Earnings Call Transcript
KIMCO REALTY CORP (KIM)
Earnings Call Transcript - KIM Q2 2021
Operator, Operator
Good day. And welcome to the Kimco Realty Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Dave Bujnicki. Please go ahead.
Operator, Operator
Good morning. And thank you for joining Kimco’s second quarter 2021 earnings call. The Kimco management team participating on the call today includes 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 Kimco’s 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 reference to certain 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. Also, in the event our call incurs technical difficulties, we’ll try to resolve them as quickly as possible, and if need arises, we'll post additional information to our IR website. With that, I’ll turn the call over to Conor.
Conor Flynn, CEO
Good morning, and thanks for joining us. Today, I will focus my remarks on our operating results, the supply and demand dynamics surrounding those results, the strategic direction we are taking the organization, and the powerful position Kimco will have upon the closing of our merger with Weingarten. Ross will then provide some perspective on the transaction market and Glenn will provide additional financial insight on the quarter along with our updated guidance. As I’ve often mentioned, our core focus has been and will continue to be on leasing that fuels our growth, validates the quality of our portfolio, strengthens our balance sheet, reduces risk, and is a catalyst to overcome pandemic-induced disruption. Our second quarter leasing activity and overall results continue to build upon the success that began earlier this year, as we leased 1.8 million square feet and signed 333 leases. This leasing included 139 new leases for GLA exceeding the prior sequential quarter. Overall occupancy finished at 93.9%, up 40 basis points, while our new leasing spreads of 9.2% and renewal spreads of 4.7% resulted in a record 42 quarters, or 10 years in a row of positive spreads. The combination of record leasing demand and a five-year low of new vacancies continues to drive the earlier than anticipated occupancy recovery for Kimco. Traffic at our properties is back to 2019 levels and the healthy leasing market reflects the reopening of the economy. The rush by tenants to capture market share is apparent as they pursue our high-quality locations. Moreover, in our attractive and strategically selected markets, we do not anticipate any material new supply in the near-term to impact our pricing power. Robust demand for anchor space continues across our portfolio. Centers with a grocery component have outperformed during the pandemic and continued to lead the rebound. We’re also seeing data on restaurants that show people are eager to go out and eat again, with the Sunbelt states showing outperformance. Similar trends with fitness, where traffic is coming back quickly. On store openings, off-price continues to be a leading source of demand, but we’re also seeing solid demand for furniture, home goods, pet supplies, hobbies, health and wellness, including discount fitness, just to name a few. Our anchor occupancy finished the quarter at 96.9%, up 70 basis points, which is the single largest quarterly gain since we started reporting anchor occupancy 10 years ago. Demand for small shops also continues to recover, albeit at a slower pace. The demand for small shops is now building, coming from franchise quick service restaurants, beauty, hair and nail salons, medical and other services. While small shop occupancy did finish down 30 basis points to end at 5.5%, it was impacted by the inclusion of Dania Phases 2 and 3 in the occupancy. If not for this, small shop occupancy would have actually increased sequentially by 30 basis points during the second quarter and we remain confident that the smaller tenants will gradually accelerate their demand for space, as they gain comfort that the recovery from last year’s severe disruption is sustainable. Further, the importance of being a last-mile solution for a multitude of potential tenants continues to grow. Our mission-critical last-mile brick-and-mortar locations will prove to be durable solutions for consumers, retailers, and many other businesses that want scale and reach to serve the end consumer. One silver lining of the last year and a half is that it showcased the strength of our repositioned grocery-anchored portfolio, the resiliency of our cash flows, and the strength and diversity of our strong mix of high credit tenants. As our occupancy recovers, we anticipate EBITDA and FFO growth will follow and bolster our balance sheet metrics. We are also in a unique position to drive earnings results with multiple levers for growth, led by our continued emphasis on leasing and attractive redevelopment opportunities. On the strategic front, the completion of our accretive merger with Weingarten is fast approaching and ahead of schedule. The shareholder votes are scheduled for August 3rd, and subject to customary closing conditions, the closing should occur shortly thereafter. With Weingarten’s portfolio combined with Kimco’s, we will have even more confidence in our ability to drive significant and sustained value from this concentrated platform of open-air, grocery-anchored and mixed-use assets in the leading MSAs across the country. Touching further on the power of the merger, the combined company will continue to focus on operating a dynamic and well-diversified portfolio in these markets, but with greater scale, resources, and embedded opportunities. We expect that the complementary business operations will allow us to extract annualized cost efficiencies while deleveraging our balance sheet. It is important to reiterate the scale and reach we will have with our targeted first-ring suburbs of core markets across the Sunbelt. Together, we’ll have approximately 550 open-air, grocery-anchored shopping centers and mixed-use assets comprising more than 100 million square feet of gross leasable area. At closing, approximately 82% of the company’s total annual base rent will be derived from strategic Sunbelt growth markets and high-barrier-to-entry top coastal markets. The combined platform will also have a highly diversified strong credit tenant base, with the top 10 tenants being all essential, industry-leading grocers and best-in-class retailers, with no single tenant representing more than 4% of ABR. Given that we are not completely out of the pandemic woods yet, with the reality and threat of new strains, we believe the combined portfolio, strong balance sheets, and battle-tested team puts us in an even better position to withstand any disruptions to the ongoing recovery. Looking beyond the closing, the Weingarten portfolio brings a largely funded and de-risked development pipeline and presents vast potential in the form of embedded untapped redevelopment from which we believe we can extract incremental value. Ultimately, we believe this creative combination will result in enhanced financial strength, with the flexibility and resources to efficiently capitalize on the value creation opportunities ahead. While we will be quantifying the impact until after the transaction is closed; we are highly energized by the opportunities in front of us to maximize value for shareholders. In closing, our team is motivated and executing. As we look forward, our ability to create value will be enhanced in the coming years by our last-mile fulfillment opportunities, with high growth, high-quality, open-air, grocery-anchored shopping centers and mixed-use properties that will enable us to realize substantial operating benefits. With that, I will turn the call over to Ross.
