Kimco Realty Corporation (KIM) — Q1 2015 Earnings Call Transcript

Thanks, Frank. Thank you all for joining Kimco's first quarter 2015 earnings call. With me on the call this morning are Milton Cooper, our Executive Chairman; Dave Henry, Chief Executive Officer; Conor Flynn, President and Chief Operating Officer; and Glenn Cohen, CFO; as well as other key executives who will be available to address questions at the conclusion of our prepared remarks. As a reminder, statements made during the course of this call may be deemed forward-looking 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 that could cause actual results to differ materially from those forward-looking statements. During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco's operating results. Examples include, but are not limited to, funds from operations and net operating income. Reconciliation of these non-GAAP financial measures are available on our website. Before we begin, I want to mention that Kimco plans to host an Investor Day on December 10 of this year in New York City. We will be sending a save-the-date notice out shortly with more details, but wanted to make everyone on this call aware of it so you can mark it on your calendar. Thank you. And with that, I will turn the call over to Dave Henry.

Good morning, and thank you for joining our call today. We are very pleased to report strong first quarter financial results and operating metrics. Glenn and Conor will cover the specific details, but the solid fundamentals of our portfolio continued to drive excellent FFO earnings growth and same-site NOI increases. Small shop occupancy improvements are particularly encouraging as the economy continues to recover. While recent retail sales growth has been modest, national retailers are still committed to robust expansion plans, all in the face of a declining inventory of retail space. Discounters and service-oriented tenants, such as theaters, health clubs and restaurants, continue to expand rapidly, helping to increase effective rents and occupancy in our portfolio and across the open-air shopping center sector. Lower gas prices are also expected to give a boost to consumer spending and in a good sign for shopping centers. Rich Moore of RBC continues to point to 5-year high levels of planned new store openings, while Craig Schmidt of Bank of America notes a recovery of retailers focusing on the middle class. The renewed strength of middle-class purchasing power is expected to disproportionately benefit neighborhood and community shopping centers anchored by conventional grocery stores, casual and fast-casual dining and discount anchors such as Walmart, Target and Kohl's. Overall, we feel terrific going into 2015 as new supply remains muted despite population growth, growing household formation and the slow but steady growth of the U.S. economy. With respect to our overall strategy, we've essentially completed our exit from Latin America, with pending deals on our last shopping center in Mexico and various land parcels. We also continue to take advantage of a strong market for shopping centers, even in secondary markets, by selling both our second-tier assets as well as those located outside our long-term growth markets. Our U.S. property dispositions, in total, are on track, with all of the identified assets largely sold or targeted to be under contract by year-end. In general, sales proceeds from our dispositions are being recycled into our large pipeline of redevelopment projects, selective new developments and purchases of our institutional partners' ownership interest in existing Kimco assets. We believe these activities in general are excellent accretive investments and superior to the acquisition auctions of high-quality stabilized shopping centers owned by third parties. Our recent Blackstone purchase, for example, allowed us to fully consolidate 39 high-quality properties we have managed and leased for approximately 10 years. We know these assets and we know these markets very well, and we are excited about their long-term growth potential. We have also increased our efforts to purchase out parcels or retail properties adjacent to or within existing high-quality properties we already own. These acquisitions are usually very accretive and increase our scale and leasing leverage in some of our very best properties. Looking at our Canadian operations. Our occupancy remains strong at approximately 96%, and our Target exposure is fully covered by parent company guarantees on all 9 of our Target Canada leases. Interest from other retailers is growing, and we believe at least 8 of our 9 Target stores will find new anchors this year. Also, as noted in prior statements, we have begun to selectively sell certain Canadian properties where we can benefit from historic low cap rates and high institutional demand. RioCan, our largest Canadian partner, has purchased our 50% interest in 3 of our RioKim joint venture properties, comprising 545,000 square feet while concurrently selling us their 80% interest in a premium joint venture property we originally developed and currently manage in Dallas-Fort Worth. Our RioCan venture is also selling 2 large properties in Québec in areas where we believe growth will be constrained. On a separate topic, we continue to be pleased with both our SUPERVALU and Safeway investments. SUPERVALU reported excellent quarterly results, and we took the opportunity last week to partially monetize our SUPERVALU stock at a large gain. In addition, the Safeway Albertsons integration is proceeding well under Bob Miller's direction. While the Safeway investment headlines are Plus business, it is important to note that over the years, we have completed many smaller transactions within the Plus business, which have led to either individual property sale-leasebacks or acquisitions of retailer-owned real estate. Generally, these investments have been off-market, a direct result of our relationship with retailers, their advisory firms and private equity contacts. As a final comment, Glenn and our treasury team continue to do a wonderful job in the capital markets. Our first ever 30-year unsecured bond was a particularly noteworthy achievement and helped stagger our debt maturities while taking advantage of today's low interest rates. Now I'd like to turn it to Glenn, Conor and Milton for their comments.

