Feb 10, 2011
Executives
David Bujnicki – Senior Director, IR Dave Henry – President & CEO Glenn Cohen – CFO, Treasurer, EVP Mike Pappagallo – COO Milton Cooper – Executive Chairman Mike Melson – MD, Latin America Operations Barbara Pooley – EVP & CAO Rob Nadler – President, Central Region
Analysts
Craig Schmidt – Bank of America Paul Morgan – Morgan Stanley Quentin Vellely – Citi Michael Mueller – JP Morgan Alex Goldfarb – Sandler O'Neill Richard Moore – RBC Capital Markets Jeff Donnelly – Wells Fargo Nathan Isbee – Stifel Nicolaus Jim Sullivan – Cowen Group Laura Clark – Green Street Advisors Jay Haberman – Goldman Sachs Vincent Chao – Deutsche Bank Samit Parikh – ISI Group Ross Nussbaum – UBS
Operator
Please standby we are about to begin. Good morning, ladies and gentlemen, and welcome to the Kimco’s Fourth Quarter Earnings Conference Call.
Please be aware, 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’s my pleasure to introduce your speaker for today, David Bujnicki.
Please proceed, sir.
David Bujnicki
Thanks Lauren. Thank you all for joining the fourth-quarter 2010 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 Operating Officer; Glenn Cohen, Chief Financial Officer; as well as other key executives who will be available to address 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 “hopes,” “intentions,” “beliefs,” “expectations” or “projections” of the future 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 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.
Reconciliation of these non-GAAP financial measures are available on our Web site. Finally, during the Q&A portion of the call, we request that you respect the limit of one question so that all of our callers have the opportunity to speak with management.
Feel free to return to the queue and if you have additional questions, if we have time at the end of the call, we will address them. With that I turn the call over to Dave Henry.
Dave Henry
Good morning. Thanks for calling in.
Our fourth-quarter results reflect another solid quarter of improving fundamentals and a brightening outlook across the retail real estate sector. A third consecutive quarter of positive same-store NOI and good leasing activity together with continued progress in reducing both our corporate leverage and our non-retail portfolio leaves us feeling very optimistic about 2011.
Retail sales have been strong and retailer earnings and balance sheets are much improved. With virtually no new speculative retail development, retailers are becoming much more flexible in terms of looking at existing vacancies and effective rents are increasing, albeit still significantly below peak levels.
There continues to be substantial geographic differences across our portfolio, again highlighting the benefits of diversification in our large scale platform. Canada, Puerto Rico and Long Island, for example, have very few vacancies and rents have held firm during the downturn.
Other markets, such as Arizona, Southern California and parts of Florida remain soft. Overall, in an aggregate, however, leasing activity and rent levels are improving.
With our strong balance sheet, substantial liquidity and multiple large institutional partners, we have selectively begun to acquire high quality retail properties from third-party owners, where the economics are accretive and the locations lie within our targeted markets. We plan to be very disciplined and patient as we evaluate opportunities, but we will definitely win our share of property acquisitions, given our size, longstanding relationships and our reputation for being a reliable buyer.
Beginning in the third quarter of 2010, to-date, we have purchased and closed on 10 properties from third-party owners, four for various joint venture partners and six for our core REIT portfolio. The acquisitions totaled approximately $269 million and comprised $1.9 million square feet across six states.
We continue to be selective and disciplined about purchasing shopping centers of high quality with good long-term demographics. As noted in our press release, we also continue to make progress in reducing both our portfolio of non-retail investments and our retail preferred equity holdings.
Our non-retail portfolio now stands at roughly $798 million, 130 investments, down from $1 billion, 161 investments at the beginning of 2009. We had good momentum with our largest investment InTown Suites, now being formally marketed by an investment banking firm and a number of other repayments expected to occur in the first-quarter.
In addition we have received $15 million in principal payments on the Valad convertible bond together with interest payments as scheduled. With respect to our retail preferred equity portfolio, over the past year, we have reduced the amount and a number of our retail preferred equity investments from $297 million and 125 properties to $158 million and 92 properties.
This has been achieved through a combination of property sales, refinancing, partner exchanges and conversions pari-passu joint ventures. Good solid progress on this front.
As we enter 2011, our priorities remain clear and consistent with prior earnings calls. Our team is focused on, one, continued improvement in the vital signs and metrics for our shopping centers, occupancy, same-store NOI and leasing spreads.
Two, achieving stability and lease-up in our Latin American portfolio. Three, reducing our non-retail investments and selling our non-strategic retail properties.
Four, growing in a disciplined and measured way by acquiring high quality properties in key markets for both our institutional partners and our own portfolio. And five, further reducing debt and targeting a net debt to EBITDA ratio of 6.0 or lower by 2012.
Progress on all these fronts will put us in a strong position to achieve both our income targets and the goals outlined above. We do indeed feel very positive about the improving environment for retail property fundamentals and our retail tenants.
Now, I’d like to turn it over to Glenn for a detailed review of our quarterly financial results and later, Mike Pappagallo will talk in-depth about our property operations and various portfolio initiatives, and then Milton will close with his perspective on the current environment for property acquisitions and values.
Glenn Cohen
Thanks, Dave, and good morning. Our activities during the fourth-quarter exhibits further evidence in progress on all aspects of our strategy and priorities that Dave just described.
