Aug 1, 2012
Executives
David F. Bujnicki - Vice President of Investor Relations & Corporate Communications and Corporate Vice President David B.
Henry - Vice Chairman, Chief Executive Officer, President, Chief Investment Officer and Member of Executive Committee Glenn G. Cohen - Chief Financial Officer, Executive Vice President and Treasurer Michael V.
Pappagallo - Chief Operating Officer and Executive Vice President Milton Cooper - Executive Chairman and Chairman of Executive Committee
Analysts
Christy McElroy - UBS Investment Bank, Research Division Craig R. Schmidt - BofA Merrill Lynch, Research Division Paul Morgan - Morgan Stanley, Research Division Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Jeffrey J.
Donnelly - Wells Fargo Securities, LLC, Research Division Andrew Leonard Rosivach - Goldman Sachs Group Inc., Research Division Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division Quentin Velleley - Citigroup Inc, Research Division Vincent Chao - Deutsche Bank AG, Research Division Michael W. Mueller - JP Morgan Chase & Co, Research Division Cedrik Lachance - Green Street Advisors, Inc., Research Division Richard C.
Moore - RBC Capital Markets, LLC, Research Division Samit Parikh - ISI Group Inc., Research Division David Harris - Imperial Capital, LLC, Research Division Michael Bilerman - Citigroup Inc, Research Division
Operator
Good morning, and welcome to Kimco's Second Quarter Earnings Conference Call 2012. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Dave Bujnicki. Please go ahead.
David F. Bujnicki
Thanks, Andrew. Thank you all for joining Kimco's Second Quarter 2012 Earnings Call.
With me on the call this morning is Milton Cooper, our 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 may be deemed 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 due to a variety of risks, uncertainties and other factors. Please refer to the company's SEC filings that address such factors that could cause actual results to differ materially from those forward-looking statements.
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. With that, I'll now turn the call over to Dave Henry.
David B. Henry
Good morning, and thanks for joining us today. We are very happy with our second quarter results as they constitute strong progress on our strategic goals and objectives.
Key items are summarized in our earnings release. But I would like to provide a general high-level economical review, together with updated information on certain disposition activities.
Overall, the neighborhood and community shopping center sector continues its solid upward trend evidenced by increasing occupancies, higher effective rents and solidly positive same-store NOI growth. With virtually no new construction activity, continued population increases and a growing GDP, we are confident about the short- and intermediate-term prospects for our business and our portfolio.
While retail real estate and consumer spending are vulnerable longer term to any form of economic double-dip, for now there is strong momentum among the majority of retailers as they execute expansion plans and growth strategies in the face of a shrinking supply of high-quality retail space. A recent research report notes that more than 76,000 new stores are expected to open over the next 24 months, 9% more than corresponding 2011 levels.
Restaurants such as Five Guys, Subway and KFC are leading the pack, but dollar stores and discount box stores are also accelerating their store openings. As Glenn and Mike will provide the specifics of our solid second quarter earnings and portfolio performance, I would like to anticipate several questions and provide an update on some of our key initiatives.
With respect to the disposition of our InTown Suites investment, we have now executed a formal exclusivity agreement and related confidentiality document with one of the finalists in our marketing sales process. While we can provide no assurances, we are hopeful that we will enter into a formal purchase and sales agreement in the near future.
Under the terms of the signed exclusivity and confidentiality agreement, this statement represents the extent of the information we are permitted to disclose at this time. At the property level, the InTown operations continue to perform strongly across-the-board with RevPAR, occupancy and EBITDA all exceeding budget projections.
In addition, the most recent Highland Group hotel industry report indicates that InTown's top line growth exceeds its economy segment competitors in almost all categories. With regard to the shopping center acquisitions and sales markets, we continue to see both increasing prices for high-quality shopping centers and a more active market with slightly higher prices for B properties and secondary markets.
Both trends are encouraging signs that the retail sector is fully back in favor among all types of investors and buyers. E-commerce is now perceived as a reduced threat as most national retailers have adopted an integrative store and Internet sales strategy, which has enhanced both aspects of their operations.
In addition, there is a growing belief that the patently unfair state sales tax advantage held by e-commerce retailers is coming to a well-deserved end. The House Judiciary hearing on the Main Street Fairness legislation went well a week ago and the Senate has now scheduled a hearing on its version of the bill for August.
On behalf of all of us in the shopping center industry, we thank our shareholders and others that have lobbied hard on behalf of the Main Street Fairness legislation. This is a critically important issue for our retailers and our industry.
On another front, Glenn deserves to take an appropriate bow for taking the initiative to tap the perpetual preferred market 2 weeks ago at a record low rate. This was our second preferred stock issued this year and helps lock in long-term, low-cost capital.
Under almost every measure, we have the liquidity, a strong balance sheet and the staggered debt maturities to weather any prolonged economic downturn or softness. As a brief note on our international operations.
The economies of both Canada and Mexico are strong and growing impressively with corresponding benefits to our shopping center portfolios in these countries. The recent election results in Mexico bode well, and we continue to see our U.S.
retailers expand aggressively in both countries. Our project in San Juan Del Rio recently represented Home Depot's 97th store opening in Mexico.
As we move into August, we are very happy with our results. We are confident that we have strong positive momentum and that we will achieve success this year in growing our FFO, improving the profile of our shopping center portfolio and maintaining our very strong balance sheet.
It is worth noting that in terms of our ongoing strengths, stability and diversity, Kimco remains the largest landlord of Costco, Home Depot, TJX, Target, Ross Stores, Walgreen and Bed Bath & Beyond, all strong investment grade companies. Now, I would like to turn to Glenn to discuss the financial details of our second quarter, to be followed by Mike and Milton.
Glenn G. Cohen
Thanks, Dave, and good morning. The positive second quarter results are clear indicators of the execution of our strategic objectives.
