F E A T U R E S
Why Kimco Shareholders Love Milton Cooper
Since coming public in November 1991, Kimco Realty Corp. has dusted the Standard & Poor's 500-Stock Index and come awfully close to matching the track record of one of the greatest investors of all time.
by Barry Vinocur
Photography © Toby Richards
REITdom was a far, far different place back in November 1991, when Merrill Lynch prepared to take Kimco Realty Corp. public as a real estate investment trust. There were a lot fewer REITs than there are today. There were a lot fewer REIT analysts, there were only a handful of dedicated real estate funds, and even investors who knew a REIT from a beet were quick to point out that there wasn’t a good reason to buy a REIT on its initial public offering. “You can pick up the stock at the IPO price, frequently lower, six or 12 months down the road,” one seasoned investor said at the time. Despite the skepticism, on November 22, 1991, the Kimco offering was priced at $20 per share. The rest, as they say, is history!
In the nearly 10 years since Kimco’s IPO, the New Hyde Park, New York, company’s portfolio has mushroomed from 126 properties totaling 15 million square feet of gross leasable area in 23 states to, as of mid-July, interests in 503 properties totaling 67 million square feet of GLA in 41 states. Those properties include 434 shopping centers, two regional malls, 50 retail store leases, 13 ground-up development projects, three undeveloped parcels of land, and one distribution center.
As impressive as Kimco’s growth has been, the statistic that grabs the attention of investors without fail is the company’s performance. Using the “Comparative Returns” feature on our Bloomberg terminal, we analyzed the performance of Kimco, Berkshire Hathaway’s Class A shares, and the Standard & Poor’s 500-Stock Index over a 117-month period from the end of November 1991 through the end of August 2001 (see graph on this page). We found that Kimco left the S&P 500 in the dust, posting a 20.7 percent annual return vs. the widely followed benchmark’s nonetheless impressive 14.3 percent annual return.
Stacking Kimco’s Chairman and CEO, Milton Cooper, up against Berkshire Hathaway’s Warren E. Buffett and Charlie Munger was an eye opener. Though Berkshire Hathaway’s Class A shares outperformed Kimco over the nearly 10-year period, it was close: Berkshire Hathaway posted a 24.2 percent annual return vs. Kimco’s 20.7 percent. Not bad for a REIT—and a shopping center REIT, to boot!
Tracing Its Roots
Founded in 1966 by Milton Cooper and Martin Kimmel (the company’s chairman emeritus), Kimco began life as a ground-up developer of shopping centers. The company’s first center opened in Southern Florida; today Kimco owns more than five dozen centers in Florida alone.
Kimco’s growth has come not only through the development and acquisition of centers and portfolios, but also through its 1998 merger with Price REIT, an experienced developer and owner of shopping centers on the West Coast. In 1999, the company formed Kimco Income REIT (KIR), a joint venture with institutional investors that today holds 57 of Kimco’s total portfolio of retail properties. KIR employs greater leverage, through nonrecourse mortgages, than Kimco, thereby potentially “juicing” returns to Kimco and its JV partners. Today KIR is one of the largest privately held REITs.
Kimco also began taking full advantage of a provision in the REIT Modernization Act, which took effect at the beginning of this year. The provision allows REITs to establish so-called taxable REIT subsidiaries, or TRSs, which can engage in businesses not permissible under REIT rules, such as providing concierge services to office tenants (see “Legislative Relief,” Property, Fall 2000, page 51). Unlike, say, lease revenue, which isn’t taxable at the REIT level as long as the REIT complies with IRS rules, income generated by TRSs is taxable.
In a recent research note, Jim Kammert and his fellow REIT analysts at Goldman, Sachs & Co. observed that Kimco Developers Inc. (KDI), a TRS, had produced an after-tax gain on the sale of an asset of $3.5 million, or $0.05 per share of Kimco’s funds from operations, the REIT equivalent of earnings. Kimco’s creative use of TRSs is one reason the Goldman analysts view the company as one of the more opportunistic and creative shopping center REITs.
Besides being widely regarded as an extremely talented CEO and all-around nice guy, industry veterans say Milton Cooper has charisma.
“Whether you’re sitting across the table from him in a one-on-one or listening to him give a presentation to a group of institutional investors, you feel like he’s talking to you—and only you,” said one portfolio manager whose firm holds a sizable stake in Kimco. He added that Cooper has a way of presenting things so even if you disagree with him “you feel guilty telling him that you don’t agree.” The portfolio manager, who asked that we not use his name, stressed, “I can honestly say that I don’t know anyone who doesn’t like the guy.” The fact that Cooper and his team have made portfolio managers a lot of money over the years is, in this manager’s words, “the icing on the cake.” As Mike Kirby, a principal of the Newport Beach, California-based Green Street Advisors buy-side research firm, puts it, “Finding the next Milton Cooper won’t be easy.”