As we reported last night, we finished the year with headline fourth-quarter FFO per share of $0.29, bringing the full-year FFO per share results to $1.13, (inaudible) consensus estimates of $0.28 and $1.12 for the quarter and full-year respectively. As many of the other pertinent numbers are disclosed in the press release and supplemental package, I will not spend significant time on those this morning.
However, we continue to focus on recurring FFO, which excludes non-recurring income and impairments, so, we’ll provide more insight here. For the fourth-quarter, recurring FFO was $119.7 million or $0.29 per diluted share and for the full-year was $465.4 million or $1.14 per share, a 5% increase over the 2009 amount of $444 million.
Full-year 2009 recurring FFO per diluted share was $1.26. The recurring FFO dollar increase is attributable to a 6.8% increase in recurring retail FFO, offset by lower recurring non-retail FFO and increased financing costs including the preferred dividends.
Our shopping center portfolio continues to show resilience and improvement. We ended the year with occupancy of 92.7% including our pro rata share for the total combined portfolio.
Occupancy for the U.S. portfolio was 92.4%, flat to last year, but up 50 basis points to 92.7% with that regard to percentage ownership.
As same-site NOI increased by 1.8%, this represents our third consecutive quarter with positive same-site results. Mike will take a deeper look at the shopping center operating performance in a moment.
During 2010, we made significant progress toward our strategic initiative of reducing our non-retail portfolio. We sold seven urban assets, monetized 42 million of mortgages and equity and debt securities, disposed the four preferred equity investments, received a distribution from our Albertson’s Investment, and a possible repayment on the Valad convertible bonds.
All total, we received cash proceeds of approximately $130 million, reduced the book basis by $110 million offset by $30 million increase, primarily related to currency improvements on our foreign investments while recognizing gains in excess of $20 million. In addition, during January, an additional repayment of $7 million was made by Valad.
Keep in mind; the non-retail investments represent only 7% of gross total assets and about 6% of EBITDA contribution. We remain focused on the disposition of these assets.
During the quarter, we sold five non-strategic retail assets from the consolidated portfolio and three others from the joint venture programs for approximately $35 million. We remain committed to our recycling program and expect to raise $150 million or more from property sales during 2011.
As discussed at our Investor Day, we plan to use the proceeds from the sale of non-strategic retail assets to pursue acquisitions primarily in our target markets. Since then we acquired three wholly-owned unencumbered properties into app process for $56 million.
In addition, we invested $43 million to acquire interest in three joint venture properties. Now, we did have our share of non-cash impairments this quarter totaling $24 million.
These charges are primarily related to assets either sold or under contract and include a mixed used joint venture development project and a hotel asset we expect to sell in the first quarter. As for the balance sheet, we concluded the year with net debt to recurring EBITDA of 6.3 times, ahead of our target of 6.5 times for 2010, and an absolute reduction in debt of $375 million.
As a result of the non-recurring income in the fourth-quarter, the headline net debt to EBITDA was 5.3 times. However, we view the recurring EBITDA as a more meaningful measure and we’ll continue to report on a recurring basis.
By way of reference, we began the year at 7.4 times on a recurring EBITDA basis. We are committed to achieving our goal of net debt to recurring EBITDA of six times by the end of 2012 and further improving our fixed charge coverage.
Our liquidity position remains in excellent shape with over $1.6 billion of immediate liquidity and only $110 million of consolidated debt maturities for all of 2011. Now, although we have no immediate capital raising needs, it’s encouraging to see our unsecured debt spreads continue to compress.
They’re now in the mid-100s. And willingness of the commercial banks to lend has significantly increased.
If this trend continues, it may be a catalyst for new business start-ups, which would help build a small shop space. All in all, 2010 was a very productive year for us.
We achieved total shareholder return of 39%, exceeding the NAREIT Equity REIT Index, which came in at 28% and the retail sector index at just over 33%. Now, if you look at what we expect for 2011, first, we’ve completed our detailed property-by-property budget process, and as a result reaffirm our 2011 FFO per share guidance range of $1.17 to $1.21.
This guidance range is based on recurring flows and does not include non-recurring transaction income or charges for impairments, if any. Assumption in determining the guidance range include, occupancy improvement of 50 to 75 basis points, same-property NOI flat to a positive 2%, investment of $250 million in property acquisitions, funded with $150 million from shopping center disposition for a net investment of $100 million and an additional $7 million to $8 million of FFO contribution from the Mexico portfolio.
Based on these assumptions, our current annualized dividend of $0.72 provides a conservative FFO payout ratio of about 60%. Now, I’ll turn it over to Mike for his report on the shopping center portfolio.
Mike Pappagallo
Thanks, Glenn. Good morning, all.
We had a very productive quarter, as the vital signs of the business continue to march forward well past the low points of the recession into a steadily improving environment. First, in terms of occupancy.
The headline U.S. occupancy of 92.4% increased by 10 basis points from the prior quarter and was flat year-over-year.
Now this is pro rata occupancy and the impact of positive net absorption for the full-year was offset by the inclusion of seven former development projects with lower occupancy and our ownership changes from property transfer to new joint ventures. The underlying portfolio activity and progress is much better than at first blush.