Once again, we have achieved positive same-site NOI growth, further improvement in occupancy and positive leasing spreads, better known as our vital signs. Our capital recycling program is on target with the continued monetization of non-retail assets, which is now down to 3.9% of gross assets and the disposition of nonstrategic retail properties while selectively acquiring shopping centers in markets, which have long-term growth potential.
In addition, we continue to focus on further strengthening of the balance sheet and reducing our overall cost of capital. Let me provide you with some specifics.
As a reminder, we are using the term FFO as adjusted to represent recurring FFO. FFO as adjusted was $0.31 per diluted share for the second quarter as compared to $0.30 last year.
Headline FFO came in at $0.34 this quarter, which includes approximately $12 million of transaction income primarily related to a distribution from our Albertsons investment, an investment that keeps on giving us we have received almost 5x the original investment; and the recognition of a gain on the sale of air rights and several promote participations. Headline FFO last year was $0.31.
We continue to be active on the disposition and acquisition fronts. We recognize almost $9 million of non-FFO net gains from the sale of 12 shopping center assets and 2 non-retail urban assets including the sale of Montgomery Plaza, a Kimco development asset, for the formation of a new joint venture with RioCan.
RioCan is the 80% partner and Kimco is the 20% partner and manager of the asset. Total proceeds from these sales were $105 million, which were quickly redeployed with the acquisition of 5 unencumbered properties and the remaining 70% interest in our Towson, Maryland property, which we previously owned 30% of for an aggregate cost of $180 million.
Our shopping center portfolio metrics continue to deliver solid results. U.S.
occupancy on a pro rata basis increased 50 basis points from the first quarter level to 93.3% and up 20 basis points from the beginning of the year and 70 basis points from a year ago. U.S.
same-site NOI growth was 2.1% for the second quarter and represents the ninth consecutive quarter with positive growth for this metric. Combined same-site NOI growth, including Canada and Latin America, was 2.6% before the impact of currency which nicked the metric by 90 basis points due to the strengthening U.S.
dollar, bringing the combined same-site NOI growth to 1.7%. For the 6 months, U.S.
same-site NOI growth was 2.2% and the combined same-site NOI growth was 2.9% before currency impact. Overall, leasing spreads were positive at 4.5% with new lease spreads at 5.4% and renewals and options at 4.2%.
Now even with what appears to be a slowing U.S. economy, the debt markets including the bank market, unsecured and secured markets and equity markets continue to function well with new record low coupons being achieved by numerous companies as investors search the yield from high-quality companies.
We are pleased with our access to over $1.5 billion of new capital raised so far this year from the unsecured bank market, the mortgage market, both CMBS and on-book lenders and the perpetual preferred equity markets. Our balance sheet metrics are strong with a consolidated net debt-to-EBITDA had adjusted up 5.6x.
And if you include the transaction income, the net debt-to-EBITDA stands at 5.1x. Also, if you pro forma the EBITDA from the $92 million of acquisitions completed in late June, the net debt-to-EBITDA would improve by another 0.2x.
Our fixed charge coverage remains solid at 2.6x including the impact of prefunding our upcoming debt maturities in November of this year for $200 million and $100 million in January of 2013 with a new $400 million term loan, which closed in April priced at LIBOR plus 105 with a term of up to 5 years. In addition, we've prefunded an anticipated redemption of our $460 million 7 3/4% perpetual preferred issuance, which becomes redeemable on October 2012 with a new $400 million 6% preferred issuance, which was completed in March, and most recently in July completed a new $225 million perpetual preferred issuance at 5 1/2%, which is believed to be the lowest coupon ever for this type of security.
We are using a portion of the proceeds to redeem our $175 million, 6.65% preferred issuance on August 15. Please keep in mind that the dilution associated with the term loan and the preferred issuances will have a $0.03 impact for the full year 2012.
However, once the redemptions are complete, the annual savings will be approximately $11 million annually and provide further reduction of our fixed charge costs. As a result of these activities, our liquidity position is in excellent shape with over $380 million of cash on hand at the end of the second quarter and over $1.7 billion available on our revolving credit facility.
As noted in the press release last night, we anticipate declaring our quarterly common and preferred dividends on or about August 15. The timing is to ensure technical compliance on the Maryland law as we consider the redemption of our 7 3/4% Class G preferred stock, which becomes redeemable on October 10, 2012.
Lastly, we are pleased to increase the low end of our FFO as adjusted guidance from $1.22 to $1.24, thus narrowing our FFO as adjusted guidance range to $1.24 to $1.26 even with the $0.03 dilution from the pre-fundings previously mentioned. The FFO per share guidance does not include transaction income or expenses or noncash charges for the redemption of preferred stock.
Our guidance assumptions do include achieving combined same-site NOI growth ranging from 1.5% to 3.5% and increasing combined portfolio occupancy for the year of 50 to 100 basis points and a further reduction of our non-retail due to the continued monetization of those assets. Now, I'll turn it over to Mike for a review of the operating portfolio.
Michael V. Pappagallo
Thank you, Glenn. Good morning, everyone.
At the midyear point, I'm pleased to report that the portfolio vital signs remain strong and continue to reflect the momentum in the shopping center fundamentals over the past couple of years. Occupancy has picked up noticeably from the prior quarter, the consequence of both positive net absorption and portfolio recycling efforts.
The occupancy levels are at their highest point since the fourth quarter of 2008, underscoring the improved supply and demand dynamics for space. In the U.S.
portfolio, occupancy levels for anchors, using space over 10,000 square foot as the definition, remained robust at 96.3%. But more significantly, we made big improvements in the small space leasing with a 1% uplift in the occupancy level to 83.3%.
Leasing spreads remain in the right direction. And while we weren't as high as the 10% combined number from the first quarter, we've been running positive for 6 quarters now.
