same that you would have used over this past year and in prior years.
David Henry
Yes. Certainly we look at current market conditions in evaluating terminal capitalization rates and discount rates we refer to through a variety of external sources as well to provide any corroborating evidence to the audit process.
But the techniques and methodology are essentially the same.
Operator
Your next question comes from Ian Weissman – ISI Group.
Ian Weissman – ISI Group
I have a question on the rent spreads you achieved. I think you said they were down 25%.
What were the key eyes on those junior anchor spaces?
David Lukes
Are you talking about junior anchor spaces in general? I referred to the 10 boxes that were released in the current quarter which experienced about a 25% roll down.
That’s what you are specifically targeting. We have prospective TI on those boxes in front of us right now.
We can get that for you. But in general, it’s anywhere from as is to $30.00 to $40.00 for a TI.
Ian Weissman – ISI Group
If it’s as high as $30.00 or $40.00 how is that trended from 12 or 18 months ago?
David Lukes
It’s come down. It’s come down because the demand has gone up.
So even as recently as yesterday we had one vacant junior anchor box that we now have four letters of intent on and the first one came in with a $30.00 work letter and the last two came in as is. So the TI’s has definitely pulled in a lot from six of eight months ago and it’s simply because there are more junior anchors there looking for space.
Where that might be different is if the building is very old and it needs to have a lot of work done to it, but to date it has not been a big issue. You can see that in the TI’s per square foot for our new leases.
If you look back over the past couple of quarters, it kind of moved up a little bit but it still stabilized in the low to mid teens.
Ian Weissman – ISI Group
So you wouldn’t say you had to offer big TI packages to get those boxes leased at this point.
David Lukes
On a couple of occasion in the last year we have, but other than that it’s been pretty stable.
Operator
Your next question comes from Ross for Christy McElroy – UBS.
Ross for Christy McElroy – UBS
Is an IPO on Westmont a possible here? Can you talk about the preferred equity?
You’ve got roughly half a billion in 600 assets called 22 million square feet. What are we looking at in terms of the maturity schedule there of when those are going to get repaid and realistically how much of that 22 million square feet is effectively going to turn into a loan to own.
David Henry
On Westmont, I don’t think it’s realistic to assume an IPO exit until rev par increases significantly from where it is today. We have seen in our portfolio which is primarily the In Town Suites portfolio that it has bottomed out and is beginning its way back.
If you recall, this is a portfolio of lower end extended stay hotels primarily in the Southeast and Southwest. So it looks like its getting healthier but until it gets back to former NOI levels, and until the hospitability market overall is perceived to be healthy and that’s probably tied to the economy, I don’t see an IPO as a reasonable exit.
Since we own the platform as well as the assets, it would be attractive we believe at some point for a hospitality owner to pick up our brand if you will, and our 130 some hotels as part of that. So I think it’s more likely to be a private exit to a larger hotel group to round out their offerings in connection with or not in connection with their own IPO.
The preferred equity, it’s really two baskets. We have our non retail preferred equity which we’re committed to disposing of and liquidating over time and there’s a variety of techniques we are using asset by asset and partner by partner to dispose of those.
Some of these assets are on the market and they will be sold and the proceeds divvied up. Others will be refinanced.
In some cases the partner is buying out our interest as a way to keep the asset. And so we’re going to unwind these.
If you recall, our preferred equity portfolio had lots and lots of small investments. These averaged a couple million bucks, so they’re not very big.
They’re not big deals and we do have people assigned to each individual one. The retail preferred equity portfolio is somewhat different.
In general, it is very high quality shopping centers that we have a good basis in. One-third of the retail is in Canada and there is substantial unrealized gain.
Some of those ventures or some of those preferred equity investments we may convert to pursue joint ventures and hold for the long term because they’re really first class assets. Others will also be sold.
Cap rates as you know in Canada are very attractive right now and we have some substantial unrealized gains that we may use to offset possible impairments on some of the non retail stuff as a way to exit non retail over time on an accelerated basis. But there’s various techniques we’re going to use on the retail side.