Looking at the U.S. portfolio metrics, without regard to ownership percentages, overall leased occupancy was up by 50 basis points from the beginning of the year on the strength of positive net absorption of 700,000 square foot of space.
Throughout this past year, we’ve been often discussed the increasing appetite for space by national and regional retail chains reflecting their strong financial results, the recovery, and decreasing supply due to the curtailment of development. Our portfolio benefited from this trend, as we signed on a gross square footage basis over 4 million square feet of new leases during the year, of which about a little over half was for spaces over 10,000 square feet.
We continue to be encouraged by the opportunities for absorption of these mid-box and larger box spaces as we enter 2011. That said we need to keep our eye on specific situations such as A&P bankruptcy and the current issues confronting borders.
On the other side of the coin, we’ve also expressed caution on the prospects for small store leasing due to the limited availability of credit and uneven recovery in certain markets. On that score, we are seeing gradual improvement and stabilization.
New leases versus vacates were roughly a push over the past two quarters for small store leasing. Our view is that the worst is over.
So we see 2011 with upside opportunity from the perspective of leasing velocity on small tenants. To put that in perspective, our quarterly financial supplement now discloses the occupancy for space 10,000 square foot or greater and that less than 10,000 square feet.
The occupancy for the larger space is over 95%. The small store level is 82%.
Another sign of stabilizing markets are rental spreads on renewals and options exercised from existing tenants. While only slightly positive, keeping tenants in place is a more important factor as it underscores the viability of the center and avoids down time and increase cost to find new users.
As I mentioned on previous calls, new leasing spreads for a given quarter can be influenced by selective leases. And this quarter was no exception.
As three of the 67 leases in the same-store population accounted for half of the 40% decline for the quarter, using the 12-month down time. Interestingly, one significant lease roll down was for a space that was Dart and Paine [ph] when we bought the property in 2007.
We knew the rent was above market and lowered the purchase price accordingly. The second lease was a deal we elected to sign as is for five years as we expect to position that property for redevelopment down the road.
And the third was a deal that involves and solve the co-tenancy that net-net generates more NOI from the property overall. My point here is that new leasing spreads in any single quarter does not necessarily tell the whole story.
We focus on the historical trend of rental rate and yes, as a trend market rents have fallen significantly over the past two years. What we are seeing now though over the past few quarters is that the rental rates are stabilizing.
In 2011, I think we will continue to see headlined new leasing spreads still in negative territory as many of the leases are roll offs from the heady days prior to the recession. But as we recapture large spaces with the low market rent in 2012 and 2013 and beyond, we expect to return to healthy positive new leasing spreads in the aggregate.
Same-site net operating income, as you heard, came in at 1.8%. Our same-store numbers started trending up back in the fourth-quarter of last year and I think the 2010 results underscore the resiliency and diversity of our portfolio.
By now most of you are aware of our longer term strategy to recycle out what we are calling our non-strategic shopping center assets and we are getting on with it. Even prior to Investor Day, we have begun the process as we sold four properties that fit the profile earlier in the year.
Since September’s Investor Day through today, we’ve disposed the 10 more properties and have an additional 10 either under contract or negotiating contracts. We expect to have 30 or so properties in the market by the first half of 2011.
Many are already out there. While operating with the sense of urgency, we will be prudent in our decision making and if we feel there is additional lease up opportunity to improve the prospects and pricing of disposition, we’ll take a longer term view, but the end game is clear, to recycle.
The cash that we generate from the sales coupled with available capital from our institutional resources has opened up the gate for us to consider selected acquisition opportunities, as Dave mentioned. In the last half of 2010, we bought properties for our own account as well as acquiring a property with an existing institutional partner SEB and a second property jointly with RioCan and a local operator.
Each of these deals reinforced our strategy to pursue assets in targeted markets where we have scale or other markets where we can find low-priced asset. Our purchase of a giant anchored center added to already strong position in Mid-Atlantic corridor.
The purchase of centers in El Paso and Jacksonville represented opportunistic buys of assets with tenants such as Lowe’s, Kohl’s and TJ Maxx. The property acquired in the Raleigh area was a negotiated deal and is adjacent to an existing Kimco center.
We closed two additional properties in 2011 and we’ll continue a disciplined pursuit of those deals. Outside of the U.S., Mexico lease-up remains the top priority.
Leasing conditions continue to improve in Mexico. In 2010, we signed new deals aggregating over 700,000 square feet versus 570,000 square feet in 2009.
Our operating plan calls for an additional 700,000 plus square foot of leasing activity in 2011. To put context around this number, the composite occupancy of the portfolio, 55 Mexico shopping centers including projects still in development and those built and lease-up is currently about 79%.
We look to increase that above 84% by year end 2011. In Canada, the operating portfolio continues to be all of our high expectation.
Dave mentioned we’ve been converting some of our preferred equity investments into straight up co-ownership positions including the portfolio of grocery anchored centers in the Vancouver area and 700,000 square foot power center outside of Montreal that we announced last quarter. This asset not only has a terrific lineup of tenants in the first phase of the project, but are positioned to startup the next phase of the project due to the strong interest from both U.S.
and Canadian retailers. In sum, I’d say that we’re looking for 2011 to be moderately improving but not spectacular operating climate.
However, we expect to make more substantive improvements in Kimco’s asset evaluation through continued positive absorption, meaningful recycling, reinvestment in our core assets and selected acquisitions. Now, to Mr.