Same-site NOI, as I mentioned, showed another positive result at 2.1% for the U.S. and 1.7% overall, with the aggregate numbers being influenced down by the FX.
But similar to last quarter, the NOI growth numbers do reflect the drag from the temporary loss in rents from the former Borders and A&P boxes with roughly a 60 basis point effect. Of the 22 boxes vacated by Borders and A&P during their prospective bankruptcy processes, we now have re-leased 17 with a composite 3% spread.
And these replacement deals will start to positively influence the NOI metrics over the next few quarters. Our non-U.S.
operations also have continued to achieve its growth objectives when analyzed on a local currency basis. The Latin America portfolio is about 8% ahead of plan so far and it's 15% over last year's numbers in terms of NOI contribution.
The big push, however, remains the leasing plans for the next 6 months as we're about halfway to our 800,000-square foot leasing goal. Canada remains a solid performer with occupancies remaining at 96.5% and same-site NOI growth at 3.8% for the 6-month period in local currency terms.
Moving beyond the operating results. I thought I'd make a brief comment on Kimco's exposure to SUPERVALU, considering the recent unfavorable news coming from the supermarket chain.
We currently have 27 leases in the portfolio across all of the SUPERVALU banners, which represent just under 1% of base rates. Most of these sites are valuable supermarket locations, and 2/3 of the current leases are at rates we feel are at or below market.
Notwithstanding SUPERVALU'S announced pursuit of strategic alternatives, we do not see a short-term issue for us. So while we keep a watchful eye on the SUPERVALU situation, I'd also point out a couple of other positive developments within our tenant universe.
The completion of the acquisition of Cost Plus by Bed Bath & Beyond gives them a new avenue for growth and it's certainly a benefit to the 17 locations of Cost Plus in the Kimco portfolio. Similarly, the acquisition of Charming Shoppes by Ascena Group not only expands the Ascena customer base but will cast a different light on Charming Shoppes' strategy to close its fashion bug unit.
Although those store closures will take -- still take place next year, as a landlord it's much better to work through any store closing and lease mitigation issues with a strong retailer with whom you have a broad relationship with. And positioning is always much more manageable when you have a better inventory of real estate to work with, which brings me to our recycling activities.
While our disposition levels are not necessarily headline-grabbing, I'd like to reinforce a few statistics on the recycling efforts in the past 18 months. We have sold more assets than we have bought in terms of numbers; 63 versus 42, but have acquired larger properties, and as a result, had a net addition to GLA of about 125,000 square feet.
The assets bought were 93.8% occupied. The assets sold were 80.9% occupied.
Average rent of property sold, $9.35; of acquired, $13.60. And while populations were roughly on par, the average household incomes of the acquired properties were almost 30% higher.
Bottom line is that there has been a real impact on the portfolio base from these activities. We estimate that the properties acquired, since late 2010, now represent a bit under 6% of the U.S.
shopping center gross asset value. The other piece of the recycling effort is putting money back into the strategic portfolio base.
The basic profile of our shopping center portfolio is large with wide spread of risk across a variety of markets. So, too, is our investment activity.
While there aren't any 9-figure, high-execution risk projects, there are a wide series projects that provide solid returns and limited risks to enhance cash flow and asset valuation. In addition to the active projects disclosed in the supplement, we have an ongoing pipeline of opportunities, either in the entitlement phase or under valuation.
It represents about 15 different properties that can launch within the next 2 to 3 years with rough spend of about $250 million. They include our centers in Live Oak and Altamonte Springs in Florida, the Owings Mills project in Maryland, a potential new center in Delaware and our center in Cupertino, California directly across from the main access point of Apple's planned new corporate headquarters.
And with that, I'll turn it over to Milton for some final comments.
Milton Cooper
Well, thanks, Mike. We have reason to be proud of our ability to withstand headwinds and improve our core metrics in a soft economy.
Notwithstanding these uncertain times, we've strengthened our portfolio, we have divested non-core assets, acquired high-quality assets in tough MSAs and focused on generating higher recurring FFO and creating value. One question on everyone's mind is where is the market going from here?
Four years ago, we were at the onset of a strong rally in corporate bonds. Investment grade corporate bonds yielded as high as 9.5% in October of 2008.
Since then, yields have plummeted. Corporate BAA yields are below 4.8%.
Real estate is, above all, an income-oriented investment, and cap rates are tied at the hip to interest rates. This is just one of the factors hinting at further cap rate compression.
Lack of new development in our sector is another. The thirst for yield is in August.
Just from a purely income-based perspective, real estate and REITs should be beneficiaries in the current environment. Looking at Kimco in particular, we have a conservative dividend payout ratio of 61% of recurring flows, one of the lowest in our sector.
So we believe our dividend is safe and strong. I would like to add an interesting fact that some might not realize.
At the end of the year, the much talked about fiscal cliff is looming, the Bush tax cuts will expire and unless some agreement is reached, the dividend tax rate will increase. Currently, ordinary dividends from a REIT are not afforded the special low tax rate of 15% enjoyed by many investors in non-REIT corporations.
Ordinary dividends received from a REIT would, therefore, not be affected by the dividend tax increase. So it seems that on a relative basis, the corporations REITs could become even more attractive from an after-tax income perspective.
We will continue to monetize our non-retail assets. We will continue to take advantage of unique situations, such as distressed retailers with good real estate and similar opportunities.
Now every 4 years, we're just amazed at the performance of the world's best athletes competing during the Olympic Games. Looking at our business, our team of real estate athletes are trained and are prepared to achieve superior performance as well.
We are back to our basic retail real estate core expertise and focusing on growing our property cash flow and creating value. Our team is doing great work in accomplishing these objectives.
And now, we'd be delighted to answer any questions you might have.
