On The Tape Podcast – Fed’s Bitter Hands with Peter Boockvar, and a Conversation with Conor Flynn of Kimco Realty

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On this episode of On The Tape Guy, Dan, and Bleakley Financial Group CIO Peter Boockvar discuss central banks around the world hiking rates (1:50), Wall Street participants with diverging views on the stock market (6:18), moats around big tech (8:29) and how the market could get out of this period unscathed (14:33).

Later, Peter talks with Kimco Realty CEO Conor Flynn about his journey into the real estate industry (17:00), transforming Kimco’s portfolio of shopping centers to become more competitive (19:39), why grocery stores are a critical anchor for their properties (20:32), the cities and markets Peter is most bullish on, Kimco’s successful investment in Albertsons (34:28), and how inflation is impacting consumer traffic & purchases (41:00).

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Show Transcript:

Guy Adami: [00:00:00] CME Ad. [00:00:01][0.4]

Dan Nathan: [00:00:30] iConnections Ad. [00:00:31][0.3]

Guy Adami: [00:01:21] You’re listening to a bonus episode of On the Tape. I’m Guy Adami. I’m always joined by Dan Nathan and our good friend Peter Boockvar, of Bleakley Advisors and the Boock Report. We’re going to give you a preview of what’s to come in the markets this week. And later, check out a great conversation with Peter and Conor Flynn, CEO of Kimco Realty. Peter, how are you, my man? [00:01:43][21.5]

Peter Boockvar: [00:01:43] Hey, Guy. Hi, Dan. Thanks for having me on. [00:01:45][1.7]

Guy Adami: [00:01:45] It’s always great to have you back last week. Interesting week in the market. Lots taking place. Obviously. For me, the biggest news was an anticipated 75 basis point hike by the ECB. But as anticipated as that was, that’s the largest hike in the history of the ECB. And it comes at a time when Europe is an absolute mess. So through my lens I say, wow, think about the decisions they had to make. As bad as things are in terms of the economy, they still think inflation is such a huge problem that despite the economy, they had to make that raise. That speaks volumes as to what’s going on in the world. [00:02:21][35.3]

Peter Boockvar: [00:02:21] And that’s the case with all these central banks. ECB They have inflation north of 9% in the UK. It potentially can reach 20% with the reset of the energy caps. They put themselves in a very awkward position of waiting as long as they did, and now they’re trying to play catch up and there are consequences to that. On the flip side, with Europe negative rates essentially killed off the profitability of their banking system. So this may be at least as a lifeline to the European banking sector, which you can’t have a healthy economy unless you have banks that are profitable and willing to lend. So that can be a potential positive within this. But there’s no doubt Europe’s in recession. That recession will deepen because of the spike in energy prices as we get through the winter. And just because we get through the winter doesn’t mean 2023 is going to be a bright spot. A lot of that, of course, will depend on how Putin manages the situation from here. [00:03:14][52.2]

Dan Nathan: [00:03:14] It’s amazing. We had this, what, nearly 10% decline in the S&P 500 from those mid-August highs. We bounced a little bit over the last few trading days here. I think part of the narrative is possibly that the Fed, after they go 75 basis points at their meeting the week after next, that maybe they take a bit of a back seat and let some of the other central banks around the world play a little catch up. But also at a time where we’ve seen crude oil rollover, we’ve seen the Baltic Dry Freight Index rollover, we’ve seen lumber roll out. We’ve seen a lot of these inflationary inputs call out a little bit. We’re going to get CPI this week. If that is a softer reading. Maybe the Fed has done the job in the near-term and then they can take their kind of foot off the pedal. And then we see as it relates to markets, possibly there’s some room to run as we saw over the course of the summer when again, the narrative was that the Fed is going to need to pivot. Now, just one quick point. You just spoke about a recession in Europe. I think Guys in the same camp as me, I just don’t know how we could have a deep, prolonged recession in Europe and not have it affect the U.S. right now. [00:04:22][67.5]

Peter Boockvar: [00:04:22] I agree. So I’ll take that in a few different parts. The positive, yes, is inflation is definitely moderating. And if you look at even the tips market, when your break evens are down to 1.7%. So sort of that has been tackled in a way that inflation, I still believe, is going to be sticky, persistent and well above that 1.2%. But those very elevated levels were sort of working our way through that. But a lot of that is because of the slow economy and the recession that we’re either in or we’re headed to. And when you talk about the markets, that is sort of the next hurdle that we now need to clear is the earnings come down. So in the beginning of the year, S&P earnings were about 220. And relying on my Bloomberg terminal for these stats are going into other reports of the second quarter. So right at the end of June, that was up to about 230 and now we’re down to about 2266. So you have what I believe will be the trajectory to be lower on that. And still the big question of what’s the right multiple to pan this market to me, still the frothiness in the market and you guys have talked about it on on your podcast and I completely agree it’s the high multiples and the money that’s still being parked in these high beta big cap tech companies and Apple and Microsoft that are still trading at a high twenties multiple for what is now more modest growth. I mean, Microsoft and I have no position in it, but Dell and HP are big customers of theirs and they’re telling you things are slowing down in PC and even Enterprise. And we know Apple is being challenged by, yes, they have the upgrade, but a quarter of Apple’s business is in Europe. If you’re wondering how you’re going to pay your heating bill, you’re not necessarily upgrading to the Apple 14. So I think we need the next stage is the earnings come down and evaluation reset more notably in those bigger cap names because other swaths of the market have already rerated dramatically. There are plenty of cheap stocks out there that maybe we’ll be more immune to a further decline in the markets relative to those big cap names. [00:06:26][123.6]