Cooper.
Milton Cooper
Thanks Mike. Firstly, I would like to congratulate our CEO Dave Henry.
At the Winter Meeting of the trustees in the International Council of Shopping Centers, Dave was nominated to be the next Chairman of the ICSC. Trustees gave Dave a standing ovation and is just further evidence of the respect that Dave has amongst his peers.
Now, Dave, Mike and Glenn have described the excellent results of our quarter and our progress in actions moving toward achieving the strategic goals we have outlined. We have a good business model.
We have a portfolio that has a steady increase in cash flow and a management team that can find ways to profit from the perturbations in the retail real estate market. My own view is that cash flows from long-term leases in our portfolio are substantially undervalued.
In my opinion, we are in an environment where hot assets are in great demand and growing cash flows in shopping centers will have cap rates that will be below 6%. I mentioned this against the background of the issues at so many states and municipalities.
Who would have thought that the credits of the great states of California, Illinois, Michigan would become suspect. Who would have thought the prices of municipal bonds will plummet.
Who would have thought that certain cities in California would be able to settle obligation at substantial disciplines. As a consequence, cash flows of shopping centers located on major thorough fares and strong markets are a wonderful safe haven.
Demand for retail space is increasing because there are very few new developments and many retailers are experiencing angst as they wonder whether they will be able to meet their expansion plans for 2012 store openings. Overtime, we will have inflation and we will have growth in cash flow and growth in value.
Now, this November we’ll celebrate the 20th anniversary of our initial public offering. Despite the restitutes [ph] of the market our investors have earned total return of 1,103% at an average annual return of 13.8% since the initial IPO.
I’m proud of the record, and we’re ready for the next phase of our growth. I thank our terrific team and we now welcome your questions.
David Bujnicki
Operator, we’re ready to move on to the question-and-answer portion of the call. Please respect the limit of one question.
Operator
Thank you sir. (Operator instructions) We’ll take our first question from Craig Schmidt with Bank of America.
Craig Schmidt - Bank of America
Good morning. I was wondering if you could describe the leasing environment in Mexico right now and do that from both a U.S.
based retailer standpoint and a Mexican based retailer standpoint.
Mike Pappagallo
Sure. We’ve asked Mike Melson who runs our Mexico team to be on the call today.
I think I’d like to let Mike give his perspective and then I’ll come across on the path. Mike, if you are there?
Mike Melson
Sure. I am.
I think in general, as Mike mentioned, we are seeing improvement overall in the environment. The U.S.
retailers, especially, the anchors such as Wal-Mart, H-E-B, Home Depot and others are back expanding again. Wal-Mart aggressively so, opened almost 300 stores last year and expects to do a similar amount this year.
On the Mexico side, I think we’ve been pleasantly surprised by the reemergence of national sub-anchor tenants, who had essentially halted their expansion for the last 18 months. Over the past six months we’ve seen them aggressively come back and seek new store count.
And in many of our properties, we’ve got multiple bids on some of our sub-anchor spaces. So, I think overall, we’re seeing an improvement in the environment, especially, from the Mexican retailers.
Dave Henry
Craig, I just would add a couple comments. On the U.S.
side, from retailers, it really divides into two camps. The U.S.
retailers that are already there in Mexico and have profited and are doing well have resumed their expansion or never stopped their expansion plans like the Home Depots and Wal-Marts and others. Other retailers that had been looking at Mexico as an expansion opportunity, I think it’s fair to say they’ve given pause to that and are taking a hard look and would like to see further evidence that the violence levels have decreased and the government is winning that battle.
So, I think it is fair to say U.S. retailers that aren’t already there, are a little bit apprehensive about going to Mexico, but the ones that are there, have ramped it up again.
Craig Schmidt - Bank of America
Do you think the leasing spreads will be positive this year?
Barbara Pooley
In Mexico you mean…
Craig Schmidt - Bank of America
I’m sorry, it’s just Mexico, sorry.
Barbara Pooley
It’s hard to look at the leasing spreads in Mexico because there are so few leases that are really showing up in those leasing spreads. It’s only on spaces being re-leased down there.
And I realize that it looks a bit odd when you look at the supplemental and see negative leasing spreads in Mexico, but keep in mind those are all very, very small spaces and a very small number of leases that comprise that, so, it can be a bit of a skewed data point.
Dave Henry
As I have mentioned before, Craig, Mexico is unusual in that the local stores there are maybe only 350 square feet, 400 square feet, size of a motel room compared to U.S. local stores that are 2,000 square feet.
Craig Schmidt - Bank of America
Okay, thank you.
Operator
Our next question comes from Paul Morgan with Morgan Stanley.
Paul Morgan - Morgan Stanley
Hi, good morning. I appreciate the breakdown for the vacancy with the shops and the anchors.
Could you talk about where was the peak occupancy for the shops, and what the catalysts are to sort of get back to that? I mean I assume it’s nowhere near where you were overall, but kind of what’s a stabilized number and then what do you think a reasonable expectation is to get back to that?
Mike Pappagallo
Paul, what we can tell you is that when you think about peak occupancy overall, it was in the 96% level, and as you know we did not break it down into these two components. But I think it’s safe to say that at the height of the market that the larger spaces that are probably a couple points or two even more occupied than they were and the stat I gave you and then doing the math obviously the small store spaces were probably over 90%.
