Earnings Call Transcript
KIMCO REALTY CORP (KIM)
Earnings Call Transcript - KIM Q3 2020
Operator, Operator
Good morning, and welcome to Kimco’s Third Quarter 2020 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. David Bujnicki, Senior Vice President, Investor Relations and Strategy. Please go ahead.
David Bujnicki, SVP, Investor Relations and Strategy
Good morning and thank you for joining Kimco’s third quarter 2020 earnings call. The Kimco management team participating on the call today include Conor Flynn, Kimco’s CEO; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, our CFO; David Jamieson, Kimco’s Chief Operating Officer, as well as other members of our executive team that are also available to answer questions during the call. As a reminder, statements made during the course of this call may be deemed forward-looking. And it’s 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. During this presentation, management may make certain references to some non-GAAP financial measures that we believe help investors better understand Kimco’s operating results. Reconciliations of these non-GAAP financial measures can be found in the Investor Relations area of our website. With that, I’ll turn the call to Conor.
Conor Flynn, CEO
Hello, everyone, and thank you for joining us. Today, I will give updates on how, as one of America’s largest owners and operators of open air, grocery-anchored shopping centers and mixed-use assets, our strategy is enabling us to successfully navigate and actively manage our portfolio to offset the impact of COVID-19, how we see the evolving retail landscape, and how we are keeping focus on our longer-term objectives for creating sustainable growth and shareholder value. Ross will cover the transaction market and Glenn will discuss our performance metrics. Both our short and long-term strategies share two overlapping principles within the evolving retail landscape. First and foremost, Kimco’s product type, open air, grocery-anchored shopping centers and mixed-use assets in well-located markets are where retailers want to be and consumers want to go. We see it in our traffic data, our leasing pipeline, and highlighted as the product of choice by retailers on their respective earnings calls. This reality has become even more pronounced during the pandemic, where, as I will discuss shortly, the open-air format is so conducive to both online and physical delivery. Second, but no less important, is that the last mile store is more critical than ever to the retailer supply chain, acting as a hub for profitable distribution and fulfillment as the demands and needs of the consumer continue to evolve. With these core principles in mind, our short-term strategy is simple: block and tackle, collect and lease, assist our tenants, and tenaciously stay on top of our costs. The good news is that we have been focused on this strategy for quite some time, well before the onset of the pandemic. So our team has been ready, tireless, and efficient in executing on it. And our results reflect these efforts. While Glenn will provide more detail, our portfolio has remained resilient during the pandemic, with occupancy currently at 94.6%. We are seeing a pickup in leasing demand, and our leasing pipeline is starting to build to a level we experienced pre-COVID. We anticipate a faster recovery for anchor occupancy versus small shops and for essential retailers versus nonessential ones. Of particular note, our strategy to focus on grocers has been spot on, as grocery anchor demand for space is surging. Over the past five years, we have upgraded Kimco’s portfolio from 64% to 77% grocery-anchored and have outlined the strategic plan to reach 85% to 90% grocery-anchored over the next five years, with over 10 new grocery opportunities currently in negotiation. In addition to growth in grocery demand, e-commerce sales across our retailer Rolodex have exploded and created a powerful halo effect on our existing store locations. Driven by changing consumer demand, the need to improve margins in data analytics, our tenants are transforming their store operations and expansion plans to include shipping and fulfillment. Tenants like Target, Costco, Walmart, Best Buy, Home Depot, Lowe’s, Dick’s and many others continue to expand omni-channel programs like buy online, pick up in-store and curbside pickup. These programs have proven the most cost-efficient way to deliver goods to consumers while satisfying the customers’ desire for quick and safe access to products. This is worth emphasizing. We don’t believe there is a one-size-fits-all solution to the last mile challenge, and we need to recognize how each retailer determines how best to serve their customer base. For Kimco, helping our tenants in the last mile is one of our highest priorities, and that’s why our portfolio and our team are well-positioned to retain tenants by helping them optimize their stores to provide for shopping, shipping, and pickup. Our dedicated team is also focused on identifying new opportunities and location voids for certain retailers and redevelopment potential. These experienced personnel employ a mix of old school networking and market research and new school data analytics to help tenants find opportunities for profitability and growth. Our overriding philosophy is that retailers are our partners. By listening to their concerns, engaging with them, and helping them maximize the profitability of their space, Kimco continues to be their partner of choice. Perhaps hit the hardest are small shop tenants who often simply do not have the resources to hang on. That’s where Kimco continues to step up. Unwilling to wait to see who will stay or go, we are in daily dialogue with our retailers to listen to their needs and challenges, and to see how we can partner to help them navigate the situation. Our Tenant Assistance Program initiatives have been a welcome sight for these tenants. Whether we help tenants pay for legal costs, provide health and financial information on our website, locate vendors to facilitate tenant acquisitions of outdoor heaters, or expand our national curbside pickup program, we are letting our tenants know we are in this together as they fight to continue to succeed. We can’t save every tenant, but we can do our part to make sure we help those that want or need a fighting chance. As the world learns how to live with the virus, our team is working tirelessly to welcome tenants and customers back to our centers while making them feel safe in a new shopping environment. In times of crisis, we want to make sure our retailers know which landlord picked up their call and which landlord called them. We are confident in our portfolio, our team, our improving rent collections, our liquidity position, and our balance sheet. At a time when many are looking for rescue capital to help carry them through this disruption or to bolster their balance sheet, Kimco’s sector-leading liquidity puts us in a unique position. Our ability to monetize a portion of our investment in Albertsons, which currently sits as a marketable security worth over $550 million, is a clear differentiator and gives us tremendous optionality in the future. I continue to be humbled and impressed with how our team at Kimco has rallied around our strategy to navigate the COVID challenge and how they are also able to focus on the long-term as we position Kimco for the future. As for the long-term, we continue to add to our war chest of entitlements and believe downturns are often a great opportunity to expedite them, as local governments are often more willing to accommodate these projects. We believe our five-year goal of securing 10,000 apartment units is certainly achievable and that these entitlements can provide future opportunities to unlock embedded value. Our development and redevelopment pipeline is now at a five-year low. Similarly, in the transaction market, we continue to witness a wide disconnect between the public and private valuations for well-located grocery and home improvement anchored open-air shopping centers. Open air centers in our well-located areas of concentration continue to trade at a cap rate range of 5% to 6%, which is clearly at odds with our current valuation. While purchasing our core product does not make economic sense given our current cost of capital, we also outlined our capital allocation strategy for the next year and how we plan to invest accretively by taking advantage of the lack of liquidity in the commercial lending market. In closing, our consumers are comfortable with the shopping center experience. Together with our tenants, we make the shopping center a safe and easily accessible destination for goods and services. We know we have the right assets, a diverse tenant geographic mix, a strong balance sheet, and the entrepreneurial spirit to not only survive but thrive during this pandemic. Ross?