Operator
[Operator Instructions] First question comes from Christy McElroy of UBS.
Christy McElroy - UBS Investment Bank, Research Division
Given the attractive terms with what you've been able to issue your most recent preferred, would you expect to do another deal this year? And has your philosophy changed at all in terms of how you would structure your balance sheet going forward, or do you plan to sort of keep the same balance of debt and preferred?
Glenn G. Cohen
I don't see us doing another deal this year, Christy. We have taken care of what we think we can do so far.
We've prefunded our debt maturities that are coming up. It's a very well-spread maturity profile.
But the program of continuing to try and modestly produce leverage and bring our net debt-to-recurring EBITDA into that mid-5x range, no higher than 6, is where we want to target. So we're just going to continue on the path we've been on.
Operator
The next question comes from Craig Schmidt of Bank of America.
Craig R. Schmidt - BofA Merrill Lynch, Research Division
I'm looking Pages 30 and 31 of the supplemental. I'm just wondering if you could comment on the negative leasing trends in Latin America as well as the shorter lease term relative to Canada and the U.S.?
David B. Henry
Well, I'll take a quick stab at Latin America. There are still some residual effects from, call it, the Great Recession in terms of local rents rolling down a little bit from some of the very high levels we had.
But the sample is small. The actual number of leases you have to look at is small.
And the underlying trends are strong. The retailers have resumed their expansion.
We're seeing lots of demand. And what's encouraging is the small shops just like the U.S., are coming back in Mexico.
So we expect over time that, that will reverse. In Canada, it's all good.
Some of the -- again, we have a smaller sample up there than we do in the U.S. so I wouldn't take away any distinct trends in terms of the shorter leases up there.
The demand is strong.
Michael V. Pappagallo
Craig, I would just add that, to echo Dave's point about Mexico, it is a small sample size. Mexico still has very strong positive same-store NOI because leasing in absolute terms, coupled with the annual cost-of-living adjustment on existing tenants more than outweighs some small negative leasing spread for a small sample.
I'd also say that, overall, these terms are a little bit shorter. I think that reflects the changing composition of the new leases signed whereas historically there's been more anchors.
Now, we're getting more small space leased up and those terms are generally smaller -- shorter. So you're going to see the average terms of lease shorten up a bit as we fill up the small spaces.
Operator
The next question comes from Paul Morgan of Morgan Stanley.
Paul Morgan - Morgan Stanley, Research Division
You talked about the disposition market getting a little bit easier as the demand for some of the secondary market assets improves. I mean, a couple of things, would you consider accelerating your volumes of sales into strength as it grows?
And then, second, what kind of cap rates are you seeing for those assets relative to the core that you're buying?
David B. Henry
I think you have seen the company accelerate its disposition activities. We are being very deliberate, and we're committed to selling these lower-tiered assets and we are heartened by the fact that the market is improving for these lower-tier assets.
I think it's because so many people have tried to buy the higher quality and there's just so many bidders that they're forced to go down a notch in terms of the markets to get their -- to get retail today. So we are seeing cap rates improve a little bit even in the secondary markets, which is good.
So we're committed to it. And we have accelerated it over time.
And we are trying to take advantage of the decline in the market to do it. Conversely, we are trying to be very careful about what we buy and make sure it's the better stuff and we're trying to do as many off-market situations as we can.
So you'll continue to see us do this recycling activity.
Operator
The next question comes from Alexander Goldfarb of Sandler O'Neill.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
I think this is the first quarter you guys have broken out same store with and without the impact of FX. Can you just talk a little bit about your view of FX?
How you -- given the odd situation that the dollar finally seems to be strengthening, how you think about your overseas operations? And then also, what the per-share impact is from the appreciation of the dollar?
David B. Henry
Well, I'll just take a very high level. As you probably know, in Canada, we're pretty effectively hedged between both the Canadian mortgage we have that are in Canadian dollar terms and the equity we've invested has been in the form of Canadian dollar-denominated bonds.
So the investment, itself, in Canada is pretty well hedged although the income is not so. We're subject to fluctuations there.
Mexico is a little different because we have very few mortgages although we do have some Mexico peso mortgages. And we have a relatively modest peso line of credit that we have used to fund some of the equity.
But in Mexico, we are relying in large measure on the cost-of-living increases that are built in every single lease in Mexico. So since 40% of the income does come from strong tenants like Wal-Mart and Home Depot, we can pretty much count on that.
So to the extent the peso weakens, it's generally because inflation has picked up and we do get a corresponding offset in terms of the revenues. So I think we're pretty well hedged long term.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
And what about the per share impact of the appreciation of the dollar?
Glenn G. Cohen
It's fairly modest, Alex. Because to Dave's point, in Canada, we are naturally hedged so you have more interest expense as depending on which way the dollar goes, there's the income goes so they kind of offset each other.
Mexico, again, has a little bit more of an impact. But on an overall basis, it's relatively modest.
Operator
The next question comes from Jeffrey Donnelly of Wells Fargo.
Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division
Dave, just want to go back to your comments about the value improvement in B properties or secondary markets. Is the compression in the 10-year treasury that we've seen since the end of last quarter, do think, contributing to lenders looking to step out the yields factor and then maybe get a little more aggressive on advanced rates for those markets and that's, I guess I'd say, the ultimate catalyst there for that segment?
Or do you actually think B property fundamentals are beginning look better than A property fundamentals for people?
David B. Henry
I would say both, I would say both. Clearly, there's a thirst for yield.
People are just tired of sitting on cash. Real estate, especially good decent real estate, remains an inflation hedge on one hand and a cash-yielding asset that exceeds all kinds of alternatives from treasuries to corporate bonds.
So real estate is increasingly in favor. Retail is one of the established food groups, if you will, for all kinds of investors.