I think that’s the best I can offer you considering we didn’t focus on those breakdowns historically.
Dave Henry
But it is somewhat encouraging from where we sit that even the local stores are showing some progress again, especially, national retailers with small store footprints. Those guys are expanding again.
The local mom and pops are continuing to struggle especially in certain geographic areas. Credit is still constraint for a single store operator, but across the board even the small shops were feeling better about.
Paul Morgan - Morgan Stanley
Okay, thanks.
Operator
Our next question comes from Quentin Vellely with Citi.
Quentin Vellely - Citi
Hi, good morning. Just wanted to focus on the non-core assets, and I guess, my question has two parts.
Firstly, with Valad notes, can you give us an update on the strategic review they are undergoing and also the management buyout proposal and what that could mean for the repayment of your notes? And then secondly, just with the intown suites that you’re marketing, just wondering if you can give us an EBITDA number for 2010 and possibly 2011, so we can get a handle on the potential valuation?
Dave Henry
Well, I think you managed to sneak in (inaudible) questions there. We’ll take them one at a time.
And in fairness to Valad, I think you have to look at their public press releases to really get more color. But it’s fair to say that the Board is looking at various strategic alternatives, including an outright sale of the company, a merger of the company, selling off major asset groups, and interestingly enough their former CEO is leading a management buyout proposal of their European management business, which the Board is now wrestling with.
Obviously, there is a built-in conflict there with the former CEO stepping aside and then leading an offer to buy the European business. So it’s fair to say there’s a lots of moving parts and they are looking at significant asset sales that they try to reduce their debt levels overtime.
They recently announced that a major hotel property that they recently got full title to is now on the market. So as these sales occur, we are hopeful that they will be able to make further principal reductions.
We’re pleased that we received $15 million so far. And they remain fully current on the interest payment, which is a nice 9.5%.
So we wish them well and we’ll see how it goes. With respect to intown, we’re pleased that we finally huddled all the caps together and it’s now formally in the market with an investment banking group.
We have 138 properties. As you probably know, we feel very good about the month-to-month increases in what they call RevPAR.
Clearly, the operations are doing better. I don’t want to give you a prediction for this year, but it’s fair to assume, it’s going to do significantly better in terms of bottom-line results than last year.
And we feel good about the timing in terms of hitting the market with these properties. Our basis is substantially below replacement value and the extended stay segment is doing very well.
So we remain hopeful that we’ll make progress and get good activity on buying us this platform because as you know we own the hotels and we own the platform as well.
Quentin Vellely - Citi
Did you have an EBITDA number for 2010 for intown?
Dave Henry
As you know, that obviously is private company. What I can tell you though is if you look at the net operating income disclosures in our supplement in the ‘Other Investment’ section, there is a number which is about $51 million.
Most of that is attributable to the intown investment as it is the largest piece of the other investments puzzle, and we expect that I’d say…
Glenn Cohen
It’s probably around 15% to 20% higher than it was from last year. So, the ramp up is really solid ramp up.
Dave Henry
We have to respect the fact that we do have other partners in this transaction. So we can’t give you 100% of the full details.
But we are feeling very good about it.
Glenn Cohen
We’re really heading in the right direction.
Dave Henry
Right direction.
Quentin Vellely - Citi
That’s fair. I appreciate it.
Thank you.
Operator
Our next question comes from Michael Mueller with JP Morgan.
Michael Mueller – JP Morgan
Actually, it was just answered. Thanks.
Operator
Our next question comes from Alex Goldfarb with Sandler O’Neill
Alex Goldfarb - Sandler O'Neill
I’ll try Quentin Vellely two-parter. Just on the NOI growth, just focusing on the mom and pops that you spoke about, that sounds like they’re slowly getting some credit help, but it’s still tough goings.
The two part is, one, are you still seeing a prevalence of franchise or financing? And then two, on your flat to 2% guidance, if credit were flowing once again to the mom and pops, what do you think the mom and pops would add to your same-store growth?
Mike Pappagallo
I’ll answer the second question, first. In that, 0% to 2% range is just that, it represents a beneficial or a good case on the high end, meaning some recovery and some occupancy increase and positive absorption on the small store space as Glenn talked about in his guidance projections.
So, I think the same-store guidance represent a moderate improvement in small store leasing and improvement in absorption. If there was a significant increase in credit availability and the economy really took off on that score, we could probably exceed that, but like many things, our guidance is balanced.
For the first part of the question maybe just in terms of just a general perspective on small store, credit availability and the impact, we have Rob Nadler on the phone. Rob, perhaps you can give a few words, perspectives on small ticket leasing.
Rob Nadler
With regard to franchise or financing, I mean you are seeing quite a bit of activity in fitness clubs, Fitness 19s that were rolled, health-oriented, some non-retail-oriented, little bit of slowdown in fast food and restaurants per se, but it hasn’t been a huge influx to the small shop leasing program to-date. In general, the earnings, especially for the national and the regional retailers they’re coming out with such strong earnings and such strong cash balances in 2010 with projections for continued modest increases in earnings that there’s a good optimism out there in the leasing environment, in general.
Alex Goldfarb - Sandler O'Neill
Okay, thank you.