Ross Cooper, President and CIO
Thank you and good morning. Following up on Conor’s commentary, we continue to see aggressive pricing for high-quality, primarily grocery-anchored product, albeit at a much lower transaction volume. Multiple trades occurred in the third quarter throughout the country at sub-6% cap rates in Pennsylvania, Northern California, and Florida, with another high-quality asset trading in Los Angeles at a sub-5% cap rate. For the right location and tenancy, there is still strong demand and an abundance of capital available. The biggest impediment to deal volume is the continued pullback in the market from traditional lending sources. With cash flow uncertainty and general concerns stemming from the pandemic, it has never been more important to have strong sponsorship, quality tenancy, and substantial liquidity. And as Conor alluded to, we see that as a tremendous differentiator and opportunity for Kimco. With our cost of capital elevated and institutional quality property cap rates remaining at all-time lows, there is a clear disconnect between public and private pricing, making it difficult for us to identify and acquire traditional retail centers accretively. So for now, we will continue to remain disciplined. However, we do expect the pricing dislocation to eventually change, and when it does, we will be opportunistic where we can invest capital at a spread to our cost while getting our foot in the door on prime locations that match our view of quality and downside protection. While the traditional acquisition market remains stalled, we are seeing and evaluating opportunities to provide either preferred equity or mezzanine financing on infill core MSA locations with strong tenancy and existing sponsorship. These owners need value-add capital to either redevelop the asset with signed replacement leases in place or bridge the gap on refinancing an asset that has a near-term debt maturity. Historically, this would have quickly and easily been funded by traditional lenders or CMBS. In this environment, finding that additional financing is not as easy, and we have sourced a few great assets where we can provide assistance. As part of our investment approach in this area, we seek a right of first offer or right of first refusal in the event the owner looks to sell the property. If the asset performs as expected, we collect a double-digit return and get paid off in a relatively short hold period. If the downside scenario occurs, we ensure that we have conservatively underwritten the properties so that we’re very confident stepping in and owning or operating the asset at a comfortable basis of less than 85% current loan-to-value. Given current market conditions and the expectation that it will remain this way into 2021, we anticipate this deal structure will become a key component of our investment strategy next year. While the instances of these deals are still infrequent as we sit here today, our expectation is that the opportunity set will substantially increase into next year, as lenders start to realistically assess their existing collateral and prepare to take necessary impairments on their balance sheets. As always, we will be judicious with our capital and selective with how we deploy it. That said, we do believe this program can unlock attractive yields and potentially add desirable properties to the future Kimco portfolio. With that, I will pass it along to Glenn for the financial summary.
Glenn Cohen, CFO
Thanks, Ross, and good morning. Our third quarter operating results have improved as compared to the second quarter, with higher rent collections and lower credit loss. We are also opportunistic in the capital markets and have further extended our debt maturity profile. For the third quarter 2020, NAREIT FFO was $106.7 million or $0.25 per diluted share, meeting first call consensus, as compared to $146.9 million or $0.35 per diluted share for the third quarter 2019. The change was mainly due to abatements and increased credit loss of $28.3 million as compared to the third quarter last year. Credit loss recognized in the third quarter 2020 was a significant improvement from the second quarter 2020 credit loss of $51.7 million. Our third quarter FFO also includes a onetime severance charge of $8.6 million or $0.02 per share, related to a voluntary early retirement program offered and the organizational efficiencies from merging our southern and mid-Atlantic regions. We also incurred a charge of $7.5 million or $0.02 per share from the early redemption of $485 million of 3.2% unsecured bonds, which were scheduled to mature in 2021. A year earlier, in the third quarter 2019, we had a preferred stock redemption charge of $11.4 million or $0.03 per share. Although not included in NAREIT FFO, we did record a $77.1 million unrealized loss on the mark-to-market of our marketable securities, which was primarily driven by the change in our Albertson stock. We also sold a significant portion of our preferred equity investments, which generated proceeds of over $70 million and net gains of $8.4 million, which were also not included in NAREIT FFO. With regard to the operating portfolio, all our shopping centers remain open and over 98% of our tenants are open and operating. Collections have continued to improve from the second quarter 2020 levels. We collected 89% of base rents for the third quarter, including 91% collected for the month of September. This compares to second quarter collections, which improved to 74%. In addition, we collected 90% for October so far. Furloughs granted during the third quarter were 5%, down from 20% from the second quarter. Our weighted average repayment term for deferrals is approximately 8 months and will begin to be repaid meaningfully during the fourth quarter 2020. Thus far, we have collected 87% of the deferrals that were billed in October. Now let me provide some additional detail regarding the credit loss for the third quarter 2020. We recorded $25.9 million of credit loss against accrued revenues during the third quarter, which included $17.1 million related to tenants on a cash basis of accounting. There was also an additional $4 million reserve against non-cash straight-line rent receivables. As of September 30, 2020, our total uncollectible reserves stood at $74.8 million or 39% of our total pro rata share of outstanding accounts receivable. Total uncollectible reserve of $45.8 million is attributable to tenants on a cash basis. At the end of third quarter 2020, 8.4% of our annual base rents were from cash basis tenants. During the third quarter, 51% of rent due from cash basis tenants were collected. In addition, we also have a reserve of $25.8 million or 15% against the straight-line rent receivables. Turning to the balance sheet, our liquidity position is very strong, with over $300 million of cash and $2 billion available on our revolving credit facility, which has a final maturity in 2025. We also own 39.8 million shares of Albertsons, which has a market value of over $550 million based on the closing price of $13.85 per share at the end of September. Subsequent to quarter end, Albertsons declared a dividend of $0.10 per common share, and we expect to receive $4 million during the fourth quarter. We finished the third quarter with consolidated net