But in general, we feel very good about the retail side of the preferred equity. But we’re committed over time to basically reduce both parts of the preferred equity portfolio.
Operator
Your next question comes from [Quinton Villalay – Citi Group]
[Quinton Villalay – Citi Group]
In your opening remarks you talked a little bit about selling about $200 million or a minimum of $200 million of non core assets in 2010. Can you talk a little bit about what the current yield is on that $200 million and how you think about the timing of the disposition?
And Mike, can you clarify your net debt to EBITDA target, are those consolidated or a see through including the joint ventures, just to make it apples to apples with the numbers you presented in the supplement.
Michael Pappagallo
The numbers that David mentioned are consolidated.
David Henry
On the non retail side, I would emphasize again a minimum of $200 million. So we’re committed.
We are committed to disposing of the non retail portfolio on an accelerated basis, but a disciplined basis. We are not going to give these assets away just to get this number down.
As you probably know, and to piggy back on some of Mike’s comments, the non retail portfolio really has four components. We have the Velot note which is a large note.
It pays us 9.5% on a gross basis. It’s been current from day one.
Velot as a company is getting its legs underneath it. Its got a three year maturity worst case.
But this is a company that needs to raise equity. It needs to pay down debt.
We’re a company that would like to go home. So there may be something to be done with this over time.
But we can’t predict it. Secondly, the hotel portfolio; that’s probably more problematic in terms of the short term.
We still feel good about it long term. It is producing 8.5%, something like that FFO return on our equity investment so that’s not so bad.
The third piece as Mike referred to is the urban portfolio. We have $200 million plus of assets scattered in four different cities.
We are beginning to see activity both in New York and in Boston, individual investors buying these building from us. In general they are very good quality buildings, but they were bought as redevelopments.
But we’re beginning to see interest in those and I believe in at least the second quarter if not in the first quarter that we will make some things happen in that urban portfolio. The fourth piece is just a huge eclectic range of assets, generally small assets of all kinds of non retail assets and all kinds of asset classes.
And again we have a business plan by asset to dispose of these assets and we’re doing everything we can to move it along, and the market seems to be going a little bit our way now as investors are returning with a vengeance and looking for opportunistic acquisitions. So we think we’ll make things happen.
We’re committed to at least $200 million. If we can do more, we will do more and we’re hoping some of the investor community concern about the non retail will go away as we chip away.
Michael Pappagallo
In terms of trying to get a financial framework around that, I think you said based on Dave’s comment about things that can be sooner rather than later and the composition of what he just said is probably not unfair to use the average yield that we provided at an earlier question as a proxy for the yield that would be removed on the $200 million plus of disposal should we be so successful.
Operator
Your next question comes from David Fick – Stifel Nicolaus.
David Fick – Stifel Nicolaus
I wanted to follow up on your guidance as to where you are projecting occupancy to end up for the year.
David Henry
Essentially as we run through our business plan, in looking forward to the end of 2010 our expectation is that we could increase the occupancy up to 50 basis points.
David Fick – Stifel Nicolaus
I’m sorry. What I was really looking for is what do you expect to happen in the constitution of the sentence as you go through that process.
Is it national retail bankruptcies that you’re assuming or mom and pop activity?
David Henry
If I understand your question correctly, it’s assuming that the trend over the last two quarters will continue that we see demand from nationals and locals alike. In general, we’re projecting rents based on the nationals because we want to select a better quality of tenant and that the shop demand is going to be tepid but probably hanging in there not seeing a great decline.
What we have not included is a series of selected retailer bankruptcies so we’re really projecting our existing tenant base plus the absorption positively over the course of the year.
Operator
There are no further questions. At this time I’d like to turn the conference back over to Barbara Pooley for any additional or closing remarks.
Barbara Pooley
As a reminder our supplementals are on our website www.kimcorealty.com Thanks everyone for participating today.