Thanks, David, and good morning. 2015 is off to a strong start. Our solid first quarter results are the product of strong execution on all fronts, including leasing, acquisitions, dispositions, redevelopments and capital raising. As we reported last night, headline FFO per share, which represents the official NAREIT definition, was $0.37, up from $0.34 last year, an 8.8% increase and $0.02 higher than first call consensus. The improved performance is attributable to higher NOI contribution from the operating portfolio, lower G&A expenses and higher transactional income from our investment in Albertsons, which contributed $6.5 million or $0.015 per share growth year-over-year. FFO as adjusted or recurring FFO, which excludes non-operating impairments and transactional income and expense, was $0.36 per diluted share for the first quarter, up from $0.34 last year, a 5.9% increase. This level of per share growth was achieved even after a $0.055 per share diluted impact from the significant transformational portfolio, including the substantial liquidation of our share of assets in Mexico totaling $480 million, non-strategic U.S. asset sales of $850 million and the impact from currency fluctuations. The diluted impact was more than offset by the purchase of 5 quality assets totaling $2.1 billion over the past year, many from our joint venture programs including the Kimstone acquisition during the first quarter, and by our reduced debt cost from refinancing higher coupon debt. Our portfolio operating team kicked off the year with solid results, delivering U.S. same-site NOI growth of 3.2% and combined same-site NOI growth, which includes Canada, of 3%, before the negative 100 basis point impact on currency. The same-site NOI growth was achieved primarily from top line revenue growth generated from increased occupancy, which is 95.7% for both the U.S. and combined portfolios. Leasing spreads were strong with a 19.1% increase on new leases signed and 8.1% for renewals and options, bringing combined leasing expense to 10.1% for the first quarter. We were very active on the capital raising front. During the quarter, we sourced a new $650 million term loan with a final maturity in 2020 priced at LIBOR plus 95 basis points. We used the proceeds to repay a $400 million term loan, which was priced at LIBOR plus 105 and to partially fund the Kimstone purchase. In addition, we issued a $350 million 30-year bond at a coupon of 4.25% yielding 4.31%, including the lowest 30-year coupon in the REIT industry and extending our weighted average maturity profile by 2 years. As a result of the significant acquisition volume in the first quarter, our net debt to recurring EBITDA is 6.6x and 6.4x when you pro forma for the full quarter EBITDA from the Kimstone acquisition, which was closed in February. We expect to bring net debt to recurring EBITDA back to 6x by the end of the year, consistent with our stated objective of operating in a 5.5x to 6x range. Our liquidity position is in excellent shape, ending the quarter with over $1.6 billion available on our revolving credit facility and as another source of low-cost capital. Based on our strong first quarter results and expectations for the balance of the year, we are raising our headline FFO per share guidance range to $1.50 to $1.55 from the previous range of $1.45 to $1.53. The headline FFO guidance range includes $32.4 million or $0.08 per share gain from the partial monetization of our SUPERVALU investment, which was completed during the second quarter. We are also increasing our FFO as adjusted per share guidance range to $1.42 to $1.45 from the initial range of $1.40 to $1.44. We are reaffirming our operating guidance assumptions for occupancy of 25 to 50 basis points and U.S. same-site NOI growth of 3% to 3.5%, as well as our acquisition and disposition targets. Keep in mind the guidance range is sensitive to the timing of acquisitions, dispositions and financing initiatives. And with that, I'll turn it over to Conor.