debt-to-EBITDA of 7.6x, and on a look-through basis, including pro rata share of JV debt and preferred stock outstanding, the level is 8.5x. This represents essentially a full turn improvement from the 8.6x and 9.4x levels reported last quarter, with the improvement attributable to lower credit loss. We expect further improvement next quarter as well. We were active in the capital markets during the quarter as we issued a 2.7% $500 million 10-year unsecured green bond and a 1.9% $400 million 7.5 year unsecured bond. Proceeds were used to repay the remaining $325 million on the term loan obtained in April 2020, fund the early redemption of the 3.2% $485 million bonds due in May of ‘21, and fund the repayment of 2 consolidated mortgages totaling over $70 million. It is worth noting that our credit spreads have continued to tighten since the issuance of these bonds, with the 10-year bond trading more than 40 basis points tighter. As of September 30, 2020, we had no consolidated debt maturing for the balance of the year and only $141 million of consolidated mortgage debt maturing in 2021. Our next unsecured bond does not mature until November of 2022. Our consolidated weighted average maturity profile stood at 11.1 years, one of the longest in the REIT industry. Regarding our common dividend during 2020, so far, we have paid $0.66 per common share, including a reinstated common dividend of $0.10 per common share during the third quarter 2020. It remains our expectation to pay cash dividends at least equal to 2020 REIT taxable income. As such, we expect our Board of Directors will most likely consider declaring and paying an additional common dividend during the fourth quarter. And with that, we would be happy to take your questions.
Operator, Operator
The first question comes from Rich Hill with Morgan Stanley. Please go ahead.
Rich Hill, Analyst
Hey, good morning guys. First of all, kudos for providing a cash flow statement, I think that’s best-in-class and I wish your peers would do it as well. I do want to focus on the cash flow statement, because I think it’s really important and provides a tremendous amount of transparency in a market like this. And it looked like to us, there was a real nice cash flow ramp that maybe isn’t even captured in the FFO numbers, which looked pretty much in line, but the cash flow ramp looked really impressive. Can you maybe just back up and help us understand what’s driving the cash flow ramp? Is it collection of deferrals? Is it less bad debt? Is it rent collections? Is it all of the above or is there one thing that we should specifically be focusing on as we think about modeling?
Glenn Cohen, CFO
Rich, it’s Glenn. I mean, clearly, during the third quarter, you have rent collections that are much higher than where they were during the second quarter and you have a much lower reserve number. The reserve number is over $10 less. There are also some timing things that come into play also, the timing of when you’re paying bonds and things like that. So you have payables, and that moved around a little bit. But the bulk of the increase is really driven by really the rent collection increase.
Conor Flynn, CEO
Yes, there wasn’t much deferral collection in Q3. We will see that ramping in Q4.
Rich Hill, Analyst
Got it. And just one question on the deferral and then I have one more final question. Did you say 87% of deferrals granted in October have already been collected? Did I hear that right?
Glenn Cohen, CFO
Yes. 87% of what we billed, so the deferrals that we billed in October, 87% of those deferrals have been paid.
Rich Hill, Analyst
Got it. Thank you. And then, Conor, maybe this is a question for you, but as you think about where you stand today and as of the end of 3Q versus where you stood in 2Q ‘20, that cadence of recovery back to whatever normal is, but let’s call it 1Q ‘20, do you feel like you’re on track? Do you feel better than where you did previously? How – can you just walk us through sort of your sentiment on the recovery to normal?
Conor Flynn, CEO
Yes, Rich, happy to. I think when you look at back in Q2 and what we talked about with our Board, the trajectory of how things could play out, and we gave multiple different scenarios to them, we feel that we are trending towards that A, B scenario versus the C, D scenario. And I continue to think where we’re trending in between the A, B, if you look at our collections and you look at the leasing volume and you look at the retention rate and the collection on deferrals, the collections on the portfolio. We’ve done a lot of work over the past few years to put ourselves in a position to be a high-quality owner to be a landlord of choice, and I think it’s starting to shine through on the portfolio metrics. And so there’s a lot of unknowns, obviously, still to come. But we feel like the trajectory is right about in between that A, B scenario that I mentioned before.
Glenn Cohen, CFO
Yes. And if you – it’s Glenn again, if you think about what you have seen, right? We had $0.37 of FFO in the first quarter. That was relatively a normal quarter where we were. Obviously, the second quarter was the hardest hit. We were at $0.24. And if you think about the third quarter, if you take out the onetime charges of the severance and the early repayment of the debt, we would really be at $0.29. So you are seeing that ramp. And it really has to do with the fact that rent collections are improving and reserves are decreasing. So if the trend continues into the fourth quarter, we expect to see further improvement from there.
Rich Hill, Analyst
Thank you, guys. Again, I really appreciate the transparency on cash flow.
Operator, Operator
Thank you. The next question comes from Juan Sanabria with BMO Capital. Please go ahead.
Juan Sanabria, Analyst
Hi, good morning. Thanks for the time. I was just hoping you could spend a little time on the bad debt, and kind of help us think about how that’s trending. What’s been the key variable in decreasing? Obviously, the amount of collections have improved, but I think, in particular, with the Street would be interested in kind of expectations for the fourth quarter. And maybe just some insights into the accounts receivable past due, how the different buckets are shaping out 30 days, 60, 90 days, just to give us a sense of what to expect going forward?
Glenn Cohen, CFO
So let me try and answer it a little bit. I tried to address it in my prepared comments. If you think about where we are, collections have certainly improved. If you look at where – what we’ve reserved so far. So we reserved – when we think about our total outstanding receivables, 39% of that number has been reserved. Again, if collections continue to improve, if it’s going to be somewhere in this low 90s range, then we would expect reserves in the fourth quarter would be less than what they were in the third quarter. So again, as we were saying earlier, we are seeing improvement. But again, it is premised on the fact that rent collections continue and that we don’t have another round of shutdowns. In addition, we have started to build some of the deferrals and the deferral collection, as I mentioned, was 87% for what we billed in October. So, if that trend continues again, we think that’s another positive but it is going to depend on the rent collections.