Ross Cooper, President and Chief Investment Officer
Good morning, and thank you, Conor. As the recovery from the pandemic continues to take shape and the essential nature of our open-air shopping center locations becomes more apparent, the capital flowing to the space also continues to significantly increase. A well-capitalized private equity investor recently told me, there’s only so much sub-4% cap rate industrial and multifamily products we can buy. The risk-adjusted return for high-quality open-air retail products has become increasingly evident. We have seen this sentiment play out in the transactions market this quarter, and the momentum continues to build. We have seen it in portfolios and one-off centers alike. Leasing velocity and renewal rates have given investors confidence in both the stability and future upside of existing cash flows and rent rolls. With capital abundant on both the equity and debt side, and with interest rates declining even lower recently, a very accommodative environment for deal flow exists. This includes a recently closed grocery portfolio in the Philadelphia MSA, a diversified portfolio of retail assets in Phoenix, one-off grocery deals in South Florida, New Jersey, several in Southern California and Atlanta to give a few examples. As we see brokers starting to report results, it is clear 2021 is on track to be one of the highest production years for the industry. There is no question that appetite for open-air retail is voracious. We continue to be opportunistic, yet selective and disciplined in the investments we make. In the second quarter as an addition to our structured investments program, we invested approximately $55 million in a preferred equity position into The Rim, a dominant retail, entertainment and mixed-use district having over 1 million square feet of GLA located in a fast-growing San Antonio market. The property has consistently been the number one most heavily trafficked center in all of Texas, with exceptional tenant sales to support the property. We are extremely excited about the upside of this investment, which was made at an attractive current yield and reasonable basis, along with a right-of-first-refusal to buy the center in the future. Another recent success is the sale of two Rite Aid distribution centers in California that were acquired by our taxable REIT subsidiary earlier this year in a sale-leaseback transaction. When we completed the sale of these two properties at a price of $108 million, it represented a significant increase from the $84 million paid just five months earlier and generated a 72% IRR for Kimco on this investment. As we carefully consider capital allocation and disciplined investment opportunities, we believe that selective acquisitions, structured investments, and partnership buyouts will continue to present themselves at the appropriate times. Now to Glenn for the financial results for the quarter.
Glenn Cohen, CFO
Thanks, Ross, and good morning. Our solid second quarter growth is fueled by continued improvement in rent collections, low credit loss, and very strong same-site NOI. Our strong leasing efforts combined with an improving economy produced a sequential uptick in occupancy and another quarter of positive leasing spreads. In addition, as EBITDA has increased, our debt metrics have also improved. Now for some details on second quarter results, NAREIT FFO was $148.8 million, or $0.34 per diluted share for the second quarter of 2021, which includes merger-related charges of $3.2 million or $0.01 per diluted share in connection with the anticipated merger with Weingarten. This compares to $103.5 million or $0.24 per diluted share for the second quarter of the prior year. The significant growth was mainly driven by increased pro-rata NOI of $44.7 million comprised of lower credit losses from potentially uncollectible accounts and straight-line rents of $15.9 million, and higher lease termination income of $2.7 million. These increases were offset by lower minimum rent and reduced tax and real estate tax recoveries due to lower occupancy compared to the same quarter last year. The improvement in credit losses attributable to our increased cash collections as we are approaching pre-pandemic rent collection levels. During the second quarter, we collected over 96% of pro-rata based rents billed. We also collected over 77% of rents due from cash basis tenants during the second quarter, up from 70% collected in the first quarter. Further, collections of prior period amounts from cash basis tenants totaled $7 million during the second quarter of 2021 versus $1.8 million collected during the same period in 2020. Our cash basis tenants comprise 8.8% of total annualized base rents. In addition, we collected almost 90% of the deferred rent billed during the second quarter. At the end of June, we had approximately $25.4 million of deferred rents remaining to be billed over the next 12 months, and 64% of this demand is reserved. As Conor mentioned, the operating portfolio delivered significant improvement in the second quarter, with a sequential increase in occupancy and positive leasing spreads. Our same-site NOI growth including redevelopments was 16.7%, including a 30-basis-point uplift from these voids. This is the first positive quarter of same-site NOI growth since the first quarter of 2020 and should be the start of a recurring trend. Another positive indicator is the increase in the spread of lease versus economic occupancy, which now stands at approximately 300 basis points, up from 230 basis points last quarter and represents $33.4 million of pro-rata ABR. The spread bodes well for future cash flow growth. Turning to the balance sheet, at the end of the second quarter, consolidated net debt-to-EBITDA was 6.3 times. On a look-through basis, including pro-rata share of joint venture debt and pro-rata preferred stock outstanding, the metric was 7.1 times. These metrics are better than the pre-pandemic levels at the end of 2019. From a liquidity standpoint, we ended the second quarter with over $230 million of cash and full availability on our $2 billion revolving credit facility. We will be using cash on hand and a portion of the revolver to fund the cash component of the Weingarten merger consideration and transaction costs. In addition, our Albertsons marketable security investment was valued at close to $800 million at the end of June, and there are no plans to monetize any portion of this investment during 2021. During the second quarter, we repaid $120 million of mortgage debt, unencumbering an additional 23 assets. We have no consolidated debt maturing from the balance of the year, and our next bond maturity is not until November of 2022. Our weighted average consolidated debt maturity profile stands at 10.7 years, one of the longest in the REIT industry. As for joint venture debt, we have only $53 million maturing for the remainder of the year, with refinancing alternatives already identified. With respect to the outlook for the balance of the year, based on our first half 2021 operating results and expectations that include ongoing improvement in credit loss and same-site NOI growth, we are again raising our NAREIT FFO per share guidance range to $1.29 to $1.33 from the previous range of $1.22 to $1.26. This new range is presented on a standalone basis and does not incorporate any impact of the pending merger with Weingarten, other than the $3.2 million or $0.01 per diluted share of merger-related charges incurred during the second quarter of 2021. Assuming the merger is complete during the third quarter as anticipated, we will provide updated guidance on a combined basis on our next earnings. Lastly, with respect to our common dividend, shortly after the merger is completed, the Board of Directors expects to declare a regular quarterly cash dividend, which will be payable during the third quarter. And now we’d be ready to take your questions.