Thanks, Glenn, and good morning, everyone. Today, I will start by recapping our progress on acquisitions and dispositions, followed by updates on our development and redevelopment pipeline and finishing with a quick recap of the operating metrics. Overall, we had a good start to the year and are pleased with the team effort that showcases how Kimco continues to execute on all fronts. The evolution of the open-air shopping center gives our talented team a tremendous opportunity to enhance net asset value. We continue to execute on our transformation and simplification strategy with the previously announced closing of the Kimstone transaction. At the time of closing, the cap rate on the portfolio was approximately 6% and it has since performed above our own internal expectations. In addition, we acquired a Sprouts-anchored center in Houston, also at a 6 cap, which gives us control of 3 corners at the dominant intersection of Highway 6 and Spencer Road. We also acquired 4 adjacent parcels to our Tier 1 portfolio as we look to expand our footprint, where we see the opportunity for future redevelopment. The acquisitions market remains red-hot and we remain disciplined. We continue to be selective about targets and are focused on unlocking opportunities at strategic locations within our core markets. The disposition market does not show any signs of slowing down, with cap rates continuing to compress for dominant secondary market assets. The definition of core appears to be shifting with numerous buyers willing to step out on the risk spectrum for a slightly higher yield. We sold 6 shopping centers this quarter at an average implied cap rate of 7.25% in addition to 37 triple net assets for a $10 million gain. We plan to have the final phase of our disposition program complete by the end of the year, and then we'll take a fresh look annually on how to continue to improve the portfolio by selling our lowest tranche and mass funding those proceeds into our redevelopment and development activities. In the first quarter, we completed 12 redevelopment projects at a cost of $35 million, giving us a return on investment of 11.7%, which was 114 basis points higher than our original estimates. Notable completions this quarter include: the Whole Foods at Pompano Beach; the 2-level Publix at our Miller Road asset, Miami; and the opening of Nordstrom Rack at Redfield Promenade. The redevelopment pipeline is focused on the emerging trend of adding traditional and specialty grocers to our Tier 1 power centers. This quarter, we completed and have under construction 12 grocery stores, including 2 Whole Foods, 2 Publix, 2 Safeways, 2 Fresh Thyme Farmers Markets, a Stew Leonard's, a Harris Teeter, a Lucky, and a Trader Joe's. These projects now bring our total percent of ABR from a grocery-anchored center to 71.2%, up from 65.8% last quarter. We believe this is the sweet spot for our redevelopments as we identify and incentivize our team to execute on creating a grocery opportunity that boosts daily traffic and surrounding retailer sales, and ultimately improves NAV. We have made great strides with these initiatives as a unique way for Kimco to create significant value and have improved from 56.3% in 2010 to over 70% today. In addition, this quarter, we broke ground on a mixed-use redevelopment in Columbia, Maryland, where we ground leased a portion of the grocery-anchored asset to an apartment developer, who is now under construction, adding 230 units to complement our retail at Wild Lake. Currently, we have a total of $289 million in active redevelopment projects, with another $659 million in the design and entitlement phase and $117 million that is currently under review. For the quarter, redevelopment added 70 basis points to our same-site NOI. Moving to development. Our development pipeline remains on track and each development is a special case where we feel the team has sourced an opportunity to either expand upon a successful asset or add an additional Tier 1 asset in our core markets. Whole Foods at Wynnewood is under construction and on schedule for a mid-2016 opening. The 3 other development projects are in the early stages of securing entitlements, and we will soon be announcing major anchor signings. The Dania Beach project sits along I-95 and adjacent to the Fort Lauderdale airport and our successful Oakwood shopping center. The Christiana, Delaware project also sits along I-95 and is adjacent to GGP's Christiana Mall. And finally, our Grand Parkway project sits along the new Grand Parkway in close proximity to the new Exxon Mobil campus in the Woodlands area of Houston. The lack of supply and strong retailer demand has given us confidence that we will be able to achieve a risk-adjusted return on each of these projects between 200 to 300 basis points above exit cap rates, and provide the company with long-term hold assets and help boost internal growth in major gateway cities. I am very proud of our leasing team and their achievements for the first quarter, historically the most challenging quarter from an occupancy perspective. For the first time in 5 years, we were able to maintain our U.S. pro-rata occupancy from prior quarter. This is no small feat on a portfolio of our size, and the credit goes to all those hardworking deal makers. The small shop occupancy drove the performance with an increase in pro-rata occupancy to 88.2%, a 20 basis point increase from prior quarter, a 260 basis point increase over prior year's first quarter. We achieved this in spite of RadioShack's bankruptcy filing, which had a negative 20 basis point drag on our small shop occupancy. Our combined leasing spreads were over 10% this quarter, an improvement over the prior year, and were boosted by new deals with Whole Foods, Publix and our first Stew Leonard's. We welcome Stew Leonard's to anchor our Airport Plaza in Farmingdale, Long Island. Stew Leonard's, who is also known as the Disneyland of dairy stores, will be the only Stew Leonard's on all of Long Island and create a one-of-a-kind signature asset. In closing, we continue to see improving fundamentals across the major metro markets in the U.S. and believe the slow recovery will soon take hold of the middle class that will provide a further boost to our retailer sales. The U.S. same-site NOI improved 3.2% due to the positive boost of net absorption, redevelopment and less-than-anticipated tenant fallout. The ABR of the portfolio is up 6.2% year-over-year, an increase from $13.18 to $14. Our new leases are being signed at $17.35, 24% above our current average base rent, showcasing the significant embedded value and the mark-to-market opportunity we have here at Kimco. We remain focused on improving net asset value through aggressive early terminations, dynamic redevelopments, adding grocery components, diligent small shop leasing and adding density to unlock value. We are ahead of our internal plan for the year, thanks to our talented team and strengthened portfolio. But as you have heard us say many times, there's more work to do. And with that, I'll turn it over to Milton for his final comments.