And there is a frustration in terms of a limited supply of truly high-quality retail in primary markets. So just like every other cycle, it has now moved downwards towards the B properties.
It's interesting to look at a country like Canada where the cap rates are much more compressed than here in the U.S. The difference between the As and Bs and the Cs is much more compressed than here and I think you'll eventually see the U.S.
move towards that same sort of situation where cap rates will begin to move more together.
Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division
And you're seeing retailer demand extend out into the B markets at this point?
David B. Henry
Yes, by necessity as there's a shrinking supply of stores that are having to take a harder look at stuff that they passed up. There are so many good national retailers that are committed to increasing their store count.
And there's this critical momentum to these expansion plans that they're forced to look at all kinds of alternatives. And they want immediate occupancy.
They don't want to go back in the old days of wait 3 or 4 or 5 years for a new development project to get entitled and get built and so forth. So they are taking a harder look at boxes they didn't look at before.
Operator
The next question comes from Andrew Rosivach of Goldman Sachs.
Andrew Leonard Rosivach - Goldman Sachs Group Inc., Research Division
I'm just on your guidance detail page and it looks like the biggest piece of it that went up was the non-retail component. And I'm just curious is that related to InTown timing because the transaction is getting done later than you might have anticipated?
Glenn G. Cohen
Correct. It is, Andrew.
When we came out with our original guidance, we had incorporated selling it by the end of the third quarter. So we've built in the last quarter.
It's the bulk of it.
Andrew Leonard Rosivach - Goldman Sachs Group Inc., Research Division
So and just to follow up on that, should we assume most of the full $0.04 of dilution is incrementally going to happen in '13 or is some of it going to happen this year?
David B. Henry
In terms of losing InTown, yes, you're right. Most of it will occur.
We think this asset will remain effectively on our books this year because even if we started the closing process tomorrow, there are mortgages to be just assumed, and by definition, that always takes a while.
Operator
Next question comes from Nate Isbee of Stifel, Nicolaus.
Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division
Mike, as you look at the recent progress in the small shop occupancy side, is there any meaningful trends that you can point to that the small shop gains you're experiencing are stronger at centers where you recently refilled vacant boxes, or would you say that the improvement is more broad-based?
Michael V. Pappagallo
I would say it's more broad-based. Now clearly, Nate, to the extent we filled an anchor, that always has a positive effect.
But I think more than anything, we've seen a lot of traction in our generally stronger geographic markets. We've also seen an increased demand as we've talked about in earlier calls from the national retailers, franchise concepts, et cetera that are filling the space.
The markets for a true mom-and-pop demand is so somewhat tepid and that is also very geographic-focused. So I would sum it in saying that it's been a broad-based improvement, but clearly a bias towards the stronger geographic markets.
Now, the 1% occupancy increase in the small stores, about 60 basis points of that was due to absorption and 40 basis points was due to our recycling efforts, getting rid of properties that had structural and chronic vacancies that we felt would not -- never lease up or not lease up for the foreseeable future.
Operator
The next question comes from Quentin Velleley of Citi.
Quentin Velleley - Citigroup Inc, Research Division
Just in terms of some of the stress that we're seeing in this value supermarkets or grocers, do you think you could see opportunities emerge similar to your experience with Albertsons? And if an opportunity did emerge, would partaking in something be consistent with your current strategy?
Milton Cooper
The answer is absolutely yes on both. There will be opportunities.
The conventional supermarket has strained from the warehouse clubs that are 70% food, from Wal-Mart superstores, from the specialty retailers such as Whole Foods. From all these, there is just avalanche of new users and wherever there is a retail that's distress with strong real estate, that's been our strong suit for a long time.
So the answers is an unequivocal yes.
Quentin Velleley - Citigroup Inc, Research Division
And do you think that's something more near-term or is it something that'll transpire in sort of 2 or 3 years' time?
Milton Cooper
I think there's a good possibility it would be near term.
Operator
The next question comes from Vincent Chao of Deutsche Bank.
Vincent Chao - Deutsche Bank AG, Research Division
Just going back to the B class and secondary market commentaries. Are there particular secondary markets that are noticeably improving, and then are there ones that you can point to specifically?
David B. Henry
Well, let me go back to one of the questions that was asked about cap rates on these B markets. I think it's a very broad range and it depends on how secondary or tertiary the markets are.
But we're seeing cap rates range from 8% to 10% on these kinds of markets. And what's interesting to me, there are markets, let's just take a Jacksonville, Florida, which are not perceived to be gateway cities or 24-hour cities or "primary markets" that a lot of the institutions would look at.
But we would consider that a very solid B market and there is a bit of an arbitrage today between the cap rates on equal quality shopping center in Jacksonville versus perhaps Long Island, New York metro markets. So that would be one example.
Now if you go all the way to the other end of the spectrum, to Huntsville, Alabama or something like that, that would be considered a pretty tertiary market and have not much appeal to the institutions. There may be local buyers that believe they can make something happen to that asset and create great cash flow.
So as we sell our B properties, depending on the market, we're selling a lot to local investors that aren't concerned about how secondary or tertiary that market is. They like the cash flow and their local people.
They believe they can make something happen with these assets.
Operator
The next question comes from Michael Mueller of JPMorgan.
Michael W. Mueller - JP Morgan Chase & Co, Research Division
Following up on the small shop occupancy increase. When you look out over the next 12 to 18 months, what do you think the goal is, or what can you achieve in terms of ramping that up more?
It sounds like it was 60 basis points this quarter. I mean, where can that go to?
Michael V. Pappagallo
Mike, I've been doing this too long to predict things 12 to 18 months out. We would like to get the occupancy up to an 85-plus percent level within the next 12 months.
But a lot of things need to happen so I can't -- I really don't want to make that a prediction. I think the big part of it is where the economy goes in the short term.