Operator, Operator
We’ve been advised to keep this call focused on Kimco’s second quarter results and the outlook as a standalone company. More information will be forthcoming once this transaction closes, which we anticipate will be shortly after the completion of the respective meetings of stockholders, which is on August 3rd. In terms of the Q&A, we want to make this an efficient process. You may ask a question with an additional follow-up. If you have additional questions, you’re more than welcome to rejoin the queue. Tom, you can take the first caller.
Operator, Operator
Thank you. The first question comes from Craig Schmidt with Bank of America. Please go ahead.
Craig Schmidt, Analyst
Thank you. Obviously enjoying the improved results, but I just want to know if the recent spike in COVID-19 cases and some of the breakthrough cases are giving any of your tenants or retailers hesitancy regarding longer-term leasing decisions?
Conor Flynn, CEO
Yeah. Craig, it’s a great question, obviously, top of mind for all of us right now. The Delta variant, as we know, is running across the country. But we haven’t seen any meaningful change in terms of our outlook or views. Right now, obviously, all markets are open, and a lot of lessons have been learned over the last 16 months of how people have adapted to sort of a new normal and how you shop and access those retailers. As evidenced by our occupancy gains this quarter, retailers continue to look for new opportunities to expand as they prepare for the new normal within 2021, 2022, and 2023.
Craig Schmidt, Analyst
Great. And then a follow-up question, it’s probably for Ross. Regarding the increased transaction market for neighborhood, community, lifestyle, or power centers, which are you seeing the biggest pickup in activity in transaction, and which are seeing the lowest rise in transactions?
Ross Cooper, President and Chief Investment Officer
Yeah. There’s no doubt that grocery-anchored infill shopping centers are in very much demand right now. As I mentioned in the prepared remarks, you think about the risk-adjusted return, the spread on high-quality grocery-anchored centers in the high 4s to the low 5s, and you’re still getting a good 100 to 125 basis points spread compared to some of the other asset classes. So we’re starting to see a lot of both private and some of our public peers getting much more aggressive on that product type and we think that will just continue. We aren’t seeing more activity on power and lifestyle; there’s not as much that we’ve seen transact as of yet. But with the improvement in the economy and the improvement in retailer sales, we are seeing much more conviction in some of those categories that you see in lifestyle centers, such as restaurants, entertainment, and fitness really coming back and solidifying themselves. So I think that there’s just a lot of demand for all product types right now within open-air retail.
Craig Schmidt, Analyst
Okay. Thank you.
Operator, Operator
The next question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.
Juan Sanabria, Analyst
Hi. Good morning. Just hoping you could spend a little time talking about the assumptions behind collections of past due rents and your reversals of bad debt for the balance of the year. And if you could just go over what was in the second quarter as the numbers you went through in your prepared remarks were pretty quick paced?
Glenn Cohen, CFO
So in terms of what we collected $7 million from our cash basis tenants from prior periods during the second quarter. As in terms of the outlook for the balance of the year, again, it’s still going to be a wait-and-see how it all goes. But collections, as I’ve mentioned, have improved. We collected close to 96% of our base rents. We collected 77% of the cash basis tenants that were billed during the quarter. So we’re going to have to wait and see for the balance of the year. We do have in the guidance, there is credit loss that’s still built into the numbers, the low end has about $20 million of credit loss built in. The high end of our range has about $5 million. So based on where things are today, we’re more comfortable, when we look at our guidance, towards the upper end of the range.
Juan Sanabria, Analyst
I apologize. I was on mute, surprise. But just if you could give a little color on Dania and how leasing is tracking there for the small shop space or where the demand is coming from and how you’re feeling about your underwriting there? Thank you.
Ross Cooper, President and Chief Investment Officer
Yeah. We actually feel very good about the direction that Dania is going with the new openings earlier this year with Urban Outfitters and Anthropologie. Later this summer, we have several other new openings on the horizon. We have American Eagle towards the end of the year, Regal, and the two Marriott flag hotels that will be opening this fall, as well as including some of the additional restaurant spaces. So there’s tremendous change in growth that’s coming from Dania as we started to get these other retailers open, and we have Sprouts that’s scheduled to open towards November, December of this year as well. Then followed by that, and obviously, it’s a strong leasing demand, as the economies have started to recover and people have really appreciated the location of this site along 995, with all the growth that’s happening in Fort Lauderdale market. We’re very encouraged by the direction of Dania long-term.
Conor Flynn, CEO
The only point I’d add is, Spirit Airlines is in procurement on their piece of the project, which is their headquarters that I think should be a nice component of the live-workplace environment that we’re building there.
Ross Cooper, President and Chief Investment Officer
And I want to add to that, Conor, that the second residential tower is also completed and ready to break ground shortly.
Juan Sanabria, Analyst
Thank you.
Operator, Operator
The next question comes from Rich Hill with Morgan Stanley. Please go ahead.
Rich Hill, Analyst
Hey. Good morning, guys. I wanted to come back to occupancy for a second, by all indications - and I think your prepared remarks support this - the leasing market feels pretty good. But I think a lot of the recovery depends upon how long it takes to get occupancy back to normal. I think your peak prior to COVID, and correct me if I’m wrong, was just a little bit higher than 96%. So while the trends look really good, I’m wondering if you can just comment on the path to getting back to pre-COVID levels. How long do you think that takes and what does that mean for a recovery in total NOI? Is that still a mid-2023 event, or do you think after this quarter that’s pulled forward to maybe late 2022?