Guy Adami: [00:06:27] Last Thursday, Scott Maynard was on the overtime with Scott Wapner. I think it was on with Scott. I apologize if it was somebody else. But, you know, he basically said stocks could go down anywhere between 20 and 30% this fall from the levels that we’re at now, which obviously is pretty dramatic. I juxtapose that with there’s still some people out there, Tom Lee, specifically, who I admire a great deal, still thinks 5100 is sort of in the cards at some point. I find it fascinating, Peter, that there’s such a divergent range of thoughts in terms of this market. And quite frankly, they both could wind up being right in this really weird dystopian world that we find ourselves in where, you know, if stocks go down quickly enough and precipitously enough, it might force the Fed’s hand a little bit that might get us the 5100 by sometime early next year. Thoughts on that? [00:07:15][48.5]

Peter Boockvar: [00:07:16] So there is this belief that when the Fed stops hiking, everything will be fine. And I wish it was going to be that easy because we’re still going to have to deal with this economic slowdown and what I believe will be a more notable earnings decline. The Fed stopped hiking in early 2000. They started cutting in early 2001. Well, that wasn’t really a big help to stocks. The Fed stopped cutting in the summer of oh six, and yet we had further to run. But we know what we were driving ourselves into. And keep in mind that just because they stopped cutting cut is still going to be going on. And the Fed has made it clear they’re not going from ending the hikes to then going to cutting because inflation is still going to remain relatively sticky. And that’s something that we’re used to. The Fed hikes us into recession and then they start cutting. That’s going to be somewhat different this time is they’re going to stop hiking. But that doesn’t mean we’re going to immediately get to a pivot of cutting. So I still think that there’s a multiple re rate and the market’s still trading 18 times earnings for the S&P. Obviously, there are other parts of the market that are much cheaper. I mean, the Russell 2000 Value Stocks Index is trading at ten or 11 times earnings. So S&P is not going to bottom at 18 times earnings. I just don’t see that. [00:08:37][80.2]

Dan Nathan: [00:08:38] It’s interesting we were just talking about these mid twenties multiples for these mega-cap tech names. And so the point is, is that we haven’t seen a revision downward in the expectations for earnings yet in the Apple and the Microsoft. And we’ll kind of throw Google in there. [00:08:52][14.1]

Peter Boockvar: [00:08:53] Could throw Tesla in there [00:08:53][0.2]

Dan Nathan: [00:08:54] You could throw Tesla in there, but that one is going to be a bit of an outlier. We’ve said that a lot. I mean, this market really can’t bottom until there’s an absolute bloodletting in a name like that. But when you think about an Apple and Microsoft, you think of the monopolies they have, the moats that they have, the cash that they have. And so even with the rerating that we’ve seen across tech in 2022, I mean, again, Apple is expected to have high single digit earnings growth here, which might prove to be high, and that’s trading about 25 times or so. And I guess you would have kind of gone back and forth on this topic. You were on fast money a few weeks ago and you were talking about value and there’s plenty of opportunities to kind of put money in places. I kind of still think that those names are going to attract a lot of capital for all the reasons I mentioned before, which might keep their valuations well into the twenties in p e terms, which might actually, to your point that the S&P, you just said, won’t bottom out in 18 times, what actually might bottom out at a much higher p e multiple than prior cycles because we’ve never had the sort of concentration in S&P earnings. Is that fair to say? And in market cap terms. [00:10:04][70.5]

Peter Boockvar: [00:10:05] I certainly don’t want to discount that possibility for sure. Let’s just take Apple, Microsoft again. Can you go from a high twenties multiple to even 20 with no change in the fundamentals of that business because of rates staying higher than longer and inflation being higher than what we’re used to? Will they get to a valuation reset for those even if their businesses don’t change? I mean, you look at Microsoft and want to talk about Moats. In 2000, they probably had 85% of the PC software business. There was no bigger moat than Microsoft at that time, but it went through 13 years of multiple digestion, you can say, because earnings and profits grew every single year, all throughout the 2000s. But I think you bring up the right point is where is that rate multiple? And none of us know really the answer to it right now. I just think when all is said and done, that multiple is going to end up lower because we are just in a higher interest rate environment and a higher interest rate for longer is going to change the multiple in everything. [00:11:06][60.8]

Dan Nathan: [00:11:07] I was at Kara Swishers code conference last week. Peter In about 48 hours you had Sundar Pichai, the CEO of Alphabet, you had Andy Jassy, the CEO of Amazon, Tim Cook, the CEO of Apple all speak. And it was interesting just kind of reading. The body language of all of them, the cross-currents, the headwinds to growth, all these sorts of things, the strong dollar, the disrupted supply chains, deglobalization or shooting war in Europe, the potential for further disruption to supply chains in Asia. There’s some dust up between China and Taiwan, all of that. I guess the longer we go into this year, as we get towards the end of next year, then we start just not thinking a whole heck of a lot about 2022 and really start factoring in how long of a slowdown we have. And when we come out. And again, we know this strategists as investors, as traders, but the body language I got from those three CEOs, which have a combined market cap of $6 trillion, over $1.2 trillion in combined sales wasn’t exactly that negative, to be honest with you. They didn’t seem like a bunch of CEOs. And I’m sure there’s plenty of things that keep them up at night, but it just didn’t seem that they’re about to go into a protracted recession. And as far as they care about this stuff, a bear market relative to their stock prices. [00:12:21][74.1]