Juan Sanabria, Analyst
Great. Thank you. And then just on the whole omni-channel e-commerce and the groceries that, Conor, you mentioned trying to ramp up that exposure there, just trying to think about, how are you guys able to monitor and track what’s going on via the omni-channel or e-commerce side of the business versus what’s going on in the four walls and making sure you get your fair share? I know it’s been something that’s been discussed for a while, but you’re seeing more of the grocers dedicate space to online pickups. Just trying to see how you guys are thinking through that as – particularly as you try to increase your exposure to the grocers over time?
Conor Flynn, CEO
Yes, sure. I think one thing you have to remember is the lion’s share of our rents are fixed rents. So we don’t really have the percentage rent clauses that some of the more mall-type landlords would be accustomed to. So even though we are focused on helping our tenants maximize their sales within the four walls, even though we’d love for them to be able to count the omni-channel sales as part of the four-wall profits, which they are starting to do in many cases, we wouldn’t necessarily participate in that upside. It just gives more value to the lease that they have with us because they’re more profitable out of that box. And so what we have done is focused on curbside pickup, focused on making sure that they optimize their store, that it becomes more of a fulfillment and distribution point. In our dialogue with them, we go through space by space within our portfolio and analyze which stores are already optimized and which ones need a reset to be able to fulfill and distribute from that store. And the nice part is the lion’s share of our anchor spaces have already optimized their stores. There are a few that are lagging a little bit behind. But the blueprint is out there, and that’s why we’re being very proactive and very aggressive talking to our retailers to make sure that they know that, as a landlord, we will co-invest with them to optimize those stores, making sure that they see what we’ve done on the curbside pickup program that we want them to do inside their four walls.
Juan Sanabria, Analyst
Thank you.
Operator, Operator
Thank you. The next question comes from Greg McGinniss with Scotiabank. Please go ahead.
Greg McGinniss, Analyst
Hey, good morning. David, I wanted to dig into leasing a bit more, given the large footprint of the portfolio, are you seeing material differences in leasing productivity based on geography? For example, if you give some insight into rent spreads in the Northeast versus the south or really any other insights that would be appreciated?
David Bujnicki, SVP, Investor Relations and Strategy
Yes, sure. No problem. Appreciate the question. So, as we went through Q3 and looking ahead into Q4, we are starting to see a healthy improvement in the deal pipeline and the volume of new activity. As Conor mentioned in his prepared remarks, we anticipate that the anchor well-capitalized tenants will be the front-runners in that expansion. They’re utilizing this opportunity, similar to the Great Recession, to expand their market share, upgrade the quality of their portfolio, and really double down in locations where they’ve seen great production and realizing as well that being closer to the customer is a value to them. And so we have seen that with off-price, we have seen that with grocery. Ironically, actually, discount lower-cost fitness has taken this opportunity despite the distress of that sector to look at opportunities to expand as well. On a geographic basis, it’s pretty well evenly spread. We have seen both the Northeast, the South, and the West Coast start to really accelerate their deal flow even on the small shop side with the well-capitalized tenants, the corporate tenants and some of the franchisees that are looking to expand. So it’s pretty well balanced. As it relates to spreads, it’s always a quarter-by-quarter item related to which deals qualify for comp spreads. So you’re always going to see some movement related to that. And a spread number could be driven by one or two individual deals, either up or down. So – but generally speaking, when we look out and we saw the high levels of retention this past quarter as well between renewals and options, which are very much in line with our historic rates, we felt really confident that the quality of our portfolio is clearly a benefit to these retailers. Again, this is the opportunity where a retailer has a choice. They can either renew, exercise an option, or look elsewhere. And fortunately, they’ve chosen to stay. And they say that when you look at our spreads related to renewals and options, they’re in the high single digits, which is sort of the high watermark of our historic trends as well. So we’re cautiously optimistic and encouraged by the activity, but we have to stay extremely focused and be out in front with these retailers to ensure that we’re part of their expansion plans.
Greg McGinniss, Analyst
Thank you, David. And then maybe shifting gears a little bit, Glenn, with the 87% deferral collection in October, just curious how that tracks against your expectations on payback and what’s been reserved against on the deferral side?
Conor Flynn, CEO
So our total deferrals during the third quarter, there’s a reserve of 29%. In terms of the 87% collection, again, I think we – it’s pretty much in line. We thought it’s probably right around where we thought it would be, maybe around 90%. And we’re not done. It’s just as we sit here today, that’s what we’ve collected so far. So it should improve a little bit further. But again, most of the tenants that we’ve provided those deferrals to were tenants we thought we would be able to collect from for the most part, large or high-quality tenants. So that seems to be coming through here.
Greg McGinniss, Analyst
Okay, thank you.
Operator, Operator
Thank you. The next question comes from Derek Johnston with Deutsche Bank. Please go ahead.
Derek Johnston, Analyst
Hi, everybody. Good morning. Thank you. Excuse me. You guys are in an enviable position regarding liquidity and flexibility. And in this environment, as we appear to be emerging from, hopefully, the worst of the pandemic, when do you shift to offense? And thank you for the opening color on private markets still being somewhat frozen and likely persisting into 2021. So when it comes to capital priorities for Kimco, how are you favoring the mezzanine loans Conor mentioned, ramping redevelopment, continued de-leveraging, or potentially buybacks?