There has been a slowdown. That doesn't certainly mean it's going to go in reverse, but the timing and the relative demand of small shop leasing, certainly the backbone is the strength of the economy.
So we'll see where that takes us.
David B. Henry
I mean the trend line is good. We feel good about the short-term trend line.
We, like the rest of the world, worry about everything from Europe to the fiscal cliff and so forth, so we're very reluctant to give you a prediction. But on the ground, we are feeling good.
Our leasing people are feeling good, and our regional presidents are feeling good about what's happening short term.
Operator
The next question comes from Cedrik Lachance of Green Street Advisors.
Cedrik Lachance - Green Street Advisors, Inc., Research Division
Just going back to Mexico. When I look at the development schedule for Mexico or what's left pending stabilization, do you think you can reach the same levels of occupancy in these projects as you have in the rest of your portfolio, or is there anything in this project where you think that stabilization is going to be a lower number?
David B. Henry
No, I do think over time you are going to see the basket of properties we have a Mexico achieve comparable levels to the U.S. These are generally very high quality properties.
Unfortunately, they were developed at the top of the cycle, if you will, and they've been a little bit slow to lease up and some of the structural items that happened in Mexico have slowed it down from an international retailer perspective. But it's all green signs for the moment, as I mentioned, in my comments.
People like Home Depot have resumed strongly their expansion plans and we're seeing improvement on the small shops now. The Mexican economy is over 4% GDP growth.
Unemployment is very low. Manufacturing is very strong.
It's got great oil revenues. Believe it or not, tourism is still doing well there.
And the election is now behind them. Every 6 years people hold their breath in Mexico and now that's behind them, so retailers are much more confident about making plans.
And our leasing people in Mexico also feel very good today about some of the leases they have pending and some of the retailers that they're working with to expand. And as I mentioned before, when you're dealing with a market of 100 million-plus people and only 1,000 shopping centers versus the U.S.
with 300 million-plus people and 100,000 shopping centers, it's just a different dynamic. But there's every reason to believe that, over time, the occupancy will achieve the U.S.
level. And then we will see better than normal growth because of the CPI increase that's built into even the anchor leases.
Operator
The next question comes from Rich Moore of RBC Capital Markets.
Richard C. Moore - RBC Capital Markets, LLC, Research Division
I just wanted to go back again to the Canadian same-store NOI. I realize that the foreign exchange had an impact, but seemed weak for the quarter even when that's taken into account, and I'm curious if the Canadian economy softening is part of that.
And then also, the transactional income seem to be in Canada and I'm curious what that was.
David B. Henry
Well, let me take the latter first because it's something we're particularly proud of. It's the sales on air rights that was done in our RioCan joint venture actually 4 years ago.
We just needed the cash 4 years ago and some of conditions precedent to booking that income we were able to get done this quarter. So I think it was $5 million or $6 million in term of an air right sale in Canada orchestrated by our friends at RioCan.
So that was the primary driver of the transaction income in Canada, although we did, I think, we got some income on some other things and then we got Albertsons in the U.S. so -- but in terms of Canada, I think there was a little bit of other income out there as well.
Honestly, it's a smaller sample in Canada, as we mentioned, but we don't see any real slowdown there particularly among the U.S. retailer demand for space in Canada.
People like Marshalls and you just read about Lowe's making a major move to expand in Canada. These things are driving some good things in Canada.
And as you know, it has about 1/2 the retail space per capita that the U.S. had.
The economy of Canada is strong and so forth. So underlying some perhaps noise in some specific leases that might have rolled down or something like that, the underlying fundamentals of Canada are strong.
I don't think we've ever been below 97% aggregate occupancy in Canada. So it's -- we still feel very good about it.
We have converted a couple of preferred equity investments into long-term joint ventures and some of those projects, I think, had a little bit lower occupancy and perhaps some of the leases are a little bit less than some of the RioCan leases. But in general, we -- honestly, we don't see any clouds up there at all.
Operator
The next question comes from Samit Parikh of ISI.
Samit Parikh - ISI Group Inc., Research Division
Back to Mexico real quick. Fibra UNO recently did a pretty large transaction, I think it was valued at about [indiscernible].
Based on sort of what they're doing out there, does this entice you at all for an exit strategy in Mexico anytime in the near term?
David B. Henry
It certainly entices us to take a hard look at valuations in Mexico and look at possible ways to create value for our shareholders over time. The Fibra UNO transaction, as you know, is little bit complicated in terms of it's multi-property type.
There was some development assets in that. So it's a little bit tougher to get a good handle on the exact net cap rate, if you will.
But we're looking at it. I think that's a fair thing to say.
Operator
The next question comes from Tom [indiscernible] of Bank of America Merrill Lynch.
Unknown Analyst
Glenn, you made some comments about where your balance sheet stands and you guys have obviously made some good progress on getting to your targeted balance sheet. Any comments about -- you guys have targeted debt-to-EBITDA.
Any comments on debt plus preferred to EBITDA and how you kind of manage that part of the balance sheet?
Glenn G. Cohen
Well, again, we've had preferred, perpetual preferred as a component of our balance sheet for a long time. I think the way you we see it now is it's going to stand at around $800 million.
We don't really expect to increase it much more. We've kind of used it as a somewhere at around 10% of our balance sheet, of our capital structure being in the preferred component.
So we'll try and keep it around that level. The metric, though, even the net debt plus preferred to EBITDA, if you look at that metric, it has come down quite a bit as well over these last couple of years.
So we do watch it in total. But we look at that metric.
We look at fixed charge coverage, which continues to improve as well. And I think you're going to see much further improvement next year as we get the benefit of the refinancing of these 2 preferreds, I mean we're going to save at $11...