Peter Boockvar: [00:12:22] I think what makes a company great is those that look out multiple years and particularly the code conference I mean, you tell me since you were there, people want to hear what their big picture vision is and not necessarily will how’s the current quarter going? And are you going to have to cut earnings estimates like Microsoft did because of that FX? So maybe that is one of the reasons. Also, there’s still a month left in the quarter and none of these companies are immune to an economic slowdown. You take Amazon’s AWP business compared to Microsoft’s cloud business. Microsoft’s cloud business is predominantly enterprise, so they’re going to have better visibility and not be as susceptible to a broader economic slowdown than Amazon’s AWS business, which has a lot of small companies. If you open up a 20 person business, you’re probably using eight of us. And if you’re having a very difficult time here in the economy, if you have to shut down, well, you’re going to shut down your AWS subscription. So I think that there’s economic sensitivity that all these companies are experiencing. But I think a conference like this is their job is to go there and tell people what the next 5 to 10 years are going to look like rather than what the short term is going to be. And, you know, getting back to the multiple conversation is we’ve seen this, we’ve all been doing this for a long time. What turns a growth company into a value stock is just a slowdown in that growth rate, and it’s a slowdown in that growth rate that makes people rethink that multiple. Like Apple for years to come will be this dominant company, but their growth rates naturally going to slow. And I know you guys have talked about it. Their revenue growth in the prior quarter was 2%. So do pay 27 times earnings for a company that’s growing mid-single digits. Maybe you do. I mean, you’re paying a high multiple for Coke and Procter and Gamble. Maybe Apple will settle into that consumer product type multiple. But you could get into a market cycle where it’s 20 times instead of 28 times. Well, if that’s the case, the stock’s down 25, 30%, just multiple rerate. And then getting to my point earlier, it’s still a consumer products company that they need to sell its high priced products and your European customer is crimped. And it’ll be interesting to see how the Chinese consumer responds in this quarter and what Apple has to say about that business as well. [00:14:40][138.5]

Guy Adami: [00:14:41] Peter, what’s the scenario where the market gets through this period of time relatively unscathed? And quite frankly, where we are right now is relatively unscathed in terms of the broader markets? [00:14:51][10.4]

Peter Boockvar: [00:14:52] I think it’s two things a continuation of this downward trend in inflation and the ability of the US economy to be able to grow to a higher rate environment. And when I say higher, I mean higher rate, not high. We obviously have still very low interest rates, but a higher rate environment than we’ve seen for the last couple of well, I wouldn’t say decades, but at least the last decade where we lived on zero rates and the housing market lived on a two and a half, 3% mortgage rate. And now we’re in this new rate world. And what is the potential growth rate for the next five years in this higher rate environment? If we can continue to power through and absorb this rate shock and companies can get a still a good return on their invested capital at our higher borrowing rate, and then maybe we can get through this okay. And I think that’s going to be a test. The U.S. economy is about to be tested with this rate shock. Putting aside inflation, what the Fed is going to do, we’ve had a rate shock. And if you’re a company that’s barge floating rate and you just saw a range of basis point rise in your interest expense and your cash flows are now slowing, are you going to be able to manage through that? And we’re again, about to see that test over the coming quarters. [00:16:05][72.7]

Guy Adami: [00:16:06] When we come back, Peter’s conversation with Conor Flynn, CEO of Kimco Realty. [00:16:11][5.1]

Dan Nathan: [00:16:14] CME Ad. iConnections Ad. [00:16:15][0.3]

Peter Boockvar: [00:17:30] I’m Peter Boockvar this is another episode of the Boock Report CEO podcast where today we’re going to go off the tape with Conor Flynn. He’s the chief executive officer with Kimco Realty, which is the largest publicly traded owner of open air shopping centers. Conor, thanks for joining me today. [00:17:48][18.1]

Conor Flynn: [00:17:49] Peter Thanks for having me. Pleasure to be here. [00:17:51][1.5]

Peter Boockvar: [00:17:51] So before we get into details about your business, we just want to hear first of how you got to this position. I know you after school, did you go right into real estate? Was there something first and was there always a passion for real estate? [00:18:04][13.1]

Conor Flynn: [00:18:05] It’s a good question, Peter. I always had, I guess, the real estate in my bones growing up. My parents are both born and raised in Ireland, immigrated over to the United States. And I think as part of that culture, our real estate, our property, as it’s known in the European side, is part of, I think, the DNA. And so I did have a fleeting interest in investment banking. So I did a investment banking internship when I was in college and then quickly realized that my passion really was focused on the property side of it, looking at looking at assets and seeing all the hard work from a before and after transformation take place. And that’s where I sort of threw myself. So right out of school, I was lucky enough to work for Kimco at that time. I was just sort of rotating between different groups. I started in the acquisitions group, then moved into leasing and was fortunate enough to have a lot of great mentors along the way that shepherd me in the right direction. I think everybody that reaches a certain part of their career has a lot of people to thank, start with my parents, and then it goes from there. But fortunately, Kimco has continued to give me a tremendous amount of opportunity room for growth. And I’ve been on the West Coast living in California. That’s where I really sort of earn my chops. Redeveloping assets in the Bay Area moved back to New York City to do grad school. While working in New York City. I went to Columbia and did my master’s in real estate development. And then when I finished that program, an opportunity to run the West Coast popped up at Kimco, the move me back to the West Coast and then after that an opportunity to become CEO of the company popped up. And so they moved me back to New York. And since then the previous CEO retired and I stepped up into the CEO role. So a nice way for me to sort of learn the business from the ground up through all different iterations and parts of the organization in the regional structure and then move back to corporate. And that’s where I am today. [00:19:51][105.7]

Peter Boockvar: [00:19:51] And much easier to just work for one company and find that ladder, which you certainly did. [00:19:56][4.6]

Conor Flynn: [00:19:56] The old school company man. I guess there’s not many left. I think most people these days think two years is the long tenure. I’ve been very lucky to work for some incredible people and surround myself with incredible people, and that’s really helped me. [00:20:08][11.4]

Peter Boockvar: [00:20:08] And Kimco has a long history. From what I read. This goes back 60 years, the beginning of it. [00:20:13][4.7]

Conor Flynn: [00:20:13] That’s right. Yeah. We’re very proud of our history, actually. The founder and chairman, Milton Cooper, is sort of renowned as the founder of the modern era, which is now over $1,000,000,000,000 business. We were the first ever reed to go public in 91 and sort of set the stage for a slew of many, many rates and many different categories now that are public and widely accepted. [00:20:32][18.7]