Conor Flynn, CEO
Sure. We can divide and conquer that question. I think there was a lot in there. So look, for – as we outlined earlier on our capital allocation strategy, we get our daily cost of capital, and obviously, our cost of capital is extremely elevated in this time. And it makes buying our traditional product type, our grocery-anchored shopping center in our top 20 mega markets almost off the table in many ways because it just doesn’t even come close to meeting our cost of capital requirements. So what we found is that there are opportunities to provide rescue capital or transformational capital where high-quality real estate is in the midst of a redevelopment or in the midst of a refinancing of a construction cost coming out for permanent financing, and they don’t have the full vote to be able to cover the refinance. And so that’s where we can come in with some strategic capital to exceed our cost of capital and get our foot in the door if that asset were ever to trade. That’s where we see our unique set of investment opportunities in the near-term. We continue to prioritize leasing. We continue to think that that is going to be number one, number two, and number three for us as where our capital is going to go. We do have a tremendous amount of dry powder, but we want to make sure we are careful. We’re still not through the pandemic. I think today, we just hit over 100,000 cases. So we clearly recognize that we’re going to have an elevated amount of cash on the balance sheet going forward just to continue to give ourselves plenty of cushion. We pushed out our debt maturity profile, as Glenn mentioned. We continue to survey the landscape for opportunities. We have a lot of deep-pocketed investors that want to partner with us. And so we continue to monitor the situation, but recognize the fact that we have to batten down the hatches, lease like crazy, get our cash flow back to where we think it should be and then continue to mine for opportunities. As we’ve done in the past, when the tide goes out, we have been opportunistic. And there’s been a lot of kicking of the can by lenders, and we’re being patient to see when people start to face the music.
Glenn Cohen, CFO
Yes. I would just add to – I think Conor covered most of it. But the way that we envision this program given the, as you quoted, enviable liquidity position, we do believe that this program is still playing offense, albeit at a different way than we’ve done it historically. And the nice thing that we really like about this program and the differentiator for Kimco is the fact that, as I mentioned, there’s still an abundance of capital for the grocery-anchored institutional quality type assets. And given the fact that there’s still a lot of demand for that product with our elevated cost of capital, it makes that program extremely challenging. The differentiator for Kimco on the preferred equity and mezzanine program that I mentioned, is that there are very few high-quality operators like Kimco that have the liquidity to play in that space. So when we find ourselves on these few examples that we’re working on going up against potential competition, it’s hedge funds, it’s more opportunistic debt platforms. So when Kimco steps in, with our track record and our ability to operate in the event that the downside scenario comes into play for the senior lender, they very much welcome Kimco’s participation. So we found it to be a very nice fit while also hitting our elevated yield hurdles. So it’s a very nice balance that we think could be a great place for us to put out accretive capital in ‘21.
Derek Johnston, Analyst
Okay, great. Great color. Thanks. And then leasing, leasing, yes. So it’s been a real bright spot. So I will just continue with that. And not just for Kim, but even for other peers that have reported. So it’s obviously encouraging and really ahead of what our internal plans and thoughts were outside of normal cyclical recession impacts that everybody kind of understands or believes they understand. Are there any positive secular trends that may be at play here since leasing seems to have popped back, pushing close to near pre-COVID pipeline levels?
Glenn Cohen, CFO
In terms of trends, I look at sort of what retailers are doing today and sort of what does that lead us, how does that lead us into the future and what new opportunities will emerge as a result. To the credit of the retailers, they’re extremely innovative. They continue to see how the customer is changing, how their needs of their store format and footprint are changing. Obviously, we’ve talked about omni-channel for years now. So in our dialogues with the retailers, we’re just continuing to see that evolution play itself out, and what that’s creating our multiple store formats for grocery stores or off-price or others that are starting to appreciate the use of, say, micro-fulfillment or distribution out of the store, trying to penetrate maybe more urban areas, so they’re shrinking the size of their footprint, but also then appreciating as a result of this online distribution that in some locations, they actually need to now expand the footprint. So the dialogue is pretty well balanced between optimizing it for efficiency and smaller to expansion or in larger to address this fundamental need. And so these are all trends that, again, they’ve been playing themselves out. I think COVID itself has just accelerated what was already in process and so it pulled that forward by a few years. Curbside, for example, we’ve talked about for years. Overnight, it was a necessity, and we deployed it at over 300 centers to support that effort. So I think we’ll just continue to see the emergence of a lot of the trends that have been sort of in its infancy continue to expand and grow. For us, that’s really encouraging, and that’s exciting to be part of that process. How do we continue to work with them, to innovate and change? And now more than ever, the retail partnership between us and them, and then the retailers to retailers are so important because we’re all servicing the same end customer, which is that shopper, and how to create the best experience for them.
Conor Flynn, CEO
But the only thing I would add is that we are watching a pretty significant demographic and population shift out of the major metros to like that first and second ring, which is where our assets are located. So we are cognizant of the fact that some of it might be short-term, but I think a lot of it may be long-term where we stand to benefit from the increase in population and migration. And I think that bodes well, not only for the retailer demand for our space but also the redevelopment potential for our shopping centers long term. When we talk to our retailers, they are very clearly weighing their expansion plans to that first and second ring, which is where our portfolio is positioned. So I think we are positioned well for both the short-term and the long-term.
Derek Johnston, Analyst
Good stuff. Thanks.
Operator, Operator
Thank you. The next question comes from Michael Bilerman with Citi. Please go ahead.
Michael Bilerman, Analyst
Yes, thanks. You talked about sort of this grocery penetration in terms of lifting it to that 85% to 90% level from the high 70s today. And you talked about having 10 grocers that you’ve either leased or closing to lease to start your way to that level. And I want to know, as you think about going from 77 to the high 80s, how much of it is adding grocers, and I don’t know if you have to add like 40 grocers, how much of it is selling assets that don’t have grocery potential? And then maybe you can sort of dig into those 10 leases that you’re doing because I would assume those are new grocer boxes. How do the terms of those? How are they being built out? What type of excess land are you attaching to them for curbside? Just as we enter this new world of new leasing, I sort of want to see how different it is versus the past or how similar it is relative to the past?
Conor Flynn, CEO
Yes. It’s a good question, Michael. So – and Dave can chime in as well on the leasing side. But on the 85% to 90% target over the next five-plus years, it is a fixed portfolio, so we actually don’t have a disposition number in that. So it’s literally just leasing up two grocery stores on an asset that doesn’t currently have a grocery anchor. Obviously, if we do take on a little bit more dispositions in time of non-grocery anchored assets, that may boost it even further. But I was just looking at the existing portfolio today and wanted to know which of our assets lend themselves to grocery repositionings. And Dave and his team have outlined the path to get to that 85% to 90%. And then on the deals in the pipeline, Dave can give a bit more color on that.