Ross Cooper, President and Chief Investment Officer
Yeah. It’s a great question. Well, the path is really dependent on demand. So I think you have to start there and understand where the retailers are today and then what we anticipate going forward. I think for a few reasons, we’ll continue to see that this demand stays in pace. We will maintain pace from what we’ve seen in the last two quarters. One, the retailer, they’re still working through their numbers that they’re trying to achieve in 2020 and now in 2021. That creates a bit of a bottleneck as they are actively trying to expand and upgrade the quality of their portfolio to A quality sites with the new supply that’s obviously come online—not new supply, but the vacancy as a result of the pandemic. That has given them the opportunity. Second, many retailers were able to raise additional capital or right-size their balance sheets through the pandemic. When you look at grocers such as Fresh Market, which may not have been necessarily on an expansion mode pre-pandemic, they’re now starting to look at new stores and new locations to add grocery in new markets. You now have some new demand drivers on top of the pent-up demand from the existing retailers. Finally, other retailers are really testing new formats. We’ve learned so much in the last 16 months of how consumers respond to retailers and how they want to shop. So, you do have retailers like Container Store, which have been fairly set in their way regarding their store format, but now are looking at smaller formats and penetrating other markets as well. You’ll continue to see that as a demand factor. New concepts are emerging, like choice markets, which is trying to reinvent the C-store and adapt to more millennial trends. DoorDash has come out with DashMart, and so we’re starting to add new categories on top of what we’ve historically seen. I think that as long as you maintain those demand drivers, we’ll be able to make good progress in recovering our occupancy and getting back to what was our peak.
Conor Flynn, CEO
Yeah. Rich, the one thing I would add is just, the Kimco differentiator, I think, is our team, obviously, first and foremost. But then we’ve optimized the entire portfolio with the curbside pickup program. I think retailers are really resonating with that program. They’ve come to us and said it’s best-in-class. They want to do more sites with us. I believe that when you combine that with our team, it leads us to believe that occupancy is going to continue to trend in the right direction. Now we might see a pause next quarter because of some of the eviction moratoriums that are burning off, but we think there’s enough demand, obviously, there to backfill that. It’s led by the anchors, and we think that’s going to follow with the small shops. The anchored demand is diverse, which is great to see, and then the small shops should follow along after that.
Rich Hill, Analyst
Got it. Conor, just to push a little bit more on this. What I’m trying to get at is, is the trough just higher than what we anticipated, but the endpoint is the same? And if looking at your prepared remarks and your press release, where you talk about maybe stronger portfolio occupancy gains than what you were previously anticipating, that leads me to believe the trough is higher, but also the recovery is a little bit steeper. If I’m looking at that quarterly, is mid-2023 for recovery still valid, or is 2Q just a sugar high, leading to a higher trough?
Conor Flynn, CEO
It’s really, obviously, Rich, it’s hard to predict the future, especially with the Delta variant out there. What we’ve seen so far is that the demand is not subsiding. I think that timeline still holds true. We’ve got to execute and let the numbers speak for themselves. Right now, this quarter, it’s not a sugar high quarter, and we see the backup of pent-up demand occurring through the leasing pipeline that we’ve built up, and we believe that we can continue the momentum. Clearly, there are a lot of various factors that we can’t anticipate, but right now, we like what we see.
Rich Hill, Analyst
Okay, great, guys. Nice quarter. Thank you for the additional color. That’s it for me.
Operator, Operator
The next question comes from Michael Goldsmith with UBS. Please go ahead.
Michael Goldsmith, Analyst
Good morning. Thanks a lot for taking my question. Rent spreads on new leases accelerated further during the period. How much pricing power do you have right now, and can that continue to accelerate from here?
Ross Cooper, President and Chief Investment Officer
The leasing spreads are always totally dependent on the population that’s within that on any given quarter, but the supply-demand balance right now, where retailers are really looking to upgrade the quality of their portfolio, our efforts to right-size our portfolio to make sure that we own A-quality assets helps us maintain that supply-demand balance. We’re able to push rents on below-market pieces that we have. When looking at the lease expiration schedule in the next couple of years, those leases and those rents are below what our corporate average is right now. We still see the opportunity to push those rents further as well.
Conor Flynn, CEO
The demand for last-mile retail has come rolling back, and when you look at some of the tidbits that we’re hearing from tenants that are typically penny-pinching, they’re saying they’ll pay up for the locations that fit their needs. Clearly, the supply and demand dynamic has shifted in our favor, and with no new supply on the horizon, we do feel like we’ll have pricing power continue in our favor.
Michael Goldsmith, Analyst
That’s really helpful. As a follow-up, when retailers are looking to expand, what are they looking for specifically in their new locations? Are they focused on certain geographies? Are they focused more on first-ring suburbs or maybe more suburban areas? How does the expansion look, and where are you seeing that demand?
Ross Cooper, President and Chief Investment Officer
It’s retailer dependent based on their corporate strategy. So it’s what are the voids that they see in their program, and how are they trying to fill it? For example, you could have a grocery store that is either modifying their formats. Sprouts did that a couple of years ago, going from 30,000 square feet down to around the 22,000 to 24,000 square foot range. They’re looking at new box opportunities that are more prototypical to what they historically targeted. Others are looking to potentially expand the box to incorporate more last mile distribution, that Conor mentioned earlier or some other form of fulfillment. The first-ring suburb is really where we’re focused, and with the hybrid back-to-work model, there’s a balance between urban and first-ring suburban markets. We’ll continue to see that demand pick up in the first-ring suburbs. It’s difficult to provide a specific general answer because every retailer is looking at it a little differently based on what they’ve done historically and where they see these voids.