Operator
Our next question comes from Richard Moore with RBC Capital Markets.
Richard Moore - RBC Capital Markets
Hi, good morning, guys. With tenant demand growing as you guys pointed out and supply of good space kind of tightening, what are your thoughts on potential new development starts going forward?
Dave Henry
Well, this is a favorite topic of mine, and it’s debated across the industry. I firmly feel that the large-scale speculative development where developers or even REITs like ours go out and buy land, get it entitled, gone, get an anchored tenant and take the risk of leasing the rest of the center, we’re several years away from that.
What you will see is where we and others own land already and it’s sitting there and we can get some demand and make it income producing, you may see some of that, you’ll see some redevelopment, you’ll see some expansion. But in terms of getting back to millions of square feet being developed across the board and adding to the inventory of retail space, I personally just don’t see it and most in the industry don’t see it.
If you think about credit is not available, construction financing is not available for this, large scale equity bets are not available for this, tenant rents aren’t high enough to justify it. I just think it’s going to be very limited for quite a while.
Richard Moore - RBC Capital Markets
Great. That covers.
Thanks, Dave.
Operator
Our next question comes from Jeff Donnelly with Wells Fargo.
Jeff Donnelly - Wells Fargo
Good morning, guys. If I could just circle back to the small shop leasing, I’m curious whether or not small shop deals are consummated, where did you put the volume of enquiries today versus say the peak of activity, which I would guess would be between 2005 and 2007?
Mike Pappagallo
Rob, you probably could cover that one as well.
Rob Nadler
Sure. Hey, Jeff, how are you?
Jeff Donnelly - Wells Fargo
Good evening.
Rob Nadler
I don’t know. It would be an educated guess in terms of percentage of enquiries.
As was stated by several of us on the phone, credit continues to be tight for the local mom and pop to either expand or invest in their business. So it’s still down substantially in terms of the inquiries from the local mom and pop.
They are the last ones to feel the recovery. Unlike the large national chains who are able to reduce their expense side of the equation because of their massive scale and their ability to source better and cut inventory and cut overhead, the local operator did not have that advantage throughout the recession, so, they are in tougher straits today.
But, consumer confidence is increasing, if we can get some employment growth going, the guys that have hung on through this recession, as Mike said, it’s sort of bottomed out, the guys that have hung on are guys that are good merchants that are executing and had the wherewithal to withstand the recession, so, I suspect we’ll see some modest but steady growth in the inquiry and in the activity.
Mike Pappagallo
Jeff, what I would add to that is that depending on the market, I mean if we’re talking about small store activity and number of inquiries, talking about new space markets, Long Island some of our Mid Atlantic states, it’s been very firm. California and Arizona, some of the areas that were hardest hit, it’s an uneven traction.
I think that’s where longer-term the possibilities can benefit us if there was a pickup in small store leasing. As I mentioned earlier, it is very regional and it’s focused.
Jeff Donnelly - Wells Fargo
When you look at small shop tenants, I guess I’ll call it national or regional nature where maybe credit is less of a concern for them, are you seeing more or less interest from those retailers expanding or are they just skittish because of lack of sales production or just rent and deal terms that are holding back?
Mike Pappagallo
No, there is more, there is an increase, they are fairly aggressive today. I mean if you take the Famous Footwears or the Shoe Carnivals of the world or the Dress Barns of the world with the Maurices division and Justice which is doing very well.
They are hungry. They are hungry for space.
And as Milton indicated they are concerned about the lack of development not providing the opportunities for them to meet their growth objectives. So no, they are strong today and looking to grow and being more adaptive and flexible than ever because of the lack of new construction and development.
Jeff Donnelly - Wells Fargo
How are they taking share, in other words?
Rob Nadler
They are what?
Jeff Donnelly - Wells Fargo
They are taking share, so to speak?
Rob Nadler
Yes. They are out there and they are doing deals.
Jeff Donnelly - Wells Fargo
Thank you.
Operator
Our next question comes from Nathan Isbee with Stifel Nicolaus.
Nathan Isbee - Stifel Nicolaus
Hi, good morning. Just going back to the same-store NOI guidance, I understand there was some caution built-in there, but if I just take the NOI coming online from the leases you already signed, your contractual ramp-ups, in fact that your renewals have been basically flat to slightly positive.
Could you just help me understand the bottom end of that guidance a little bit? Is it fair to say that something would have to change dramatically to get there?
Milton Cooper
Dave, I would offer that both the bankruptcies that have been announced as well as some speculation on other enterprises that may go bankrupt put in the short-term, (inaudible) in terms of net operating income, at least for the short-term you think about down time, etc., So that is really the primary driver on the low end. As we’ve spoken about earlier, longer-term, many of those spaces for those tenants like Blockbuster, our AMT exposure, even our discussion at Investor Day about orders.
In terms of recycling the rents and the market rental spaces, we feel pretty comfortable that there wasn’t long-term damage in terms of our cash flows. But you’re always going to have some shorter term downtime in releasing vacant space.
Nathan Isbee - Stifel Nicolaus
All right. Thanks.
Operator
Our next question comes from Jim Sullivan with Cowen Group.
Jim Sullivan - Cowen Group
Thank you. Good morning.
I have really a geographic question. For some time, California and Florida have been your two largest markets and you alluded to, I guess, the fact that in Florida, you have some recovery in some markets not in others.