David Bujnicki, SVP, Investor Relations and Strategy
Yes. So in terms of the conversion of the boxes, it varies case by case and what the needs are. For example, the Lidls and the Aldis of the world are targeting a smaller footprint. Sprouts, in the not-too-distant past, had modified their footprint from 30 down to sort of that mid-20 range. But they’re still being very aggressive in looking at anything within that square foot category. So they can grab market share and be flexible and adapt to the needs of the customer. And then when you go into the larger-sized formats, you talk about the Krogers, the Albertsons of the world, and what they’re doing, they’re still very much in that larger format, the 40,000 to 60,000 square foot range, dependent on the brand. And they’re really accelerating the use of distribution and fulfillment out of the store. So in terms of having to modify the shopping center to accommodate those needs, there’s not a massive change or transformation in the dialogue because we’re able to accommodate curbside today as we were yesterday. There may be some modifications to expansion or contraction of the footprint depending on the grocery themselves. In terms of deal structure, it can vary between a ground lease scenario, lower rent, lower cost, to something that’s more capital-intensive. And we just look at the economics to determine what makes the most sense. But I wouldn’t say there’s been anything that’s been materially different aside from just obviously the growing demand. And when you think of the grocers, to their benefit, they’ve had this surplus of cash that they’ve received as a result of COVID and the necessity of grocery and the stay-at-home trend. And so fortunately, they’re able to now to use that cash surplus and really make the investments that they were either targeting and now can pull forward or they’re already planning to do and just continue to strengthen their position in the market and the service offering to the customer.
Michael Bilerman, Analyst
Thanks for that. And then, Ross, I want to come back to this press mezz program that you’ve been talking about. And you sort of quoted, you said double-digit returns and an 85% LTV sort of mark to leave it at the borrower default on that, that’s where you’d be in the cap structure. And I just wanted to better understand sort of the double-digit return that you’re talking about. How much of that cash pay upfront, how much is picked, how much may be an amortization of fees or structuring? Because a double-digit return seems quite – it’s good, but it seems quite high relative to probably how those assets are performing from a cash flow perspective to be able to generate that type of return for Kimco.
Ross Cooper, President and CIO
Yes. No, absolutely. And what we’ve seen thus far, there’s certainly no one-size-fits-all. These deals are all a bit unique with various dynamics that are occurring. The few deals that we’ve seen that we’re working on currently do have a majority of that double-digit return that is paid current. And there is plenty of cash flow currently within those assets to support that with the remainder that will accrue and be paid pick. When we look at these deals and why the borrowers or the partners are willing to pay that return is really because they’re not in a position where they need to or really want to sell the asset today. It is much more challenging to negotiate an acquisition price and see the capitulation between buyer and seller to acquire the site outright versus them expressing a willingness to pay a somewhat elevated interest rate on a small piece of the capital stack that they view to be short-term. And as I mentioned in many of these cases, it’s for a very specific purpose. So one of the transactions that we’re working on right now is a former Sears Box, where there’s $25 million of capital needed to redevelop that part of the property with executed leases with TJ Maxx, Burlington, and Five Below. Now historically, that would have been funded by a construction loan at a relatively inexpensive rate. Today, it’s much more challenging for the borrower to find that. So they’re willing to pay a double-digit interest rate for that redevelopment because the value creation that will occur once that’s completed is far in excess of the short-term high-interest rate payment that they have to pay to us. So that’s just one example of where we are seeing it. Another example is on a very high-quality asset that was just recently constructed, urban location, New York metro. And there is a construction loan that once it was put in place was at a much more comfortable LTV than what the lender believes it is today. So as that construction debt is maturing, we’re coming in with a $10 million to $12 million piece to bridge the gap between where the new permanent financing is coming in and where we can help them take out the rest of that construction loan. So again, it’s a asset that we understand to be extremely high quality, with tenancy that we know will perform in any part of the cycle or mid-pandemic, post-pandemic. But just that additional capital to bridge the gap is not there in the environment today.
Michael Bilerman, Analyst
And should we expect like, I don’t know, $200 million, $100 million? What should we expect in terms of deployment for this?
Conor Flynn, CEO
Michael, it’s really too early to tell because we’re not sure the size of the opportunity set. And so what we’ve done is we’ve aligned ourselves with a number of partners that would like to align themselves with Kimco because of our underwriting and capabilities to manage the property in the worst-case scenario. But we’re starting to see a drift in. We thought it actually would come sooner, but we’re being patient and we’re waiting for these opportunities. So for now, anyway, it’s sort of a case-by-case scenario where we’re being disciplined in looking at what could this look like. We’re not sure yet.
Glenn Cohen, CFO
Yes, I think the word that really does come to mind, and Conor just said it, is discipline. We’re working on two of these deals right now. We’ve passed on dozens. So at the end of the day, it doesn’t differ from our core acquisition strategy in the sense that we are going to be very focused on the underlying real estate, very focused on the downside scenario. And if we have to come in and step in as an operator and own this, that we’re very comfortable having that become a part of the Kimco portfolio. It’s not a program to chase yield. It’s a program to get a very attractive yield, but get our foot in the door on high-quality real estate that we would be very comfortable and happy to own if that scenario played out.
Michael Bilerman, Analyst
Okay, great.
Operator, Operator
Thank you. The next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.
Caitlin Burrows, Analyst
Hi, good morning Just a question back to Albertsons. Could you talk about just your latest thoughts for the holding? So I guess do you expect to be a long-term holder given the kind of optionality you said in terms of what could be sold in 2021? And do you think it would be to sell the shares only if you had an expansionary use, such as acquisitions or development? Or would you sell sooner and use the proceeds for something like debt pay down to the extent that you could?
Conor Flynn, CEO
Yes. Again, Caitlin, we have a lot of optionality with it. As Ray mentioned, the first 25% doesn’t become unlocked until really the end of this year. So we don’t expect to do anything for the rest of this year. And then we will evaluate it as we go through 2021. Again, if there’s a good source for us to do something accretive, we would use that capital to do that, including debt paydown.