Conor Flynn, CEO
Retailers today have more data on their customers than they’ve ever had before, and they’re focused on how to best serve that customer. With the data they have, the last-mile store has become more valuable due to the pandemic. Retailers are revisiting spaces they may have previously passed on. There’s a lot of pent-up demand and voids that need to be filled.
Michael Goldsmith, Analyst
Appreciate it. Good luck on the back half.
Operator, Operator
Tom, next caller.
Operator, Operator
The next question comes from Katy McConnell with Citi. Please go ahead.
Katy McConnell, Analyst
Great. Thanks. Good morning, everyone. I’m wondering if you can provide a little more background on the Rite Aid transactions and the market dynamics that led to the quick monetization of that investment.
Ross Cooper, President and Chief Investment Officer
Sure. When we started the conversation with Rite Aid back in May of 2020, obviously it was a different environment. We stated publicly around that time that we were looking to be opportunistic. We felt that our balance sheet and liquidity position enabled us to do that. We were fortunate enough to negotiate favorable leases in terms of rent versus market, having annual increases that we felt were very attractive, and we saw demand for single-tenant products, particularly in the industrial space, so we wanted to maintain flexibility, which is why we bought it into the TRS. The market spoke, and there was good upside that we wanted to capitalize on with the monetization itself. It was a bit of a unique transaction, but we were excited about it, of course, and we’ll continue to look for those diamonds in the rough where they come.
Conor Flynn, CEO
Katy, you know, but others may not, that this really falls into our plus business, which we believe is a real differentiator for Kimco. We focus on retailers that are real estate-rich, and we believe we can unlock a lot of value for our shareholders through a differentiated strategy. We’re proud of it. We own a lot of Albertsons shares because of this strategy, and this is just another data point of why we think it’s a nice differentiator for Kimco to unlock value from retailers that are real estate-rich.
Katy McConnell, Analyst
Okay, great. And then bigger picture, can you provide some more commentary around what you’re seeing from an institutional capital perspective and the appetite to put capital to work in strips today, and maybe touch on your appetite to monetize assets if approached by your capital partners for more JV deals today?
Glenn Cohen, CFO
Sure. It’s voracious, as I mentioned in the opening remarks. There’s a significant amount of capital that was raised during this pandemic, and everybody was looking for distress, which did not materialize. Now, what you’re seeing is that a lot of that capital is focused on core. We’re in a pretty unique position that a lot of investors want to invest in retail but may lack the operational expertise. We’re fielding a lot of inquiries from institutional capital that want to invest in retail to take advantage of the need and utility of our open-air space. How they actually go about investing it is the question they’re asking. There’s plenty of capital looking for it, and we’re being very selective about where we put our capital and who we invest alongside. There are other investors that have substantial legacy retail investments, many of which are not necessarily in open-air retail, that are looking to reduce that exposure. That also becomes an opportunity for us, as they’re looking for what part of their retail investments are liquid in this market. Clearly, it’s the open-air neighborhood grocery shopping centers that are attracting a lot of capital that they know they can monetize, and we’re there to discuss that with them as well.
Katy McConnell, Analyst
Okay, great. Thanks.
Operator, Operator
The next question comes from Greg McGinniss with Scotiabank. Please go ahead.
Greg McGinniss, Analyst
Hey. Good morning. So I just noticed that renewal lease volumes were down from last quarter, but I assume that bucket is primarily driven by expiring leases and somewhat out of your control. Now that said, have you noticed any changes or trends with regard to tenant retention?
Ross Cooper, President and Chief Investment Officer
Yeah. So Q1 tends to have a higher renewal rate because that’s when more leases rollover, so you’re spot on there. It’s really related to the population on a given quarter about when their leases roll. As it relates to retention trends, they’ve been very strong, and people that have made it through the pandemic at this point feel good about the position they’re in. For us, as Conor mentioned earlier, we’ve done an extraordinary amount of work to provide a true Kimco advantage to be a retail partner within a Kimco center. Retailers have come to learn that their landlord matters, and if you’re well-capitalized, have vision, and are happy to test and experiment, it makes a big difference. For many of these small shops, this is their livelihood, and they’re investing a tremendous amount of sweat equity and their own money into the business. They want to make sure that whoever they’re aligned with is in partnership with them. This has helped us maintain high retention levels.
Greg McGinniss, Analyst
So that maintains retention then, or is it increased, like, versus pre-pandemic?
Ross Cooper, President and Chief Investment Officer
Our renewals have always been quite strong. I think it’s just stability proven.
Conor Flynn, CEO
The most sellers today are looking at their spaces and recognizing that the leases might be below market and that it might be very difficult to replace that location. Retention rates are high, and we feel confident in the portfolio, knowing that with the supply and demand dynamic, we don’t see that changing.
Greg McGinniss, Analyst
Okay. Thanks. And then, Juan, partially covered this question earlier. But, Glenn, I’m just curious how you’re thinking about switching tenants back to accrual-based accounting. Are you waiting to see what happens with the potential rising COVID cases right now, or could we start to see some of those reversals?
Kathleen Thayer, Analyst
Hey, Greg. This is Kathleen. I’ll take this one for you.
Greg McGinniss, Analyst
Okay.
Kathleen Thayer, Analyst
You’re right; there’s always a thought of what’s to come with a pandemic. Cash basis isn’t the kind of category where tenants can pop in and out of it from a GAAP perspective. There are criteria that need to be set. Generally, we look to see that the tenant remains current on their base rent for six to nine months. We’ll continue to monitor that trend. I do anticipate that in the second half of the year, there will be some of our tenants that make up that 8.8% of ABR that Glenn mentioned, who will be coming out of cash basis. Just something to keep in mind when thinking about that: just because a tenant comes out of cash basis, they need to be current on their rent. The impact that you’re going to see on credit loss is very minimal, because they’re actually paying. Where you may see some FFO impact really on the straight-line side, which, although I wish that was cash, is not. There could be an FSO impact from that.