Unknown Analyst
EBITDA growth from the acquisitions, too, right, so yes, I definitely understand that. And any comments on obviously the 5.5% execution was very good perpetual capital.
But you guys have now done 2 sets of preferreds and term loan rather than unsecured bonds. Any commentary on the relative attractiveness of those types of capital versus unsecured bonds?
Glenn G. Cohen
Well, at the time we did our term loan, our term loan was priced at the time probably 120 basis points tighter than what we could have done in the unsecured bond market, which is why we went that route. The preferred that we've done are really refinancings of much more expensive preferreds, right?
We have one that's 7 3/4%, one that was at 6.55%. So we brought them down to 6% and 5 1/2%.
So those are just straight refinancings that way we look at them. The unsecured bond market more recently has tightened.
You've seen deals that are getting done 40, 50 and 60 basis points through their secondaries. So it's a market we constantly watch and we always try to be opportunistic.
So we'll continue to watch and if it makes sense, we would tap it.
Operator
Next question comes from David Harris of Imperial Capital.
David Harris - Imperial Capital, LLC, Research Division
Milton, you mentioned the [indiscernible] fiscal cliff. Capital gains would go from 15 to 24 or more, plus or minus.
I wonder if that's animating any of your potential sellers of property? And more generally, are you aware that fiscal cliff considerations are causing anybody to sort of hold back from signing long leases or commit to investments on -- through your joint venture programs?
Milton Cooper
No. Insofar -- first, let me take the latter part first.
There are sellers who are very worried where tax rates will be next year. And they feel this is the last shot that they have at the lower capital gains, right?
So how much we'll be able to get in year-end closings, I don't know. But we're certainly trying to be fast on our footwork to accomplish opportunistic purchases is one of the reasons Glenn has kept the balance sheet so strong.
Insofar as the retailers are concerned, I don't think -- they must expand. Just imagine retailers depend on people working in the stores and those people are the ones who deal with their customers and if the retailer is stagnant, it's going to lose its best people.
You wouldn't want a sister or a relative to be working in the store where there'll be no opportunity to become an assistant manager as they grow stores managers. So if retailers do not expand, they -- it's a self-fulfilling prophecy about losing good people.
So I don't see the capital gains or the tax issues as an inhibition on moving forward with new stores.
David Harris - Imperial Capital, LLC, Research Division
Any comments on investors' inability to underwrite after-tax returns?
Milton Cooper
I happen to believe, over time, tax returns are a factor, but people still want to have yield. I remember when there was an excess profit tax and taxes were as much as 90%, people still want to invest to get the other 10%.
They will look at relative opportunities. And with yields as anemic as they are, real estate and cap rates have a very large spread, historically high spread between 10-year treasuries and cap rates.
So I think the demand will increase.
Operator
The next question comes from Christy McElroy of UBS.
Christy McElroy - UBS Investment Bank, Research Division
One of the most common themes we hear in support of continuing strength and fundamental trends is lack of new supply growth. But as you mentioned earlier, Kimco's starting to pick up redevelopment and development activity as are most of your peers on the margin.
I'm wondering at one point the increase in construction sort of extends beyond the REITs who again seems to be doing it at a relatively judicious pace, but at what point could it sort of accelerate from there given that there's free yields that's out there and the fundamental strengthening that we've seen? And the second part of that question is what are you and your peers sort of doing differently this time around, if anything, to try to avoid some of the oversupply issues in certain types of space that we faced a few years ago, whether it's at the project level or investing where certain criteria are met?
David B. Henry
First of all, there's just a huge difference between expanding an existing shopping center or building out some land that you already have in your inventory versus, call it, the prerecession days when people would buy 100 acres of land and spend the next 5 to 10 years getting it zoned and then titled and fighting off the environmentalists and then working with major anchor tenants to do pre-leasing and then arranging for construction financing and equity financing and so forth. The retailers do not have the patience for that anymore.
A lot of them got caught up in bankruptcies and half completed development deals. Secondly, the economics are tough.
Rents haven't recovered enough to really justify a significant amount of new construction. On an incremental basis, where you already own the land, where you already own the center, it's much easier to make the numbers work.
So you will see the redevelopment activity pick up a little bit, but it's nowhere close to the addition to supply that we saw in the old days, if you will. And it's going to keep demand higher than addition to supply, I think, for quite a while.
Now it's hard to say at all it won't come back at some point, and I'm sure it will, because everything's is cyclical. But the old days of buying these big sites and adding millions of square feet to new supply, which by the way, was somewhat dependent upon growing housing and we're probably a long way away from the growth in housing or "rooftops" again to justify all that.
So I think you're going to see limited supply for quite a while.
Operator
The next question comes from Jeffrey Donnelly of Wells Fargo.
Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division
Just a question on the portfolio leasing detail that's on, I think, it's Page 25 and 26 of the supplemental. The square footages decline across your 8 investment management portfolios over the last several quarters and as you sold off assets, the in-place average space rent has also declined as well.
I think in the most recent quarter, it's something like 6 or 8 of the portfolios were flat or down Q2 versus Q1. I know there may be a lot going on beneath the surface, but is that decline in average rent just is a function of rents rolling down the market over the last several quarters, or could it stem from selling off the higher rent, higher-quality assets in those portfolios?
David B. Henry
Well, we'll give you one great example. We bought out our partner on Towson Place.
This was a very high quality asset with very, very high rents and so forth so we've taken that out of the investment management business, if you will, and it's on balance sheet. We haven't sold it off at all.
So I think there are situations where we have bought out our partners on the very high-quality stuff. But I don't think anything dramatically different is going on in the investment management portfolio than our general portfolio.
And in general, many of these joint ventures have very high quality properties and so perhaps you do have some top of the market rents that rolled down a bit. But we're very happy, generally, with the quality of what we have in the investment management business.