Peter Boockvar: [00:20:33] And now you guys have over 530 shopping centers around the country and almost 30 states. And I know you have interests in about 27 more. Now, you had made an acquisition last year. Weingarten It added about 150 shopping centers. What was attractive about Weingarten that you did the deal, and was it a geographical decision that got you into certain markets that you were not in beforehand? Or is it sort of fillings to existing markets that you had? [00:21:01][28.6]

Conor Flynn: [00:21:02] Yeah. So when I became CEO, we did a pretty significant strategic shift and moved our portfolio to be focused on first ring suburbs in the major metro markets. So concentrating in where we thought supply and demand was imbalanced or in the landlord’s favor. And we also shifted the portfolio away from commodity power centers is what we call the power centers. It’s typically your category killer lineup. So think big box after big box after big box of your who’s who of who dominates categories. And we shifted away from the power center. It’s more the grocery shopping center as we felt like that was more resilient and felt like that was really the growth vehicle for the organization going forward. We’re 80% grocery anchored today. The other 20% is a mix of power centers that are in different phases of redevelopment. The nice part about power centers is there’s more acreage, there’s more land to work with. So your highest and best use, there might be something else other than retail. And that’s where we’ve been focusing on entitling the highest and best use. So for us it’s really focused on apartments and we’ve entitled over 5000 apartment units, activated over 2000, and our goal for over the next three years is to get to 15,000. So we’re well on our way of achieving those goals. And the portfolio transformation has really helped Kimco outperform the peer group over the last three and five years. And so the when the Weingarten opportunity presented itself, it was very fortunate. The timing was almost ideal because we saw the recovery in our own shopping center. Is predominantly in a Sunbelt where Weingarten was based really starting to accelerate. And it was in the midst of the pandemic when everybody was hands up, sort of worrying about the sky is falling. And we saw the fundamentals really coming back strong for grocery anchored shopping centers. And that’s exactly what Weingarten honed in the best markets in the Sunbelt. We saw the Sunbelt really accelerating at that time and thought that that would be a unique opportunity to combine the organizations and give us really a strategic advantage and some of the fastest growing markets across the country. And so that the combination came together quickly. The timing was great. It was one of those rare deals where both companies traded up on the day that we announced. It was a unique situation where I think we delevered the balance sheet with the integration as well. So it was a fortunate combination that allowed us to enhance our growth profile and delever at the same time. And so in the markets we’ve been really looking to enhance the portfolio. So it’s one of those rare situations where I think everything lined up for us. [00:23:25][143.3]

Peter Boockvar: [00:23:26] And that grocery anchor. It’s like when back in the day with the enclosed mall where the department stores were the anchor, it was the reason why people made a trip to the mall, the enclosed mall, and now with the open air shopping center, it’s that supermarket that is the draw that people have to go to unless they get obviously at home delivery, but it becomes a destination trip for them. And then you can also feeling, as I know some of your other big tenants are like TJ Max and Home Depot and Ross Stores and PetSmart. So you can sort of also fill in that it’s a must drive to your shopping center as opposed to, do I want to go to the mall, the enclosed mall or not, do I want to browse or not? You’re creating sort of a captive audience, it seems, for the markets that you’re in. [00:24:10][43.7]

Conor Flynn: [00:24:10] Yeah, that’s exactly right. I think when you look at a merchandizing mix, you want to try and drive traffic at all points during the day. And the grocery anchor is the most consistent traffic driver. So when you look at like a TJ Max, they’re a phenomenal operator. They really don’t drive the same amount of traffic traffic on a weekly basis as a grocery store does. So your typical grocer sometimes drives 2 to 3 trips per week. And that’s really exciting because then you get the halo effect of those cross traffic trips. And so the grocery anchor continues to be where we want to put our focus, and we think there’s a number of reasons why it’s got a wider moat than other retail uses, a lot of commodity type retailers. There’s a lot of debate on is it going all online, is it going somewhat to the online or is there a omni channel approach? And so what we’ve seen is the grocery anchor continues to be the hub of where people want to shop. And then there is these ancillary items that people also want to shop the most convenient way possible. And so whether you want it delivered to your home, people do that. They go online, they shop, and they have it delivered to their home all the time. That last mile grocery store, the last mile, meaning the closest to where people live, is what’s servicing that online order. And so the big takeaway from the pandemic was it crystallizes the value of the store for the retail chain because not only is it encouraging people to come in the store where the margins are the highest, but that store can be utilized as a distribution of a film End Point, whether it’s by online pickup in store, whether it’s curbside pickup, whether it’s delivery to the home, that’s really where it’s now being focused because you don’t have to pay for the shipping. You don’t have to pay for the person driving the car, the gas mileage. All those things add up to if you can service the consumer from that closest point, your margin gets enhanced. And so that’s why I think when we looked at our portfolio, we’ve really continued to lean into that grocery anchor property where it’s going to be servicing the customer in a variety of ways. [00:26:08][117.4]

Peter Boockvar: [00:26:08] And I know through this you sort of created a new acronyms, as you say, the BOPIS. So when people go, there are dedicated parking spots, right, for pickup. So you’re not just making it easier for the store in terms of them creating their own distribution facility within the store. But you are sort of advertising to the customer that we will provide an easy in and out for you to pick up what you just bought online. [00:26:33][24.8]