Greg McGinniss, Analyst
Thank you so much for the clarity.
Operator, Operator
The next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.
Caitlin Burrows, Analyst
Hi. Good morning. In the beginning, in the prepared remarks, you touched briefly on the redevelopment opportunity that Kimco had. I was wondering if you could give more detail on the depth of that opportunity. I know you’re working on a number of large mixed-use projects, but even just the smaller ones—how much of that activity do you expect you could complete each year, and what types of projects are most appealing?
Ross Cooper, President and Chief Investment Officer
Sure. Hey, Caitlin. So on the redevelopment side, we continue to see a lot of opportunity. We continue to look for the highest and best use of our real estate. We’ve been averaging around 700 to 1,000 multifamily units a year that have entitlements. We continue to think that’s a great use of our sweat equity to create a future value opportunity on the asset and activate that when it’s best to do so. On the smaller redevelopment side, clearly, those are the ones we get the best bang for our buck, where we’re on average returning over 10% on invested capital. We’ll continue to monitor the portfolio for those opportunities. Typically, it’s adding a pad in front with a drive-through or expanding a shopping center in some way, shape, or form. Those continue to be around $80 million to $100 million a year of capital investment. We’d love to do more of that. Clearly, there are great returns on capital, and we’ll continue to look for those opportunities going forward. As you know, we’ve done a lot of work on entitlements already for up to 5,000 apartment unit entitlements; we continue to think that’s a great use of our time and effort going forward.
Caitlin Burrows, Analyst
Just to clarify, you mentioned on the smaller ones it was $80 million to $100 million per year?
Ross Cooper, President and Chief Investment Officer
That’s correct.
Caitlin Burrows, Analyst
Okay. And then maybe a question on leasing volumes. You guys pointed out that for the second quarter, historically, 2Q 2021 was 11% higher than the historical level. So I was just wondering if you expect the above-historical average leasing activity could continue through mid-2023 as occupancy comes back or do you think the current strength is more of a quick bounce back and then it could slow to more historical levels?
Glenn Cohen, CFO
I mean, obviously, when you hit a peak, it’s a peak. If we’d never achieved that level, we are very proud of the effort in Q2. To meet or exceed that any given quarter is obviously a big effort, so we’d anticipate being a little less. With the demand side, as we’ve mentioned earlier in some of our other marks, it’s very, very strong. We still anticipate growth over the next year and a half to two years within retail demand in place.
Ross Cooper, President and Chief Investment Officer
Caitlin, I think, the way we continue to think about it is, you’ll see anchors lead the way until it hits those historical high occupancy levels. Once that hits, you’ll hopefully see the small shops pick up the slack, and that’s the way we think about it. Typically, the small shops around an anchor lease up once the anchor has been leased, and that’s what we continue to think will play out.
Caitlin Burrows, Analyst
All right. Thanks.
Operator, Operator
The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Alexander Goldfarb, Analyst
Good morning. So two questions: first, on the cap rate side, you guys did the prep deal in San Antonio. As you see the acquisition market, are you seeing sellers reluctant to sell because they want to stabilize their NOI or do they view the cap rates to accelerate? In which case, should we expect to see more partial investments like prep deals or JV stakes with the option to buy out eventually, or do you see that sellers are willing to transact even though there’s a view that the fundamentals are getting better and that cap rates are going to continue to compress?
Ross Cooper, President and Chief Investment Officer
Every circumstance is a little bit different. There are plenty of owners willing to execute on dispositions. They see that the market is continuing to work in their favor. The financeability of these assets has never been greater with interest rates where they are. So it’s a very good time, if you’re a seller, to take advantage of low interest rates and cap rates. At the same time, there’s an opportunity for owners with the capital and financial wherewithal to reinvest in assets to stabilize cash flows if they've been down during COVID, depending on their tenancy. So you’re seeing decisions possibly being delayed for a period. You always have to compete with the opportunity for an owner to refinance their assets, as the financeability of those assets is very much available. Every circumstance is unique, but we’re finding plenty of opportunities. We believe structured investments with preferred equity and mezzanine financing will continue to be disciplined, only looking to invest in those assets where we feel good about the basis and our current return.
Alexander Goldfarb, Analyst
Okay. And then, the next one is—sorry for all the confusion. I didn’t go to CPA school. So I apologize on accounts receivable and reserved rents. But big picture, you’re collecting over 96% of the rents and yet you have 51% of your AR reserve. So big picture, it sounds like almost all your tenants are healthy operating. It’s just a matter of when you can get paid for past bills, whether that’s a payment plan or if you guys are going to say, 'Look, for a tenant who doesn’t have the wherewithal to pay back stuff, just wash that clean, pay the rent going forward.' I’m just trying to reconcile sort of north of 96% collected but you have 50% reserved?
Glenn Cohen, CFO
It’s a good question, Alex. To help you a little bit, 36% of AR is cash basis tenants that haven’t paid yet. A significant portion of the reserve is related to cash basis tenants. The reserve results from timing and our own policies around tax bills and disputes. Those are the two big pieces that make up the reserves.
Alexander Goldfarb, Analyst
Right. But basically some of those tenants are still in the portfolio. They may be paying you now. So when you say 96% collected in the second quarter, that includes cash basis. I’m just trying to understand?
Glenn Cohen, CFO
Yes, that includes the cash basis and what we didn’t collect. We collected 77% from cash basis tenants, and 23% was not collected. They’re all reserved.
Alexander Goldfarb, Analyst
Okay. So that’s the 36%, in other words.
Glenn Cohen, CFO
In total, when you look at total AR, 36% is related to cash basis tenants. We’re still accruing them; they’re just fully reserved.