Thank you, Conor. I associate Kimco with great properties, great people, and a promising future. Since we announced our transformation strategy during our 2010 Investment Day, we've traded over $5 billion in properties. This significant amount not only surpasses many of our peers in terms of equity market cap but also highlights the transformation of our portfolio. As a result, our portfolio is now better situated, of higher quality, more resilient, and presents excellent growth opportunities for redevelopment. This transformation extends beyond just our portfolio; it includes our management team, which is what excites me the most. Our revamped management team, led by future CEO Conor Flynn, combines energy, talent, and experience. With our new Chief Investment Officer Ross Cooper and our new Executive Vice President of Asset Management David Jamieson joining Conor, Glenn, Ray Edwards, and our outstanding General Counsel Bruce Rubenstein, I believe we have an exceptional executive team at Kimco. Furthermore, I've frequently highlighted our strong depth at Kimco. This phrase often implies just a backup team, but that's far from the truth. At our headquarters and in our regions, we have many capable leaders who are advancing Kimco every day, including Will Teichman, our Senior Director of Strategic Operations; Chris Freeman, our Vice President of Property Management; and Tom Taddeo, our Chief Investment Officer, among many others. I've seen these talented individuals develop over the years, and I'm eager to see what they will achieve in the future. Now, we would be happy to take any questions.

We're now ready to start the question-and-answer segment of the call. Frank, please introduce our first caller.

Conor, I'm wondering if you could provide your thoughts around Whole Foods' new concepts of lower-priced stores aimed at millennials. It sounds like they've already started negotiating some leases for the new stores. If you're able to provide any color on whether or not you had discussions with them and what size and type of locations they're targeting? And also, is this a game changer potential here? Or are they up against some pretty steep competition to that demographic?