Conor Flynn: [00:26:34] That’s exactly right. I mean, I think when you boil it down, you have to ask yourself, what do consumers really want today? And I think the majority are still very focused on convenience and value. And if we can solve for both of those major themes, then I think we have the ability to enhance our cash flow growth, have pricing power, and if we can make the store more valuable, that usually lends itself to the landlord having pricing power and the ability to push rents and grow cash flow. And so what we thought was why not activate the parking lot for curbside pickup, which a lot of people use during the pandemic because they didn’t want to go in the store, maybe they were risk averse, maybe they felt more comfortable. Whatever the reason was, it just continues to this day where people like the convenience factor of driving it. In essence, it’s like a drive thru. You drive in. There’s these stalls that are labeled curbside pickup and then you can call it whatever store you’re shopping at and they know where you are. Because we use a very simple, almost a. You’ve been to a sports game parking lot? A one. That’s the same thing we use, which is a one, two, three. And you just tell a good spot and then they fill up the back of your car with your goods. That continues to be, I think, a nice bonus as customers are gravitating towards it. They like the convenience factor. I have young kids if I have three kids in a car and I’m going to get something. The thought of getting them out in the car alone is a hurdle that’s pretty high. And if you don’t have to clear that hurdle, that’s a nice thing to be able to do. [00:27:55][81.0]

Peter Boockvar: [00:27:55] Yeah, without question. So that supermarket creates definitely a sticky customer. Now, in that shopping center, you have the supermarket, you’ll have PetSmart. You’ll also have like the local dry cleaner and the local pizza shop as well. [00:28:07][11.8]

Conor Flynn: [00:28:08] That’s right. We think merchandizing mix is really important because it has to not only service the customer or the demographic that you’re providing for, but it also connects to the community. And the key is this the community aspect is one where if there’s a local shop that’s renowned in the community, you’re more than likely going to support that local shop because it’s part of the fabric of the community. And so what we try and do is we find those unique operators that are really great at whatever it is they do. Could be waffles in the morning, it could be bagels. It could be you name it. And so the nice part about having the anchor tenant like the grocery store is you have that daily traffic driver, but then you try and enhance the surroundings with the offerings and the merchandizing mix that drives people to the shopping center at all points during the day. So you have your awesome coffee bagel shop in the morning, you have your great salad or chicken quick service restaurant in the middle of the day and then in the afternoon we like to have those treasure hunters, Ross or T.J. Maxx or HomeGoods or Burlington, where people shop not knowing what they’re going to buy. But they still see that and say, oh, there’s an opportunity to find a deal. And so that’s the ideal merchandizing mix that you try and create as find a unique offering that’s going to drive traffic all during the day and have those dominant anchors that help the credit profile of the shopping center. [00:29:22][73.9]

Peter Boockvar: [00:29:23] And the mixed use that you said over the next couple of years will be about 15% of your total portfolio. I mean, that tries to create a sticky environment as well. It’s like you’re sort of creating your own community where you can live, you can work, you can shop all within walking distance. Now, is that being done redeveloping older shopping centers where you guys trying to find raw land and building it literally from scratch? [00:29:48][25.7]

Conor Flynn: [00:29:49] For us, it’s focused on redeveloping existing shopping centers into those mixed use communities. And what we’ve been able to do is we feel like there’s a better risk adjusted return doing that because you’ve already got the built in place that people are used to coming and visiting and shopping. And so whenever you take down raw land, you have to take a very large and long process of trying to create the place, and that can be very rewarding but can also be very unrewarding if it doesn’t go well. And so we found with the tremendous portfolio that we have and again, we’re focused on that first string suburb in the top 20 major metro markets where we always thought northeast this was is that the big CBDs are going to push out. There’s going to be sort of this sprawl where all of a sudden our shopping center is going to be surrounded by density. And if you think about the most underutilized form of commercial real estate, you would typically think about shopping centers because 80% of the land is dedicated. The parking lot, it’s not generating any revenue. 20% is single storey buildings. And so if you’re surrounded by these towers of apartments, office hotels, whatever it is, you’re typically sitting on the base of the raw land that is totally underutilized. And so that’s where we have focused our efforts on putting together a team that is laser focused on unlocking entitlements across the portfolio for the highest and best use of the real estate. And so typically it is activating parts of the parking lot for apartment towers that we can add to the shopping center. [00:31:16][87.0]

Peter Boockvar: [00:31:17] Now with the multifamily, you operating them in-house like you created a separate division for that since I mean, it’s a similar skill set, but you’re talking about usually 1 to 2 year leases, more of a physical tenant relative to a supermarket where you guys outsourcing that management. [00:31:33][15.6]

Conor Flynn: [00:31:34] Yeah. So we definitely want to walk before we run and we’re not egocentric at Kimco, so we try and make sure that we recognize that it’s not our expertize, right? It’s sort of focused on what you do best and make sure you have the core competency. So to date, what we’ve done is we’ve taken a little bit of a differentiated approach to others, and we’ve grown these certain portions of the portfolio to apartment developers now ground. In essence, if you’re not familiar with that term, it’s very simple. It’s exactly that. You lease the ground to a developer and they come in and they develop the apartments and they just pay you a lease on the ground. So they take on the management, they take on the roll over, they take on the apartment expertize. We still own the land, but they just pay us a rental fee on the land. That is sort of the most risk averse way to do it. And then we’ve also entered into joint ventures where we contribute the land at a marked up basis, in essence getting paid for our own tenant work. And we contribute it into a new joint venture with a best. Class apartment developer operator where we know we’ve aligned ourselves with the dominant player in that trade area so that we feel very comfortable riding side saddle, watching them, learning from them as we go forward. So those are the two approaches that we’ve seen that have been working for us. We continue to evolve and we’re continuing to learn every day. But today, if that’s what we’ve done and we feel very fortunate that we’ve got wonderful partners and activating wonderful projects. [00:32:54][79.9]

Peter Boockvar: [00:32:54] So let them deal with the 2am my toilet’s not working and come fix it now. [00:32:59][4.6]