Kathleen Thayer, Analyst
But that 36% is a cumulative number. So during when COVID was really high back in Q2 and Q3 of 2020, that AR wasn’t at 96%; it was actually in the high 80s. That balance is still sitting in AR, creating reserve.
Alexander Goldfarb, Analyst
Okay. Awesome. Thank you very much.
Operator, Operator
The next question comes from Wes Golladay with Baird. Please go ahead.
Wes Golladay, Analyst
Hey. Good morning, everyone. I just had a question on when you think paid occupancy will bottom and how much of an impact will the eviction moratoriums have on occupancy? Also, you still have a lot of abatements, about $5 million. When will those start to burn off?
David Jamieson, COO
The impact of that should be fairly small. There are obviously moratoriums on the West Coast that are still in place that I believe California lifts towards the end of September. We anticipate some modest impact on that but nothing significant.
Wes Golladay, Analyst
The second one was regarding the abatements. You still have some abatements running through the numbers, just seeing when those will end?
David Jamieson, COO
We anticipate those will start to trail through Q3 and Q4 as we’ve gone through the majority of the pandemic's impacts.
Conor Flynn, CEO
Just to give you a little bit of further color. The abatements booked during the third quarter were $5 million, but only about $2 million of that related to second quarter rents. We expect it to be lower as we go through the balance of the year.
Wes Golladay, Analyst
Okay, got it. Thanks for the color on that. And then, I guess, one more big picture question. Do you have a sense of what percent of the new leasing has been driven by demand that emerged during the pandemic, such as the last mile, the first-ring suburb, and is it more concentrated in shops or anchors at the moment?
David Jamieson, COO
The increase in occupancy of the anchors shows you can see demand more coming from the anchors. Only the small shops will pick up the slack. It’s hard to narrow it down to one specific category or pandemic demand versus general growth or adjustment to their retail strategy. It’s really a combination of all these things, referencing a few points made earlier, historic growth opportunities, expansion in new markets, and it all culminates into higher demand.
Wes Golladay, Analyst
Got it. Thanks, everyone.
Operator, Operator
The next question comes from Haendel St. Juste with Mizuho. Please go ahead.
Haendel St. Juste, Analyst
Hey. Thank you. I appreciate the comments earlier about your desire to pursue more preferred investments as they present themselves, but I haven’t heard any mention of the returns there. So maybe can you share more on the return on the investment in that The Rim asset, the $55 million there? What are the returns you’re targeting there, and how do they compare versus comparable asset quality acquisition deals? Thanks.
Ross Cooper, President and Chief Investment Officer
Sure. Each deal is an individual negotiation. But from a macro level, the difference between preferred and mezzanine financing is that we typically look for a high single-digit current return on our investment, but we participate in the back-end profit assuming that the asset performs. There’s usually back-end participation that can enhance that return into the teens from an IRR perspective. In the case of The Rim, it is a preferred equity investment. We have a very high single digit current return, but when we look at the opportunity on that asset and some of the things that we think can occur in terms of occupancy increases, we think we will certainly see some participation on the profit on the back end. We’re looking to achieve a minimum of teens IRR.
Haendel St. Juste, Analyst
Great, great. That’s helpful. Appreciate that. And just going back to Albertsons for a second, I am curious and understand there’s no need to tap into the stock here, given the lack of near-term debt maturities, the liquidity you talked about before. But I’m curious under what scenarios that thinking could change. Are you waiting more for opportunistic deals to perhaps fall in your lap, or is it waiting maybe another year or two as you start to approach some of those debt maturities? Just curious how you have this liquidity, how the available options that you’re considering could perhaps drive a change in thinking there? Thanks.
Ross Cooper, President and Chief Investment Officer
The good part, as you point out, is that there’s very little in terms of debt maturities in the near term. There’s no emergency or real need to monetize it today. Two, we also need to manage our re-taxable income position. The good news is — as we’ve talked about before — the built-in gain actually burns off next month. So the federal income tax piece will no longer be an issue. However, we still manage our re-taxable income. There are certain lockups related to our investment with our partner. In order to monetize it today, it would be subject to a marketed sale and in agreement with the rest of our partners. But come June 2022, there are no further restrictions on the investment. We know we have two preferred that are callable, and we have a bond that will come due. So there are plenty of opportunities to use that capital to further deleverage the balance sheet.
Haendel St. Juste, Analyst
Got it. Thanks, guys. It sounds like it’s more of a 2022 event at this point based on what you’re looking at. Okay. Thank you.
Conor Flynn, CEO
Sure.
Operator, Operator
The next question comes from Floris Van Dijkum with Compass Point. Please go ahead.
Floris Van Dijkum, Analyst
Thanks, guys. Quick, I guess, a follow-up question in terms of cap rates. I understand saying there’s a big institutional portfolio from Bentall Kennedy. I think it’s just trading or about to trade at an $800 million price tag, sub-5.5 cap rates from market sources. As you look at—we’re buying the Weingarten portfolio at higher cap rates. Do you think there’s a disconnect between private and public real estate? Can you maybe give some comments on that? What kind of implied cap rates are you valuing The Rim transaction at? You mentioned something about JVs. Obviously, your JV assets are better than others. As you look forward, is there an opportunity to buy out JV stakes in your portfolio and in the Weingarten portfolio, which has I think something like 39 or 31 or somewhere in that neighborhood of JV assets? If you could comment on that and do you have provisions for a right-of-first-offer in your JVs typically?