Yes, it's a good question, Christy. We have an open dialogue with Whole Foods. As you've heard in my remarks, we have a number of deals pending with them in different forms of construction. So we do think that it's going to be an added benefit to our portfolio, especially when you look at the size that they're considering because many times when we try and add a grocery component to one of our assets, the size of the box sometimes restricts what kind of retailers we can add. So I think their price point going after the millennials, trying to probably be a little bit more competitive with some of the new specialty grocery concepts that have done so well in the recent years. I think that's their strategy, and I think it's a good one because I think that they have, for a long time, been the highest price point in terms of the grocery sector. And I think if they launched a competitive line of millennial-targeted grocery stores, I think it will fit nicely within our portfolio and others.

As you noted in your opening remarks, the debt to EBITDA ratio has increased this quarter, seemingly due to Kimstone. Could you elaborate on that? Also, could you remind us how that leverage might decrease based on the options available? There’s the ATM, which I believe hasn’t been used, and possibly equity raises or asset sales. I’m looking to understand how you prioritize these options as you work to reduce leverage.

Sure, Samir. Well, obviously, the leverage is up due to the Kimstone portfolio. We brought on balance sheet roughly $1.1 billion of debt, and it is our goal to bring it back down to the 6x level. As I mentioned, it's 6.4x today when you really pro forma in the full amount of the EBITDA, right? We closed in the beginning of February, so you're missing a full month of EBITDA. So you have to really start at that 6.4x. And then we have multiple options and levers to pull. Selling the SUPERVALU stock is one piece to it, which happened in the second quarter, so that will help bring down leverage. That's an asset sitting on our books that had no EBITDA, so the cash will go to reduce debt there. We have the balance of our sales that we're working through as well. And we do have our ATM program in place, which, at the right time, we'll be able to use, and we've modeled that into our forecast. So we feel comfortable that we'll get it down one way or another to 6x by the end of the year.

I'm wondering as you head into Las Vegas, I can see ICSC convention. What are your top priorities? What do you really want to get accomplished with this convention?

The ICSC in Vegas is an opportunity to review our portfolio and engage in strategic discussions with our retail partners. We've enhanced our portfolio and are introducing several redevelopment and development projects for the future. This event allows us to consider long-term strategies, understand where our retailers are expanding, and identify their current needs from us as landlords. The perspective of landlords has shifted regarding what we aim to provide at shopping centers. It's important for us to understand what retailers seek and how we can be more proactive. Meeting with some of our largest partners is always beneficial as we discuss their expectations for the upcoming year and beyond.

Recently, we have seen that Sears has been very active with mall owners to reposition its mall-based Sears locations. I know your Kmart exposure declined in the first quarter. But just curious if they have been more receptive and active to the same strategy with respect to the Kmart locations in your portfolio?

This is Ray Edwards. First off, you should appreciate that the mall locations, Sears owns those properties. And for the mall owners to joint venture with them for the redevelopment is very important. Kimco has lease positions with Kmart. We have a number of locations that have no term remaining for the next 2 to 3 years that we'll be getting back. So we're focused on those, and we are working with them on some other locations, but we have a lot more flexibility with Kmart. They're all leased positions. We're working with them. They don't have control of the spaces for a tremendous amount of time, and we are working with them. We have done deals with Kmart and Sears in the past. And particularly, we closed last year on Christiana, which was a property that they owned, that was a product service center for them. And we worked with them for 5 years to get that site redeveloped. And then upon getting the site rezoned, we were able to acquire the property and develop it on our own. So we have a good relationship with them, and we'll work strategically where it makes sense.

Okay. And then, regarding the comments Conor made regarding the power center redevelopment strategy. Just curious whether you found that grocer-anchored power centers kind of consistently sell at lower cap rates than when you estimate that?