Conor Flynn: [00:33:00] We’ve got plenty of those in our own portfolio, a roof leak or any other issue or the sprinkler head that’s off or somebody ran it over. So we’ve aligned ourselves with the best in class and try to make sure that we’re learning and watching and trying to figure it out. And we like the business. That’s the best part of it. The thesis was it’s actually going to enhance our growth because if you bring in the apartments you have built in a shopper base, and then typically that allows you to charge more rent for your retail. And what we’ve found is that it actually allows you to charge more for the apartments as well, because if you think about take New York City, for example, and we don’t own anything in New York City, but just for an apartment pricing exercise, if you were to lease an apartment, the amenity package would probably determine how much you could lease that apartment for if you had a pool or if you had a gym, if you had a grocery store, if you had a coffee shop, if you had a dry cleaner. That’s exactly what we already have. We’ve already built in the amenity base into the apartment complex. So in essence, they’re able to charge a significant premium to their apartments because of the amenity base that we’ve built. And so we are understanding that that’s a real differentiator that allows you to price above market rents that we can actually activate. And so that’s why we’ve sort of shifted more towards the joint venture model. [00:34:10][70.0]

Peter Boockvar: [00:34:10] And I’m sure over the last couple of years with the sharp rise in construction costs, your partners are probably grateful that they have that pricing power in terms of the rents they can charge to absorb what they probably weren’t necessarily budgeting at pre-COVID and going through COVID with whether it’s lumber or whatever, steel prices and so on. [00:34:29][18.3]

Conor Flynn: [00:34:29] You’re exactly right. I mean, the ability to push the costs onto the consumer. I’m sure you’ve been following the apartment rents and and where they’re headed and now the results and the same site and I growth of the apartments that we have has been phenomenal. You have the ability to reprice those every year typically. And so who knows how long the consumer can handle it. But to date, you’ve seen upwards of 15 to sometimes 20% increases. [00:34:52][22.5]

Peter Boockvar: [00:34:53] I make sure to read the apartment list dot coms monthly national report as a good guide for that. Now, in terms of markets, I know you guys are on the West Coast, the East Coast presence in Florida and Texas, one in Denver, other markets that you’re not currently in that you want to be in. And if the case, do you try to buy your way in or you try to develop your way into those newer markets? [00:35:14][21.5]

Conor Flynn: [00:35:15] Yeah, it’s a really good question because it’s pretty strategic on how you want to operate your business and what’s the highest return on your time. So I’m a big believer coming from the operations side. We need to do get economies of scale and in order to do that, we had to really concentrate the portfolio so that we could, in essence, operate at a higher level rather than operate at a number of different assets in a number of different markets and not be really local experts. And real estate, especially retail, is very localized. And so what we’ve done is we’ve created these pockets, these clusters of assets surrounding the top 20 major metro markets. And so we look for new markets all the time. Actually, through one garden, we picked up San Antonio as a new market, which is a really fast growing market that we’ve always liked and always wanted to be in but didn’t have a presence there. Now we really have a foothold there and we’re going to look to grow that. The same goes for other markets that we’re watching closely. Some we missed. I mean, we’re not perfect. We missed Nashville. We don’t have a presence in Nashville. And that’s a wonderful market that’s really just exploded. The issue, though, is you can’t really go in one shop with one shopping center in order to really have scale, you need to go in with in our opinion, you need to go in with a sizable portfolio in order to have it make it work. We’re big believers. You’ve got to live and breathe your assets and we’ve got to have boots on the ground on these assets that are walking in every day. [00:36:30][74.5]

Peter Boockvar: [00:36:30] So let’s just say you got that cluster. How many miles away. Or would the centers be in order to not be too close, but enough to have a good market share? [00:36:38][8.0]

Conor Flynn: [00:36:39] They can be right across the street from each other. You really control the retail node that way. So typically it’s a one day drive. We want to try and make sure we have everybody. If they’re managing a portfolio, they can get to every asset in one day. That’s sort of the way that we think about it is you have a concentration of assets that allows you to be optimizing your time, right? It’s all about time and your return on time. And we found that when you’re dispersed, a lot of your travel time is just not productive as it could be. So that’s the way we’ve done it. But there’s loads of markets out there that we’d love to have a bigger concentration in or ones that we don’t necessarily have presence in. But for us anyways, the incremental costs of adding a shopping center in one of our existing clusters where we don’t have to add any DNA versus starting a fresh market, that’s what we look at. And again, the allocation of capital there, it’s pretty clear to us that we should just incrementally increase our cluster strategy. Unless a unique opportunity like San Antonio presents itself. [00:37:32][53.5]

Peter Boockvar: [00:37:33] You focus on the markets where there’s population growth, there’s job growth and so on. We know a lot of that has been taking place in the Sun Belt. Are there any markets that you’re in that is not living up to your expectations and you say, you know what, maybe we should better allocate these resources somewhere else or you’re happy with the markets that you’re in. [00:37:51][17.8]

Conor Flynn: [00:37:51] So I will tell you that my previous experiences have probably shaped my thoughts on certain markets that are not necessarily true today. So one of the markets we picked up in the Vanguard transaction is Las Vegas. And Las Vegas was one that I managed through the financial crisis. I was out west. There was a lack of diversity of economic growth there. And so when the gaming market dried up there, it was not a pretty place to be from a retail perspective. Demographics shift rapidly there because there’s really sort of a sprawl in Vegas. There’s not really barriers to entry there. They sort of build the next new shiny thing, another ring out, and that’s where the wealth goes. And so what once was the dominant corridor can change really rapidly. Now, since then, Vegas has diversified quite a bit since I was there. Anyway, I’m dating myself. They have a number of new sports teams, NFL, NHL, they’ve got a diversity of economic growth drivers. So that’s one we’re continuing to do a lot of research on. I don’t want to necessarily jump to conclusions on it because when I was there was a little different. But people love Las Vegas and there’s a lot of economic growth drivers there. But when there’s a lack of economic diversity in a market, that’s what makes me nervous new because it’s not as buoyant to go through the waves we’ve seen before. [00:39:11][79.3]