Ross Cooper, President and Chief Investment Officer
There’s no doubt that we think there’s still a disconnect between public and private pricing. When we look at NAVs of ourselves and some other peers versus transactions in the low 5s dipping into the high 4s, there is still very much a spread between those two. The BentallGreenOak portfolio is high-quality, grocery-anchored products, and it was not surprising to see strong demand and many bidders before this deal was awarded. We think we’ll continue to see more of that. As for partnership buyouts, it is something we have taken advantage of in the past. It’s difficult to model or predict when those opportunities present. Our partners have different horizons and reasons for exiting. We stay in close communication with our partners and have a good sense as to when they might look to exit or what might trigger that. We believe there will be some of that in the relatively near future. For these assets we’re managing and operating day in and day out, we’re the logical buyer; we can move quicker than others as we know the assets inside and out. It’s a win-win if it’s an asset we view as a long-term hold and a partner is looking to exit. We will see more of that as time goes on over the next year or so.
Floris Van Dijkum, Analyst
Thanks, Ross. Maybe do you see anything imminent happening in any of these potentially in your JVs over the next 12 months?
Ross Cooper, President and Chief Investment Officer
That’s very possible.
Operator, Operator
The next question comes from Mike Mueller with JPMorgan. Please go ahead.
Mike Mueller, Analyst
Yeah, hi. Just a quick one on guidance. It looks like ex the Weingarten charge, the midpoint of guidance went up around $0.08. I’m assuming about $0.02 of that is tied to the prior period collections. But can you walk through the major components of that increase?
Glenn Cohen, CFO
Sure, Mike. The bulk of it is coming from the improvement in credit loss. That’s really the driver. We had credit loss built in our guidance with the low end still at $20 million and the high end having about $5 million. So based on where things are headed today, we feel more comfortable towards the upper end of the range. That’s the primary driver of the increase.
Mike Mueller, Analyst
Got it. Okay. That was it. Thank you.
Operator, Operator
The next question comes from Chris Lucas with Capital One. Please go ahead.
Chris Lucas, Analyst
Good morning, everybody. Just two follow-up questions: Glenn, just going back to the guidance as it relates to the bad debt number earlier, over a range of $5 million to $20 million for the balance of the year. Are there any offsets to that, meaning prior period rent or deferral payments that are included in that sort of offset that number? Is that a gross number?
Glenn Cohen, CFO
No, it’s all built into that, Chris. We collected $7 million of rents from prior periods, but there were cash basis tenants that didn’t pay. The expectation in guidance is that at the high end of our range, we would incur around $5 million of credit loss and towards the lower end could be as high as $20 million, but we feel comfortable towards the upper end of the range.
Chris Lucas, Analyst
Okay. And just on the move from cash to accrual, the straight-line impact that was mentioned earlier is a possible tailwind. Do you have an assumption built in on that as it relates to your guidance as well?
Glenn Cohen, CFO
We haven’t built that in because we really don’t know who will move in and when we will move them. We have not built that in, but should we start moving some in, there would be an uplift from straight-line rent.
Chris Lucas, Analyst
Okay. And then last question for me, Conor, you’ve talked about tenant demand. I’m just trying to think through this whole process of how much insight you have. Given that retailers are making their open-to-buys this year for store openings in 2023 and 2024, what is your confidence level that this demand remains as strong as it has been in the first half of 2021?
Conor Flynn, CEO
We have been virtual for most of this pandemic and have been able to conduct virtual portfolio reviews with tenants on their expansion plans. A lot of retailers that are well-capitalized have actually come to us saying they need more deals for this year. It’s broad-based, which I like. Clearly, grocery continues to expand and is quite hot, but other categories are showing signs of solid recovery too. The most impacted categories such as entertainment, fitness, and restaurants have come back strong, faster than we anticipated. We believe that bodes well for the recovery in those sectors. Of course, we’re not out of the woods yet with the Delta variant causing uncertainty, but we have a battle-tested team ready to manage through this. The customers’ awareness of utilizing last-mile retail in various ways has increased tremendously.
Chris Lucas, Analyst
Thank you.
Operator, Operator
The next question comes from Linda Tsai with Jefferies. Please go ahead.
Linda Tsai, Analyst
Hi. Good morning. Based on your earlier comments, it seems like there’s a pull-forward of demand for core assets, given the validation of necessity-based grocery-anchored retail and low interest rates. How does that impact your view on potentially increasing disposition activity in this favorable environment?
Ross Cooper, President and Chief Investment Officer
It doesn’t move the needle for us. We look at the portfolio every day, every week. We consider risk, opportunity, and concern, and that truly motivates our decisions. We’ve worked hard to put the portfolio in its current favourable position and perform well. We’ll continue to prune where we see specific assets that don’t make long-term sense. But from a macro level, it doesn’t alter our decision-making as we feel confident in the portfolio.
Conor Flynn, CEO
We’re in a fortunate position. We’ve gone through a massive transformation of the portfolio, de-risked it, and we’re now at a sweet spot. We can identify sites flattish in growth to recycle capital. They’re not necessarily low quality, as some might be single-tenant type ground leases or assets where we’ve squeezed the juice out. We can leverage our disposition strategy to drive incremental growth.
Linda Tsai, Analyst
Thanks for that. And then when you think about last-mile distribution, it seems like most retailers start with making changes within the four walls of their existing boxes to accommodate on-site fulfillment. Are you seeing more retailers making physical changes to existing boxes versus physical expansions?
Ross Cooper, President and Chief Investment Officer
It’s either expansion or modification of utilizing the square footage within the four walls. Some examples are those that create a pickup point in front of the store; we’ve all seen it in restaurants or shops. Others are repurposing their back house for distribution and fulfillment. Each retailer is trying to do what’s best for them based on their setup. I believe we’ll see a hyper-efficient system as we progress.
Conor Flynn, CEO
We’re starting to see some tenants utilize adjacent spaces for sortation centers, which could create a new demand factor that we’ll monitor closely for influence on our demand.
Linda Tsai, Analyst
Thank you.
Operator, Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Dave Bujnicki for any closing remarks.
Operator, Operator
I just want to thank everybody that participated in the call. We hope you enjoy the rest of your day. Take care.
Operator, Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.