What I would love to hear is some granularity regarding the individual markets in both Florida and California in terms of where you are comfortable with the outlook, where you think it’s going to take longer for recovery to take hold and how that impacts your decisions and thought process and dispositions and acquisitions?
Mike Pappagallo
In thinking Florida, I’d reaffirm with the things we said very often that our portfolio in Southern Florida, Miami-Dade area, Fort Lauderdale, Broward County, etc., has been and continues to be very strong in terms of occupancy, tenancy, etc., so we’ve done very well there. Our issues have been mostly on the West Coast of Florida when you think about everything up from Central Florida and Orlando, Tampa, St.
Pete, etc., That’s been a difficult market. We continue to see pressure on leasing spreads.
There has been some improvement, but there’s still ways to go. And we are focused obviously in our small ticket leasing in that area.
California obviously, a large state. We have significant exposure there.
I would say that Northern California for us, the Bay area remains very strong and has continued to do so. We’ve got a lot of signature properties up there.
In Southern California, many of which were acquired from the Pan Pacific acquisition. There again we’ve relatively been disproportionately hurt in terms of small ticket leasing or small store space.
The rents were quite high from earlier that were signed five years or ten years ago, so there’s been a lot of pressure in that arena as well. That said Jim, when I made my earlier comments about new leases and vacates being a push in total, I think one of the things we’re encouraged by is that in recent quarters in the Southern California portfolio that we have been signing almost as many leases as tenants have been vacating.
So we’re starting to see a bit of a turn in terms of the velocity and small ticket leasing in Southern California.
Operator
Our next question comes from Laura Clark with Green Street Advisors.
Laura Clark - Green Street Advisors
Hey, good morning. I duplicate your availability of capital and narrowing spreads versus a tight credit market that the local operators are experiencing today.
How do you think about essentially being a bank for those tenants? How does that impact the amount of TIs you’re willing to provide?
And lastly, how do you price the risk associated with the additional investment?
Milton Cooper
I don’t think we’re going to be a bank to the tenants. We have certainly over the last few years added more TI allowance, where it’s been needed to fill the spaces.
I actually think also for the tenants you’re going to see over the next six months to 18 months that they’re going to start to be able to access more capital from the commercial banks. It always starts with a large, better credits.
We’ve seen our credit spreads come in dramatically, again our ten year spreads today in the mid-100s and you’re starting to see loosening up somewhat from the commercial bank level. So I think you’re going to see improvement come over that time period, but we’re not really changing our stripes in terms of being the bank for the tenants.
Laura Clark - Green Street Advisors
Okay, great, thank you.
Operator
Our next question comes from Jay Haberman with Goldman Sachs.
Jay Haberman - Goldman Sachs
Hi. Dave, a question on investor interest at this point in the non-strategic retail and what returns are these opportunistic investors looking for?
Dave Henry
It depends on why we put it into non-strategic bucket, if you will. In terms of the shopping centers, we’ve got some very good shopping centers.
They just don’t happen to be in our core markets and those trade at very low cap rates. We’ve got some other shopping centers that are B properties or have issues that are going to trade eight to nine-ish cap rate at the end of the day, so, it really depends on where that property is.
Interestingly, if you take one more step and look at our non-retail, the level of interest we get called everyday now. We heard you guys are selling some non-retail stuff.
The amount of cash that’s sitting out there, wanting to invest in decent real estate is just quite amazing to me. And people are tired of getting virtually no returns.
So, anything that’s cash flowing is of interest today.
Jay Haberman - Goldman Sachs
Question for Mike on the above market rents and some of the markets that are still challenged. What is the timeframe for that to burn off, I guess?
I mean, are you looking at this sort of the next two years?
Mike Pappagallo
I’d say, that’s fair, Jay. I alluded to in my prepared remarks about 2012 and 2013, where positive spreads would be driven very much by many of the below market rate anchor leases that are coming due, some of which we put forth in our Investor Day material.
As it relates to the small ticket leasing, you are seeing stabilization occur and really the critical difference is spreads are against a contract rate versus discussion about market rates spinning [ph] out. We see market rates stabilizing across the board.
It’s just a question of what was the old contract rate and needs to be a little bit more betting out of some of those older leases and older contract rents before we get into positive absorptions.
Jay Haberman - Goldman Sachs
Okay, thank you.
Operator
Our next question comes from Vincent Chao with Deutsche Bank.
Vincent Chao - Deutsche Bank
Hi, good morning, everyone. Just had a longer-term question, just with A&P and some concerns about SUPERVALU after their quarter, in terms of your, the second tier and third tier sort of grocers, what’s your longer-term view of this group emulation to the Wal-Marts and Targets and Costcos of the world?
Mike Pappagallo
I’ll just take a pass at that. Clearly, with grocery, with grocers or the traditional grocers, so much of it is dependent these days about their location in terms of where they are at as well as their own operating strategies.
We can talk about grocers who do very well either in their specific market like HEB or Wegmans or some of the larger operators like Publix and Harris Teeter and others who do very well in their markets. So, a lot depends on operating strategy, the execution, the ability to deliver the product, and to maintain good quality product in good markets.