Peter Boockvar: [00:39:12] Yeah, that makes a lot of sense. Speaking of which, during COVID, one of the challenges that business obviously had and you as a landlord is some stores just couldn’t open if there was face to face needs in a particular store, that business couldn’t be open. How did you manage helping the tenant but at the same time knowing that you have to pay your bills as well. How did you manage that tenant landlord situation when so many stores were closed for a period of time? The non essential stores that had no choice but to close but wanted to stay in business when we got through COVID. [00:39:45][32.8]

Conor Flynn: [00:39:46] Nobody was prepared for that, right? Nobody had a pandemic playbook. And for us, we were fortunate where the lion’s share of our retailers were deemed essential, like the grocery stores that were able to operate through it. Where it became very tricky was when you were deemed non-essential and you were forced to close. So what we tried to do was focus on the tenants that needed the help the most, which is typically the small shops, the ones that didn’t have rainy day funds, big balance sheets, the ones that were operating sort of on a day by day, week by week basis. The PPE program that the government launched, we felt, was a great opportunity to help our tenants get access to that capital, to help them weather the storm. And so what we did was we developed a full service operation dedicated to our small shop tenants to go through the PBP program to help them fill out all the paperwork. We even paid for their attorneys to go through the PPE program, which was not as simple as it probably was designed to be. But it really helped a lot of those small mom and pop retailers get the rainy day funds they needed to weather the storm. And we told our bigger retailers that had balance sheets. We told them it was tough, but we had to be very tough because in those days, the people with the big balance sheets needed to flex their balance sheets, they should be paying us the rent because in essence, that allows us to go and help the small businesses. And the US is still, in my opinion, based on small business engine growth. And so that was our strategy. It seemed to work. We did give deferrals for a lot of these tenants that were deemed non-essential. So in essence, don’t pay us for two or three months, but those three months of rent are due there just do on the back of your lease term. And so that’s what we’ve been doing. We’ve been collecting on that and it’s been doing very well. [00:41:27][101.0]

Peter Boockvar: [00:41:28] Right. So to buy these businesses time to get them to the eventual reopening that we’re obviously in the midst of, I know through that good relationship that you have with your tenants, you’ve been able to get through with a very high occupancy. Just want to talk quickly about the hidden asset you have in the holdings of Albertson’s and then just talk macro wise on what you’re seeing with the consumer now. Albertsons is an interesting holding of yours because not only is it a tenant, but it’s been a very successful investment. And I believe the lockup period is this month. What’s your strategy? You don’t go into full detail, but is it a long term relationship from a tenant landlords perspective? Well, it will maintain that as a shareholder as well. [00:42:10][41.7]

Conor Flynn: [00:42:10] We’re very fortunate where we’ve been able to make a lot of value through focusing on unlocking the real estate value that are owned by our retailers. Now you’re seeing a lot of funds and do it now, but we did this for decades where we focused on retailers that are real estate rich, that are not getting credit for their own real estate. That’s what sort of was the thesis behind getting involved in Albertsons. It’s a long story, but in essence, we bought defunct grocery banners from SUPERVALU. We rolled it up under Albertsons. We took Safeway Private, which was a public company on the West Coast. We combine that with Albertsons, brought in some great management, took it public, and now we’re sitting with Billion three, 1,000,000,004 of marketable securities and Albertsons, where our tax basis is $100 million. So we’ve had a wonderful, wonderful investment there. We are one of the largest landlords for Albertsons as well. So it is a bit interesting to have a foot in and a number of different ways. Our strategy is the lockup expires this month. We’ve been very focused on this where we are going to monetize around 3 to $350 million a year so that we can reinvest those proceeds back in our business. And we’ve been able to communicate that to the street and have them understand that there’s rules where this is a pretty unique situation for it to be in, where we have this big of a taxable gain because the rules were set up where you’re not really supposed to have a billion plus dollars of taxable gain coming from non-real estate as a result. So we want to maintain our status. That’s priority number one. And so in order to do that, we can only really have 3 to 400 million of taxable gains per year. And so for us to do that, we have to have sort of the methodical approach of selling the shares 3 to 400 a year until we monetize the investment, redeploy those as best we can into our business, whether it’s we’ve got a suite of opportunities and investments, we’re really excited to finally monetize and redeploy that. And we feel like there’s going to be some incredible opportunities for growth for PIMCO going. [00:44:11][121.1]

Peter Boockvar: [00:44:12] And with the higher cost of capital, that certainly is a nice source of financing, no question. One thing that I know you guys have done very well is manage your balance sheet where most of your debt, almost all of it is fixed. And this rise in short term interest rates impacting floating rate debt. Has it really matter to you guys? [00:44:29][16.5]

Conor Flynn: [00:44:30] Yeah, we’re big believers since we have long term assets, as have long term debt and have it be fixed. 99% of our debt is fixed. And we just did a recent ten year bond reopen the market at the time that we thought it was a high coupon, but it’s already much higher today than it was back to three months ago. And we were able to access the 30 year bond market. We have the longest debt maturity profile in the peer group at over ten years. No maturing debt really now for another two years. And so we bought ourselves, I think, a nice runway to see what happens and have the highest cash position we’ve ever had, the lowest debt we ever had in the company’s history, and have the Albertsons monetization be a nice dry powder as well to put to work. So we’ve always been very focused on maintaining a very strong balance sheet where triple B plus one. Our strategic goal is to get to a minus a three. The only thing of that goal is that we don’t control that destiny. The rating agencies, I think, are still a bit nervous about any type of upgrades, especially in the changing environment that we’re in. But we actually price as an A-minus, a three already. If you look at our spreads versus the A-minus three category, we’re already right on top of them. So that, I guess is the benefit we’ll take. But we’re in a very strong position there because typically when the tide goes out, the balance sheet becomes the number one important metric. [00:45:41][71.9]