Yes, it definitely compresses the cap rate when you can add the grocery component into a power center. It's probably between 50 to 150 basis points depending on the location and who the surrounding retailers are. But not just from a cap rate compression standpoint, it's a great thing to boost surrounding retailer sales because the traffic flow is dramatically increased when you have that grocery component. And originally, we thought that this new strategy was only going to be dedicated toward the specialty grocer sector. But what's been a huge boost for us is now the traditional grocers are trying to take advantage of this as well, and it might have something to do with the supply and demand factor where boxes are just not readily available. So when we can put together spaces for these grocery concepts, it's fantastic for us.

Okay, then finally for me. In the past, merchant developers have been a major source of acquisition opportunities in the industry, but development starts have remained relatively low this cycle. I'm just curious, and again, in anticipation of ICSC, I'm just curious whether you're seeing any evidence of any material increase in terms of merchant development starts?

No, we really haven't. We think it's going to remain muted for quite a while. The few developments you are seeing are generally smaller and generally food anchors. So those large 800,000 to 1 million square-foot large scale spec developments of years ago, they just haven't come back yet. So the total supply in terms of new supply, we expect to remain very, very low for a while. Remember, we're still in a recovery mode in terms of rents getting back to previous high levels. So the economics are still tough for developers to make a lot of sense.

Multi-family developers are significantly increasing land prices. Therefore, when comparing retail development to multi-family development, it becomes quite challenging to make the numbers work.

Glenn, I guess one for you, a question on the guidance. In the guidance detail on the back of your supp, we see that the full-year portfolio contribution is up a bit in the forecast for this year versus what you were forecasting last quarter. Despite you leaving these same-store NOI outlook unchanged. So is that reflective of dispositions, perhaps, occurring later in the year than expected? Or maybe you're taking a wait-and-see approach for your same-store NOI guidance and maybe you'll wait until next quarter before revising it upward?

Well, again, it's up. It's up modestly, right? If you look at where it is, it's only a few million dollars up. So it doesn't move the same-site NOI needle all that much. And part of it is a little better performance really coming from this Kimstone portfolio, which is not in the same-site NOI number. But overall, the portfolio is performing better. So it is early in the year, though. But we feel comfortable with our guidance range.

And then a question on the impact for the first quarter of snow. I'm just curious on how much that might have taken a bite out of your NOI in the first quarter?

Yes, we actually saw the snow have a 15 to 20 basis point impact on our same-site NOI numbers this quarter.

I noticed that you are marketing the centers in your large portfolio on the West Coast, and I wanted to ask if that is a joint venture you plan to exit completely, or if it is just part of a price discovery process, perhaps related to a right of first refusal?

It's part of our simplification strategy, that is a JV that back last year, if you remember, we split the portfolio into 2, and this was the remainder of that portfolio. We are in the market with that portfolio, and we'll see what the pricing comes in at. But it's a portfolio that has some good locations but also is mixed. So we're marketing it as a portfolio to see what kind of price discovery we can find.

And just a follow-up on the TIs on new leases, excluding redevelopment assets, has been running kind of in the $20 a square foot range the last few quarters. I think Kimco used to pride itself on really its lack of TI contribution in prior years. Is that just, I guess, what's necessitated in this environment? Or is that really a function of your shift to sort of a higher quality type of property that's maybe driving increased TI contribution?

I think it's a little of both. Historically, we have been running as the low-cost provider and many of our assets, I think, require some upgrading. So you're seeing that in terms of when we reposition an asset with a new anchor, we want to make sure that we bring the asset up to a competitive level. So we are investing quite a bit in terms of redevelopments as well as some property upgrades to help curb appeal, and the TIs have ticked up a little bit, but I think that's part of our strategy going forward.

Just a quick question on size. It looks like obviously guys are the biggest in the group. But as you look at some other sectors, there's kind of behemoths in their group. So is there a benefit to even larger scale in the shopping center peer group? Or is size, once you get to your level, kind of irrelevant?

Well, we think we have 2 benefits. One is the total size and the number of properties we have, but also being national in scale. That helps us with retailers. We're at the top of their list in terms of landlords they want to sit down and talk to and review their expansion plans and their desire to meet their store count. So it does give us a little bit of an edge having so many properties and having so many relationships with these different retailers. It also helps from the cost standpoint on our side. We're more productive and there's more efficiencies in our back office when you spread our cost over so many properties and so many different leases.

I would just add that I think size makes a difference when you have a controlling interest in specific submarkets. So as you can see when you look at our map, we're trying to get a lot more concentrated around the major gateway markets because we believe that there is significant pricing power when you can control significant submarkets, and that's what we're trying to get to. I don't think that the size necessarily matters in our sector because of the amount of strip centers that are in the population. But if you can concentrate your ownership around corridors, retail corridors that are very successful, then you can use us to your advantage.

So if Kimco was to, say, double in size, you don't think there's much incremental benefit to the extra square footage added?

It really depends on where those assets are when you double in size. If you own the three or four corners in the best market, you can definitely use that to your advantage as leases roll, and you can see how to upgrade the tenants and push rents. Additionally, it may create significant redevelopment opportunities if you control a lot more real estate. However, it is really market-specific, and what you want to focus on is where the growth is coming from.

Regarding the 37 net leased properties you sold in the quarter, were those the same net leased assets you acquired a couple of years ago? And also does that eliminate your net lease exposure? Or do you have a bit more that you're looking to sell?

These are part of the portfolio of net leased restaurants we did acquire a couple of years ago that was fairly public. So far, we've sold 42 of those net leased restaurants. Original cost was about $58 million, we've sold them for $70 million. So there were some nice gains in that. We have 29 more to go, 20 of them are under agreement to sell, so we are liquidating those net leased restaurants. But you shouldn't confuse these net leased restaurants with our net leases that we have lots of different net leases with different types of tenants. We just think it's a great time to sell these net leased restaurants and some of these are in secondary markets, and the 1031 market in particular is very aggressive right now.

Some recent press reports have the Safeway consortium preparing to tee it up for an IPO. Can you discuss what you've accomplished there so far and how close you are to an event?

Again, this is Ray Edwards. The Safeway transaction closed at the end of January this year. We have reached an agreement with SUPERVALU regarding the transitional service agreement and our plan to reduce our reliance on them, which will enable us to operate as an independent company. This is our primary focus. Bob Miller and his team are currently working on merging a 20-store chain, and we are pleased with its performance to date. As for our exit strategy, we consider it daily, but it's still too early to determine our direction and the outcome.

Sure. Just a quick follow-up question here. Conor, you mentioned that the acquisition market for secondary markets is particularly strong. I'm curious, given the strong demand across the quality spectrum, do you think that there is a cap rate compression between primary and secondary markets, or is the spread remaining the same as it was about a year ago?

This is Ross Cooper. I would say that there is a little bit of compression certainly between the secondary markets and the primary. But at the same time, you're also seeing the primary markets continue to go further lower, as Milton has indicated in prior quarters that he expects. So there is a little bit of compression certainly, but we're also seeing the A quality in primary markets come down a little bit as well. So it's a good time to be a seller in those secondary markets, but it's also a pretty challenging market to be buying in the A and primary markets as well.

I know that can be difficult to assess exactly why this might be happening, but do you see more buyers out there for the secondary markets now than they did a year ago? And there was reference to the yield-driven acquisition strategy. But does there just seem to be more funds teed up who want entry into that product type?

Yes, I would absolutely say that's accurate. On our disposition when we're in the market, we're seeing significantly more bidders and all different types of bidders, both private institutions, bidding on properties that a couple of years ago may not have had the same response. So we're very excited about where we are on our exit strategy for the secondary market assets and expect that to continue through the end of the year.

It may be worth adding that the growing CMBS ability of obtaining financing is helping for the secondary market acquisitions. CMBS is back, and financing is available for the secondary assets now.

Thanks, Frank, and to everybody that participated on our call today. As a reminder, additional information for the company can be found on our supplemental as posted on our website. Have a good day.