Michael V. Pappagallo
And Jeff, I think the tagline is that the investment management program in terms of -- have been relatively stable in terms of their composition with some movement out like the Towson example and the rents have moved a little, the average rents, but not something which would detect a fundamental shift in the underlying quality or composition of the portfolio. In one particular portfolio where there was a little bit more meaningful shift down in the average rent, it did have to do, to Dave's point, with particularly roll down as that portfolio has a concentration of properties in the Las Vegas and Reno markets.
Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division
And I recognize this is a very small part of the company, but you have a pretty small total hold in countries like Peru and Brazil and even arguably Chile. And those markets aren't necessarily as deep as the U.S.
either, but how do you guys think about the benefit or operating in those -- operating those properties versus the cost of operating in those countries and your ability to grow your platform over time because it's been quite some time that you've really had pretty steady base in those markets.
David B. Henry
Well, you're right. We have less than 20 total properties in 3 countries at all.
What we have has been successful. In Chile, in particular, where we have, I think, 15 properties they've been very successful for us; Peru, we have 2; and Brazil, we have 2.
So it's a foothold. It's been a place cardholder coming out of the recession, if you will, as we concentrated on Mexico.
I think the challenge for us from our shareholders, from our board, from Milton is prove the case in Mexico. Get what you have in Mexico leased up, have it produce wonderful FFO earnings, and if that indeed happens, then perhaps we can expand what we have already -- the seeds we have planted in South America.
But it's fair to say our focus and our concentration today is on Mexico and making that a very profitable part of the total portfolio that we have.
Operator
The next question comes from Quentin Velleley of Citi.
Michael Bilerman - Citigroup Inc, Research Division
It's actually Michael Bilerman speaking. I just want to come back just in terms of sort of the portfolio acquisitions and dispositions and tie it a little bit to Milton's comment about investors' thirst for yield being enormous.
And it would appear as though if you look at the transaction activity, especially more recently, that more is being done with Kimco's own capital on balance sheet rather than with joint venture partners. And I'm just curious if investors have this enormous thirst for yield, why aren't you using that capital more in terms of the existing investors that you have or seeking new investors for funds versus potentially levering up a little bit and taking more assets on balance sheet relative to the assets that you're selling.
David B. Henry
Well, first of all, we have had the balance sheet capacity to buy for our own account, if you will. So as we have found good high-quality acquisition, we have put them on our books.
And as we have sold assets, both nonstrategic retail asset and our non-core asset, we've had capital coming into the shop, if you will. So rather than needing institutional capital, we've been able to use our own capital.
That is not to say, over time, we will go back to some of our very valued partners and help us acquire a very competitively priced asset because to Milton's point, as cap rates continue to decline, we may need to tap the pension funds and the life company to be competitive because some of those cap rates are getting very, very low. But for now, you are right.
We are buying more on our own balance sheet than needing institutional capital.
Michael Bilerman - Citigroup Inc, Research Division
And maybe Mike, can you just clarify. You talked about all the acquisitions relative to dispositions in your opening comments and you gave us some of the stats about base rents and occupancy and trade areas.
Can you just comment on what the cap rate that you bought, the $900 million, and the cap rate that you sold, $360 million, just so we get a sense of spread and...
Michael V. Pappagallo
Yes, I think, Michael, the rough number averages out to about 6.9% cap rate on the acquisition and 9% on the disposition. I think those are good numbers to use for your financial analysis.
And the one comment I'd make on the dispositions. We've talked a lot in this conference call about B properties, I would submit that many of the assets we sold in this first rush would qualify as C properties.
So it's very different type of asset and even in good -- Milton's saying they're even D properties. So put that in perspective as I give you those cap rates.
David B. Henry
And before you compute the math on the dilution, Michael, remember some of the non-retail assets that we have sold, some of our urban properties, as an example, were totally nonearning so we sold them at effectively 0 cap rate and that capital comes back into the equation, if you will.
Michael Bilerman - Citigroup Inc, Research Division
Right. I don't think it's even in the 365.
I think you've sold more than that as you liquidated like the Valad stake and everything else, that you've netted more proceeds from your disposition program.
Michael V. Pappagallo
That is correct. And again, the statistics I've given you reflect the sum total of the activity, which goes back to September of 2010 as we've got the more recent transactions, obviously the cap rates have trended lower, versus those that we acquired late in 2010.
Again, just a reflection of the marketplace, but it does average out to the numbers I provided to you.
Operator
The next question comes from David Harris of Imperial Capital.
David Harris - Imperial Capital, LLC, Research Division
Sorry, if I missed this, but your cash leasing spreads in the quarter were up 4.5% compares to a 10% spread in first quarter. Is that just a mix question?
Glenn G. Cohen
Yes. It just reflects back in the first quarter, we had an unduly large 40% new leasing spread driven by the Target taking over an old Kmart lease in Staten Island, New York, so that obviously averages way up in that first quarter.
David Harris - Imperial Capital, LLC, Research Division
So 4.5% is more your run rate number?
Glenn G. Cohen
As we've generally talked about, a mid-single digit leasing spread in this environment to be a good run rate absent any more significant macro issues. There'll be pluses and minuses every quarter as there always are, but trend lines, I think, second quarter reflects where we are as a portfolio.
Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division
And any comment on CapEx, leasing CapEx, is that sort of pretty much running at similar?
Glenn G. Cohen
It remains relatively consistent actually this year on -- slightly lower than the first half of last year, but again it was nothing that implies any structural shift in dealmaking.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to David Bujnicki for any closing remarks.
David F. Bujnicki
Thanks, Andrew, and to everybody that participated on our call today. As a final remember, our supplemental is posted through our website at kimcorealty.com.
Thanks, so much.
Operator
The conference is now concluded. Thank you for attending today's presentation.
You may now disconnect.