Caitlin Burrows, Analyst
Okay. And then just the portion back to kind of the rent collection topic. The portion of the rents in the bucket of the – to be decided and collected under negotiations seems like it’s roughly like 6% to 8% of each of 2Q, 3Q and October rents. So I was wondering what sorts of tenants are included in this category? And what’s the outlook for getting these resolved?
Conor Flynn, CEO
Yes. So in terms of the – go ahead, Dave. No, go ahead.
David Bujnicki, SVP, Investor Relations and Strategy
Alright. So yes. In terms of the open accounts, it is within the categories that you could probably expect: restaurants, theater, some fitness, entertainment, etc. So we continue to work through those individuals and helping them structure a program lease modification program that works for them and works for us as well. But there is also a sizable amount that’s related to outstanding billings and real estate taxes. And a good majority of that is typically tied to your larger national tenants that have a period of time in which they do a review, ask questions, and then eventually, it’s reconciled and paid. And that could lag up to 60 days or so on average. So you would see that there are some of those account – open account items that would fall into that category.
Caitlin Burrows, Analyst
I guess as a quick follow-up to that. Could you just say then, does that suggest that normal rent collection – I feel like we have not ever talked about it before 2020, but that normal rent collection isn’t quite 100% right away and that some sort of lag is normal?
David Bujnicki, SVP, Investor Relations and Strategy
Yes, yes. Great question. Glad you actually asked it. So our historic average on collections is actually never really 100%. It’s around 95%. So when you think about where we are today, in that 90% to 91% range, we are not that far off from what we have historically collected and what we anticipate collecting when you use 95% as really your ceiling. So there’s always a component of there that’s outstanding, that’s in dispute or may not be collected as a result. So when you put that back into context, you started to get a sense. We are getting fairly close. We are not – to where our historic norms were.
Caitlin Burrows, Analyst
Okay, thank you.
Operator, Operator
Thank you. The next question comes from Floris Van Dijkum with Compass Point. Please go ahead.
Floris Van Dijkum, Analyst
Thanks and good morning guys two quick questions, I guess. Number one is what is your billable rents in the third quarter relative to your first quarter? And what is your recurring – so what I was trying to figure out is, what is your recurring revenue in the third quarter relative to your recurring revenue in the first quarter?
David Bujnicki, SVP, Investor Relations and Strategy
Yes, Floris. It’s David Bujnicki. The billable amounts have not changed dramatically from the first quarter to where it is now. If anything, it may be because of rent fallout from some of the tenant bankruptcies. But outside that, if you try to get back to that denominated change, it really hasn’t changed much at all, because even our cash-based tenants, as we have increased them, we still accrue that rent and show us a billable piece, and then we take it as part of the reserve. That has not during the quarter.
Glenn Cohen, CFO
Right. So to Dave’s point, the cash basis tenants during the third quarter, embedded in that $25.8 million reserve, there’s $17 million of reserve that relates specifically to the cash basis tenants. So if you think about that, if you didn’t have that accrual, you would have $8 million, $8.5 million of reserve, right? And we are just showing it gross up so that the denominator really hasn’t changed all that much. Again, your denominator is low the tenants that would fit the tenant fallout that you have from the bankruptcies.
Floris Van Dijkum, Analyst
Okay. Let me ask you one other question. And obviously, Ross, thanks for giving your views on cap rate development. I think that was – obviously, as we are looking at the stocks, they appear to be trading at a big discount. I was curious to get your views on M&A in the sector. When – what do you think will trigger it? And also, maybe, Glenn, if you can give your views on, at some point, if this discount persists, when do you start to think about buying back stock? What would be the trigger for you to do that?
Ross Cooper, President and CIO
Yes. I mean I think as it relates to M&A, it’s always a bit tricky. We have done it five different times in the past in the company’s history. We continue to stay very focused for – Kimco purposes on location, geographic quality, etc. So the discipline will remain there. We will continue to monitor the landscape, but it’s a very challenging environment for that. Particularly when you look at, as I mentioned, the landscape in terms of financing, it makes it very challenging for any sort of privatization in the market as well. So while it looks like the opportunity could be right just based upon the discount to NAV, it still becomes a very challenging endeavor that we will see how things play out as we round into ‘21 with some of the companies out there.
Glenn Cohen, CFO
As far as the buyback, again, we are very, very focused on liquidity. We’re very focused on bringing our net debt-to-EBITDA levels down in this environment. Again, and we are still – us and everyone else, no one is fully out of the woods yet with this virus. I mean, today alone, you had a new – 100,000 new cases reported. So no one knows the full impact of what’s going to happen. And I think it’s prudent to just be very cautious at this point. So again, having liquidity is crucial. And until we have real clarity that we are moving back in the full right direction, I think it’s very important to just hold on to your liquidity.
Floris Van Dijkum, Analyst
Thanks guys.
Operator, Operator
Thank you. The next question comes from Chris Lucas with Capital One. Please go ahead.
Chris Lucas, Analyst
Hey good morning guys. Sorry to keep the call going. But I just had two quick ones. Dave, just on the sort of on your inventory of space that’s come back to you in the last couple of quarters, how does that match up to sort of where the demand is in the market?
David Bujnicki, SVP, Investor Relations and Strategy
Good question. So on the anchor space side, the Stein Marts had filed, and we’re going to see that fall out this quarter. That’s very well in line with a lot of the off-price and the grocer activity that we’re starting to see in the market. In the mid shop size, that 8,000 to 12,000 range, you’re seeing the likes of five Below, Alta and others that are actively expanding, including the Dollar stores. So that is a bright spot and encouraging. On the small shop side, we will start to see – again, the recovery on the small shops will be more prolonged, a little bit slower, but when you see service-oriented tenants, medical, health care, that’s a growing category that fits well in the small shops, as well as some of the very well capitalized quick service fast food restaurant opportunities as well. I mean, they’re seeing opportunities here to expand their footprint. So that’s where we are seeing the alignment that works out well. And – but it’s – I’d say the inventory is fairly consistent to what we have seen historically. It’s just right now, we’re obviously seeing more of it in a shorter period and I think though, fortunately, we will start to see, because of the higher quality, we’ll see that absorption accelerate pretty quickly as we move into ‘21 and ‘22.
