Michael Rulli and Robert Lee have heard all the reasons why they should not have started their new shopping mall investment and management company.

In a business increasingly dominated by mega public companies paying record prices for real estate, Rulli and Lee set out to create an independent company focused on getting first-class profits from shopping malls located in second-tier U.S. cities.

But first they had to convince investors and property sellers that they were for real. And their company's new name, Coyote Management Inc., did not open many doors.

"Here we were, trying to start our own business at a time when competition is off the charts and all these companies are merging and being bought out," recalls Rulli, a 20-year veteran of the shopping mall business who last summer set up the Dallas-based firm with a handful of partners. "Everybody thought that we would never get anything done."

"Everybody" was wrong.

In less than a year, Coyote Management has purchased three Southeastern shopping malls and is on the prowl for more buys.

"Our goal is to acquire about 12 to 15 malls over a three-year to five-year period," says Rulli, who along with Lee was a former top executive with Marathon U.S. Realties Inc. "We also want to have some fun building a company."

During the past few years, there have been few grins at U.S. shopping mall firms. Coping with industry-wide consolidation and restructuring under performing property portfolios has been serious business for thousands of shopping center managers.

Starting fresh Coyote Management chief executive Rulli and president Lee had their share of merger work during the three years they helped prepare Marathon U.S. Realties for sale by its Canadian parent company, Canadian Pacific Ltd.

In October 1996, Canadian Pacific sold Marathon U.S. and its nine Southwestern shopping malls for $312 million to a partnership headed by Cleveland-based First Union Real Estate Investments.

Rulli, who had worked for developer Herring Group when Marathon bought them out in 1989, decided that this time he would strike out on his own. The company consists of a group of about 20 industry veterans, about half from Marathon.

"We still have a lot of people out here who are wondering what they are going to do if their company is sold," Rulli says. "We didn't want to go to work for another big corporation and deal with the same insecurities."

With funding from Lehman Brothers, Coyote Management last August purchased three Mississippi shopping malls to kick off its new investment and management operation. For $63.2 million, Coyote Management bought Metrocenter Mall in Jackson, Miss., Leigh Mall in Columbus, Miss., and Greenville Mall in Greenville, Miss., from the California Public Employees' Retirement System.

Together, the three regional shopping centers contain more than 1.8 million sq. ft. Coyote Management already has begun more than $3 million in improvements to the smaller Leigh Mall and Greenville Mall.

"For a lot of the big guys, these kinds of properties don't have the glamour that they are after," Rulli says. "They don't appreciate that in every community there is a level of disposable income. The challenge to the owner of these properties is to continue to improve them and not allow them to deteriorate. Just because it's a small market doesn't mean there isn't a chance for some value enhancement."

Coyote Management is doing a complete interior remodel of the Greenville and Leigh malls. Both centers were built in the 1970s and contain about 300,000 sq. ft. of GLA. Greenville Mall is anchored by JCPenney, Sears and McRae's; Leigh Mall is anchored by JCPenney, Sears and Stage Store.

Along with an inside makeover, both of the Mississippi malls are getting an exterior facelift with new high-profile entrances, landscaping and signage. Work on both projects will be completed this year.

"The shoppers in Mississippi are not going to know what's hit them," Lee says. "Both of these properties haven't been touched in 15 years. They had low light, dark carpeting and dark paint. We're replacing the carpet with bright floor tiles, dropping in skylights and redoing the whole appearance."

Lee expects that both the Leigh and Greenville malls will have 25 percent new tenants when the grand opening is held in October. "If we didn't do the renovation, we wouldn't get the new tenants," he says. "Both of those centers could use a fourth anchor, and we are working on that."

The Metrocenter Mall in Jackson, which is anchored by Dillard's, McRae's, Gayfers and Sears, was given a total makeover in 1993. "[It is] a fabulous-looking center," Rulli says.

Sales in all three projects range from $210 to $235 per sq. ft.

Expansion anxiety Now, Coyote is anxious for additional buys, and Rulli says the clock is running. "We have been meeting with a lot of institutional investors, and everyone has the same theory that we have about another 12 months of this window of opportunity," he says. "That's why you are seeing so much activity.

"The availability of capital and such low financing rates is saying to people, 'Now is the time to buy and sell,'" he continues. "The challenge is to compete against the REITs. They have the luxury of such low yields that they are forcing the cap rates down. And it's extremely difficult to compete with them in acquisitions."

Still, Coyote Management has offers on the table for three more shopping malls. The investors are sticking to markets in Southern states that many of the big public buyers have skipped over.

"We are looking for property that dominates its market and has the potential for improvement," Rulli says. "No, we're not always looking at big-city properties. But these are markets where people live, raise families and want to buy merchandise."

Coyote's top executives are not put off by these locations, as they developed similar properties while working at Herring Group. And with the first acquisitions behind them, it's becoming easier to get a foot in the door for further purchases.

"We are now on the social register," says Rulli, "and we are now able to talk to major financial institutions that we weren't able to get the attention of before."

Mike Landon, senior director with investment banker Holliday, Fenoglio, Dockerty & Gibson, recalls working with Coyote early on. "A big part of our original process was convincing the seller that these guys could do the job," he says. "The first purchase was a pretty big number coming right out of the box, and it put them on the map and gave them a lot of credibility with sellers.

"Not only did they close on the first three centers, but they have increased the income and performance of the properties," Landon continues. "They have a niche area of expertise that almost nobody else has. They had a great track record and story, and now they have access to the capital they need."

Quality is job one Developer M.G. "Buddy" Herring, who hired Rulli away from The Hahn Co. in 1985 to join his development firm, says he is not surprised that the former Marathon officers struck out on their own.

"The timing was ideal for Mike to do something like this," Herring says. "He worked hard turning around the Marathon properties and he stayed there through the end of the sale. I'm a big fan of Mike's. If he can't be successful doing what he is doing, then nobody else can."

For his part, Rulli says he is trying to keep the company centered on what shopping center managers and developers do best: providing high-quality retail environments for both merchants and consumers.

He worries that many retail investors have forgotten the industry's roots, as they focus on the financial side of the business. "That is the nature of business we are in right now," Rulli says. "There is no question that the financial side of the business is important, but let's don't lose sight of what business we are in."

He still gets frustrated when asked about the company's exit strategy. "I had to answer that question three times yesterday," Rulli says. "At some point, we will definitely look at the possibility of going public. But we are here because we wanted to stay in a business we love. We are not here for dis positions."