Peter Boockvar: [00:45:42] And that eight categories from what Tripoli plus right now to help me one I want to wrap this up by just giving some color on the macro. Obviously, everyone’s debating recession, no recession. The way I put it is more it could be a recession for some, but not for others. Now, obviously, you’ve structured your business to be a destination, a necessity destination, but you still see, I’m sure, changes in traffic trends or maybe not or any consumer trends that you’re seeing in this more fragile state that the U.S. economy is in. [00:46:11][28.3]

Conor Flynn: [00:46:11] Yeah, it’s a really tricky time. I mean, we watch traffic very closely to date. Our traffic is higher than last year. So that’s one we’re watching. We continue to see the shopper and again, we offer everyday goods and services. So I think that’s a pretty critical aspect of what we’re offering. We don’t see where the consumer wallet is necessarily shifting towards. So we don’t have, I would say, the data that shows that they’re buying chicken instead of steak. That continues to be something we’re looking for through our earnings of our tenant base. But the traffic is still strong. The pricing of our assets is still very, very strong. We haven’t seen any dislocation there yet. We’re waiting because we think we could be opportunities there. But the private markets are very healthy for grocery, good shopping centers. The public peers are still looking for acquisitions as well. The consumer is stretched, I would say, on the lower end. There’s no question about it. They’re facing the real impact of inflation. Right. But the silver lining is gas prices have come down pretty significantly recently. So that in essence has become, I think, a relief valve and the employment market is still strong. So I know everyone’s trying to determine where we are and where we’re headed, but it is very tricky as there’s components of this economy that show that there’s little to no recession going on while other parts of it are starting to shine. Bright lights on different cracks in the economy. [00:47:23][71.9]

Peter Boockvar: [00:47:24] Yeah, there’s no question. I’d like to see that the U.S. economy is not this light switch that just goes on and off, like there could be a dimmer. It can vacillate in different directions, sort of in between. And as you said, the labor market is still pretty healthy. And the interesting thing is that how we would define a recession potentially can be an unemployment rate of four and a half percent instead of three and a half, where four and a half percent used to be historically very low. That used to be the bottom end of a rate that we would see in a recession. Now, to top that. [00:47:55][30.8]

Conor Flynn: [00:47:56] And be interesting at that, four and a half comes to fruition from participation rate going up to like that’s another piece of it, right. That could be really interesting to watch. [00:48:03][7.2]

Peter Boockvar: [00:48:04] It’s exactly right. The August payroll number, we saw a rise in the unemployment rate from three and a half to three seven. And that’s because you had a 700,000 plus rise in the size of the labor force on top of a rise in employment. That was less than that. So it actually rose for good reason [00:48:20][15.9]

Conor Flynn: [00:48:21] Its interesting, Kimco I think is going to be one of those unique situations where there’s going to be a lot of probably noise in the economy and things like that. But we’re still in a reopening phase where we’re seeing record demand for space. Literally no new supply pricing power in the landlord favor are able to really push rents and really have good strong spreads where there could be a slight pullback. And I think where we’re positioned, it may not impact the reopening dynamic that we’re experiencing because it’s so strong, but we’ll have to see. [00:48:49][28.0]

Peter Boockvar: [00:48:50] I think the last thing we learned is also that people still like to go out and shop. It’s easy to say, I’m just going to stay on my couch and click buttons and have it delivered. But people like to go out. They like to see things, they like to try things on. They want to be out there themselves. [00:49:03][13.2]

Conor Flynn: [00:49:04] No question about it. And the value proposition of the Last Mile store, that is the biggest takeaway, in my opinion, of the pandemic. I think there was a lot of people. Debating the real value proposition of brick and mortar retail and you can make a case for it was all heading online. If the government can shut down certain retailers and still they survive and think that the physical store is the highest margin, best way to invest going forward, that sort of, I think, puts the rest of that argument. [00:49:27][22.8]

Peter Boockvar: [00:49:28] I completely agree. And I’ll wait to see is the online businesses that are now opening physical stores. [00:49:32][4.4]

Conor Flynn: [00:49:33] Yeah, exactly right. I mean, we’re back to the fundamentals, right, of where the cash flow growth is coming from, where the highest margins are. Oh, it happens to be the store. Let’s reinvest in store growth. [00:49:42][9.1]

Peter Boockvar: [00:49:43] Agreed. Well, Conor, I can’t thank you enough. Your insights were great. I think that the listener got a deep dove on your business, and I really appreciate having you on. [00:49:51][7.8]

Conor Flynn: [00:49:51] Always nice to see you, Peter. Thanks for having me. [00:49:53][1.4]

Peter Boockvar: [00:49:53] Thanks. Nothing in this broadcast should be construed as investment advice nor a recommendation to buy or sell securities. The discussion is for informational purposes only, and past performance is not indicative of future results. The specific securities discussed may be held by Peter Boockvar personally and or purchased, sold or recommended to weekly clients. [00:50:15][21.4]

Guy Adami: [00:50:17] Thanks once again to CME Group and I connections for sponsoring this episode of On the Tape. If you like what you heard, make sure you hit, follow and leave us a review. It helps people find our show and we love hearing from you can also email us at on the tape at risk reversal dot.com any time. Follow and connect with us on Twitter at on the tape pod and we’ll see you next time. [00:50:40][23.5]

Dan Nathan: [00:50:41] On the tape is a risk reversal media production. This podcast is for informational purposes only. All opinions expressed by me and Nathan Guy, Danny, Danny Moses and any other participants are solely our opinions and should not be relied upon for specific investment decisions. [00:50:41][0.0]

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The post On The Tape Podcast – Fed’s Bitter Hands with Peter Boockvar, and a Conversation with Conor Flynn of Kimco Realty first appeared on Risk Reversal.