That said it is apparent that there is so much competitive pressure coming in from the super Wal-Mart, the super Targets, even the drug stores providing some level of food, the warehouse clubs, it’s on and on and on. So, from our perspective as we look at our own exposure, as we look at buying property, selling property, redeveloping property, we’re not getting into a binary decision in terms of all grocery anchored centers are good, all big box centers are bad.
You’re basically looking at the strength of the retailer, where they are in the competitive environment, the viability of the space to continue to be primarily a super market, if that particular tenant or retailer fail and so on. So, it’s a complicated equation and (inaudible) Vincent I think there’s been a little bit too much simplistic thinking about grocery versus big box in the current environment for valuation purposes.
Dave Henry
Clearly, when we talk to our grocery tenants, they are feeling increasing pressure these days by the number of other outlets for food. Even Dollar Stores and convenient stores and so forth.
So they anticipate there’s going to be margin pressure. You combine that with commodity prices going up, their inventory going up, and some of the things that held firm during the recession, prepared foods and store labels that have served them well, that’s going to be less of a factor for them, so I read a lot of these guys as a little bit worried now about where it’s going.
And as Mike pointed out, when we buy new grocery anchored centers, we’re taking a very hard look at the rent and whether we can replace that with another user, if possible.
Vincent Chao - Deutsche Bank
Okay. Are there any particular grocers that you have concerns [ph] of currently outside the ones that?
Dave Henry
We love all our tenants.
Mike Pappagallo
Particularly, the grocers that are privately owned like H.E. Butt, Publix, Wegmans.
Vincent Chao - Deutsche Bank
Snookes [ph]
Mike Pappagallo
We don’t say bad things about anybody on conference.
Dave Henry
Anybody that pays us rent is a wonderful tenant.
Vincent Chao - Deutsche Bank
Got it, thanks.
Operator
(Operator instructions) Our next question comes from Samit Parikh with ISI Group.
Samit Parikh - ISI Group
Hi, good morning, guys. My question really has to do with sort of valuations in the market right now.
I’ve asked this other companies, I’m curious what you guys have to say as well in terms of what sort of underwritten unlevered 10-year IRRs are you guys targeting? Your core acquisitions that you are looking at right now, and how does that differ in terms of from the infill stuff that you are looking to invest in versus more of the middle market things.
What’s really the spread there?
Dave Henry
As you know, IRRs are very dependent on the exit cap rates and your assumptions, I think we start by looking at the unlevered cap rate that we’re going in at and whether that’s sustainable. Most good quality properties I think we can bank on somewhere around 2% annual growth and if we can get that and if we can buy it at 7.5% to an 8% unlevered return, we think that’s pretty accretive and we would consider that for our core.
As the higher quality properties get down closer to six cap, we do look at those as a product for our institutional joint ventures. We really need to leverage our side of the returns with fees and other things to make the numbers work long-term.
So for us it’s really not so much about IRRs long-term, because it’s so dependent on the assumption. We look at that rent rule that’s in place today, what the cash flows are today and what the risk to those cash flows are over time.
Samit Parikh - ISI Group
Thanks.
Operator
Our next question comes from Christy McElroy with UBS.
Ross Nussbaum - UBS
Hi, everyone. It’s Ross Nussbaum here with Christy.
Wanted to push you a little on a comment that was made at the beginning which was Milton’s view that cap rates could go to 6% or under. As I look at the implied cap rates on the shopping center REITs today, all the companies are generally trading with one exception that 6.75% to say 7% cap rates at least for some of the larger companies.
And that would suggest to me that it would make sense to start ramping up strategic larger acquisitions, if you truly believe that the cap rates are going to go down to a lower level and curious what do you think about that?
Dave Henry
I think it starts with the fact that there is tremendous bidding wars right today for the high quality stuff that pushes cap rates to 6% or less. We are losing deal all the time to people that are bidding an under 6% going in cap rate.
So you don’t even have to look out, you just look at what’s going on today. And certainly, the trend that Milton is looking at is cap rates are still going down because demand is exceeding supply and these are good hard assets that provide a cash flow at a time when people are little bit worried, whiff of inflation, hard asset is good and so forth.
For us, as we said before, we start with the quality of the property, the sustainability of that cash flow, whether it’s accretive or not to our shareholders and whether we need an institutional partner.
Ross Nussbaum - UBS
Does it make any sense to you that there is nearly 10 publicly traded shopping center REITs with market caps under $1 billion?
Dave Henry
No.
Ross Nussbaum - UBS
Are you going to do anything about that?
Dave Henry
Well, as Milton has always pointed out, M&A is difficult, because by the time you pay for their investment bank or your investment bank, their lawyers, your lawyer, you pay the premium that you need, it starts to get tough to make the numbers work. And then if you think about most Boards of Directors for companies that have made it through this downturn are not really that prepared to sell at a stock price, that’s 30%, 40% below where they were a couple of years ago.
So I suspect there will still be very few M&A deals in our sector.
Ross Nussbaum - UBS
Thank you.
Operator
This concludes today’s question-and-answer session. At this time, Mr.
Bujnicki, I’ll turn the conference back over to you for any additional or closing remarks, Sir.
David Bujnicki
Thanks, Lauren. A final reminder, our supplemental is posted on our Web site at www.kimcorealty.com.
Thank you for participating today.
Operator
This concludes today’s conference. Thank you for your participation.