Chris Lucas, Analyst
And then, Glenn, just a quick one for me, on the bankrupt tenants, how much did they contribute in terms of revenue to reported results for third quarter?
Glenn Cohen, CFO
So the bankrupt tenants account for approximately 2.3% of our ABR for the third quarter for the third quarter.
Chris Lucas, Analyst
Okay great. Thank you.
Operator, Operator
Our next question is from Samir Khanal of Evercore. Please go ahead.
Samir Khanal, Analyst
Good morning. Just one for me here, from a modeling standpoint on G&A, what’s the run rate we should be thinking about? I know you had a couple of moving parts there with the streamlining of the businesses in a different region?
Glenn Cohen, CFO
Yes. So we took, as I mentioned, Samir, about an $8.6 million charge during the quarter related to the voluntary retirement program that we offered, plus the merging of the 2 regions. It will probably have an impact going forward of about a $4 million, $5 million a year reduction in G&A. You’ll start seeing it towards the middle of the second quarter next year as everything winds down and it gets completed.
Conor Flynn, CEO
Samir, there’s two other real modeling things, as you keep in mind. One of them relates to cap interest burn off as our development and redevelopment projects have scaled down, and the other is our equity and income from other real estate investments. Glenn, maybe you can give a little color on that.
Glenn Cohen, CFO
Sure. So on both of those points, our redevelopment and development pipeline is probably the lowest it’s been in about five years. So you have this burn-off of the cap interest. So we would expect next year, cap interest will probably be about half of what it was. So that’s probably around a $7 million less number next year. And then as I mentioned, we sold a pretty large portion of the preferred equity investments that we still hold. And so if you look at the balance sheet, you’ll see that we sold about 40% of those. And the recurring income on those would probably be about $4 million to $5 million less next year. So those 2 items account for about probably $12 million or so of less FFO going forward.
Samir Khanal, Analyst
Thanks guys. That’s it for me.
Operator, Operator
Our next question will come from Vince Tibone of Green Street. Please go ahead.
Vince Tibone, Analyst
Hi, good morning. I would like to come back to the commentary you provided on cap rates. Just cap rates may not have changed much since COVID, but NOI expectations are certainly lower today versus where they were in January. So I wanted to hear some color on how buyers are typically underwriting NOI today compared to 2019 levels. And do you have a view how much asset values have fallen all-in this year?
Glenn Cohen, CFO
Yes. No. It’s definitely a very specific undertaking that each organization takes. We have an extremely robust risk and underwriting group. And certainly, in this environment, you want to make sure that you’re protecting your downside. So I think it’s fairly common in this environment that buyers and anybody that’s evaluating cash flow is being very conservative. Looking at a space-by-space analysis, determining the credit, the actual tenancy that you have in place, what type of services they perform or provide. And lots of buyers are structuring around that, whether it be looking for certain escrows or holdbacks. And there’s a variety of ways to skin the cat to ensure that you’re protected. But there’s no doubt that pegging the NOI that you’re capping today is the biggest challenge in terms of underwriting and getting comfortable. And frankly, that also, in addition to the lack of financing, is a big gap in the bid-ask between buyers and sellers, is coming to a determination and an understanding of what that appropriate NOI is today. It would be very difficult to specify what a decrease in value is pre and post-pandemic. I would say what we’re clearly seeing is that the bid-ask spread is much more narrow for the essential-based retail properties, grocery, home improvement being 2 categories that are still transacting at pretty close to pre-pandemic levels. And you’re seeing that widen out pretty significantly when you get outside of the essential-based retail. So I think that it’s – where previously it was grocery versus power or core versus non-core. The analysis today is the percentage of income coming from essential-based retail versus nonessential. And that’s really the biggest differentiating factor in underwriting today.
Vince Tibone, Analyst
Got it. That’s helpful color. Is there any debt available for power centers today? Or is it kind of come back to just the essential mix and some of the stuff you touched on?
Glenn Cohen, CFO
There is. It’s very dependent upon the tenancy and the location of that power center. We did see one transaction occur last week. It was a grocery-anchored power center, but the grocer was a relatively small component of the property. And from my understanding, the buyer closed with 65% LTV interest-only debt at low 3% interest rates. So when you have the right tenancy, you can find that, but it is more challenging today than it’s been in the past.
Vince Tibone, Analyst
Got it. One more super quick one for me. Just – it looks like operating expenses were up 8% year-over-year in the quarter, whereas most of your peers cut OpEx in the mid single-digit range. So does that increase at all attributable to some of the internal restructurings or is there something else Kimco may be doing differently than their peers?
Glenn Cohen, CFO
No, Vince. It really had to do a timing issue more than anything else. We deferred a bunch of cap projects in the early part of this year, especially with the pandemic, we also holding off. So this is where – during this quarter, you saw a lot more of that coming through. Yes meaning on the recovery as well.
Conor Flynn, CEO
Yes. I mean if you look for the nine months for the year, it’s basically flat.
Vince Tibone, Analyst
Yes. No, I just wanted to see if it was more, but – I mean, it sounds like it’s a one-time issue anyway or a catch-up around some of the charges related to.
Conor Flynn, CEO
There is also some expenses related to things we did around COVID that we needed to do as well. So that’s all factoring in. But as Glenn mentioned, for the year-to-date, we’re consistent with where we were last year.
Vince Tibone, Analyst
Okay great, thank you for the time.
Operator, Operator
Ladies and gentlemen, at this time, we will conclude our question-and-answer session. At this time, I’d like to turn the conference back over to Dave Bujnicki for any closing remarks.
David Bujnicki, SVP, Investor Relations and Strategy
Great. We just want to thank everybody that participated on our call today. As a reminder, our supplemental and our investor presentation is posted to the IR website. Thank you very much, and enjoy the rest of your day.
Operator, Operator
Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect.