“Kimco was one of the first new-era REITs in the industry. Most REITs were externally managed before, and it was not a very growth-oriented business.”

It's easy to relax a bit when you're riding a big wave of success. But some companies continue to surge higher even after that wave appears to reach its crest. A perfect example of this kind of success is Kimco Realty Corp. of New Hyde Park, N.Y.

Two partners, Marty Kimmel and Milton Cooper, founded Kimco in 1958 when they built their first shopping center in Florida. The pair formally incorporated in 1966 and took the company public in 1991, specializing in shopping center development. Today, Kimco's wave of growth continues to swell.

A history of change

The internally managed REIT has always done things a bit differently, notes Scott Onufrey, director of investor relations. “Kimco was one of the first new-era REITs in the industry,” he says. “Most REITs were externally managed before, and it was not a very growth-oriented business.”

Externally managed REITs often met with a hefty dose of skepticism because the industry viewed the fees charged by the external managers as self-serving. Real estate would pay the external advisers, who basically charged whatever they felt the market could bear.

In 1991, that atmosphere of scrutiny was coupled with the economy's recent emergence from the savings and loan crisis. In this climate, Kimmel and Cooper recognized the opportunity for rapid expansion through acquisition of properties. However, due to the lending crisis, financing was not necessarily available. The pair then turned to the public markets.

They managed to raise $125 million with a well-received public offering in November 1991, starting with approximately 126 properties and 15 million sq. ft. of retail space. Most importantly, the company was self-advised, with all the management of the REIT performed internally by Kimco.

In 1998, Kimco merged with Los Angeles-based Price REIT. Acquisition drove much of the company's growth throughout the '80s and '90s. “But when we brought on the Price REIT people, we entered development again,” notes Onufrey.

Peak performance

Today, Kimco Realty Corp. boasts a portfolio of nearly 500 properties and 66 million sq. ft. of retail space. “Since going public, our compound annual growth rate is 12% in FFO,” says Onufrey, who reports the growth rate for the industry is more in the realm of 6% or 7%. “Our dividend also has grown at approximately 11% at compound annual growth rate.”

This growth allows the REIT to out-perform much of its peer group. “We've been fairly successful for our shareholders,” Onufrey says. “The IPO total return on investment is 20%, vs. the NAREIT benchmark of 11%.”

Not only does the company out-shine the peer group on total return on investment, it created a subsidiary, Kimco Developers Inc., to help continue its growth. The company took this action following the REIT Modernization Act, effective Jan. 1, 2001. “Kimco Developers Inc. develops shopping center projects,” Onufrey says. “We sell them, rather than hold them, so we can capture the developer's profit.”

It is then able to reinvest the capital from profit. “With the REIT Modernization Act, you're allowed to retain the earnings,” Onufrey explains. “You pay a tax, but you can retain the earnings without paying them out in the form of a dividend. So we expect Kimco Developers to be a self-funding operation.”

Secrets to success

How does Kimco keep its profitable edge? “Our secret is finding opportunities other people don't really see,” says Onufrey. One example is a sale leaseback transaction the company performed with retail giant Venator Group Inc., formerly F.W. Woolworth Co., back in 1995, when Woolworth first closed its Woolco division.

“We purchased the rights to the Woolco leases,” says Onufrey, “and we continue to generate quite a healthy return from those assets.”

In 1996, Kimco also bought some properties originally belonging to Strawbridge & Clothier. “We acquired 16 vacant stores which were fairly cheap,” explains Onufrey. “Then we turned around and leased them with Kohl's as the primary tenant.”

In 1997, it seized another opportunity, performing a sale leaseback transaction with cash-strapped Venture stores. This move paid off for the REIT in unexpected ways. “We were generating approximately a 12% return,” Onufrey recalls.

“The stores had very cheap rents — in the $3 to $4 ranges. Then they filed for bankruptcy in 1998. The bankruptcy court awarded us the right to the leases, and we were able to quickly lease almost half of the 96 stores to Kmart Corp.”

Kimco then profitably leased the remaining stores over the next 12 to 18 months, at market rates in the $6 to $8 ranges.

Future plans

Moving forward, Kimco counts on continuing its double-digit earnings growth. The company recently hired a West Coast division head to open a San Francisco office, and it will continue growing its shopping center portfolio through development and sales. According to Onufrey, the company has expanded its platform to create diverse sources of revenue through good times and bad.

Kimco also has a large joint venture investment called the Kimco Income REIT, or KIR. With this neighborhood shopping center REIT, Kimco buys properties with well-anchored centers and high-quality tenants such as The Home Depot, Wal-Mart and Kohl's, and then uses financing on the properties on an individual, non-recourse basis to generate returns in excess of the high costs of capital.

“The venture is now over a billion dollars in assets, with approximately 9.5 million square feet,” says Onufrey. “So we're the largest of all the REITs in neighborhood shopping centers.”

Carol Badaracco Padgett is an Atlanta-based writer.