At age 72, Cooper shows no evidence of slowing down. When we caught up with him recently, the avid tennis player had just finished playing singles with a man roughly 20 years his junior. “He usually beats me, but this time I won,” Cooper told us.
There is a successor in the wings. David Henry, the 52-year-old former chief investment officer for GE Capital Real Estate who joined Kimco in late March, is slated to assume the CEO mantle next year. But even Henry says he doesn’t expect his boss will ever “really” retire. “I expect that he’ll still be doing deals when he’s 103-years-old,” Henry says.
Doing deals is in Cooper’s blood. He and his team have executed an impressive string of transactions that by some estimates has added hundreds of millions of dollars in shareholder value over and above the value added by normal business operations. Typically, Kimco gets involved with a troubled or even bankrupt retailer, with an eye toward eventually controlling the real estate. The list includes Hechinger, Woolco, Clover, Venture Stores, and most recently Montgomery Ward.
Kimco structures each involvement according to the specifics of the situation. However, its 1998 deal involving then-bankrupt Venture Stores, a value-oriented department store chain, illustrates the potential upside in these transactions. In a note earlier this year, Green Street Advisors wrote that Kimco invested $262 million in the Venture transaction and delivered a return north of 15 percent. Put another way, Green Street analyst Greg Andrews pointed out, the Venture Stores deal produced a $3.50-per-share (14 percent) increase in his firm’s estimate of the company’s net asset value.
The latest evidence of deal-making prowess came when Kimco announced its operating results for the second quarter of 2001. Funds from operations came in at $1.10 per diluted share, in line with consensus estimates and a 10 percent increase over the year-earlier period. In a note to clients, Larry Raiman and his team of REIT analysts at Credit Suisse First Boston pointed out, “The highlight from the quarter (by far) was the much-anticipated detail regarding profits from the Montgomery Ward transaction. Kimco (thanks in large part to Milton Cooper) once again managed to pull off an impressive return from an opportunistic investment (of just $30 million).” The CSFB analysts noted that Kimco expects to generate proceeds of $0.35 to $0.40 per share, or roughly $23.5 to $27.0 million, from its half interest in the Montgomery Ward deal, a joint venture with the Columbus, Ohio-headquartered Schottenstein Group (30 percent interest) and Simon Property Group, a mall REIT headquartered in Indianapolis, (20 percent interest).
In their note on Kimco’s conference call with analysts, Jeff Olson and his team at UBS Warburg commented on Kimco’s $50 million loan to its third-largest tenant, Ames Department Stores, which recently filed for bankruptcy protection, “While details of the transaction were not provided, we believe the deal could add as much as $0.10 per share in FFO once fully funded.” In a recent phone interview, Olson predicted that the mounting woes of many retailers could produce a target-rich environment for Kimco. “We expect more deals such as Montgomery Ward,” Olson said.
Kimco plans to capitalize on such opportunities via its Retailer Services division, which among other functions helps retailers find tenants for closed stores. The company recently announced that it had brought Ray Edwards, a veteran in such matters, on board to help with the effort.
The Other Side of the Coin
Less encouraging was the second quarter performance of Kimco’s core portfolio, which posted a gain in same-property net operating income of only 2.6 percent. Vacancies also edged up, thanks to tenant bankruptcies, by roughly 50 basis points from the first quarter and 90 basis points from the fourth quarter of 2000. The results reflect the soft economy and the problems it has visited on some retailers. Moreover, with the economic picture still cloudy, it’s too soon to say when the performance of Kimco’s core portfolio might reverse itself.
Even so, the company is making progress in the face of a tough retailing environment. During the first six months of last year, for instance, Kimco signed 147 leases totaling 857,000 square feet at rents averaging $8.90 per square foot. In the comparable period this year, the company signed 123 new leases totaling 605,000 square feet at an average rent of $10.87 per square foot. In their note on Kimco’s second quarter conference call, Jonathan Litt and his colleagues at Salomon Smith Barney pointed out that the new leases were signed at rents representing an 8.4 percent increase over the rents of tenants who vacated space this year—and 38 percent above the portfolio average of $7.89 per square foot.
Though not immune to the economy’s woes, Kimco is well-positioned to weather an economic storm because of Cooper’s long-term vision. Several years ago, Cooper and his team began to aggressively diversify Kimco’s revenues. The fact that Kimco’s earnings were up as strongly as they were in the second quarter of this year—despite a tough retailing climate and the slower growth of its core portfolio—suggests that efforts such as the company’s Retailer Services division are paying off nicely for shareholders. Kimco Income REIT, the joint venture with institutions, is another such effort, as is Kimco Developers, the company’s merchant building operation.
“Kimco’s multiple business units continue to generate sector-leading growth despite the weak retail climate,” wrote Litt and his colleagues. They observed that Kimco is offsetting “below-plan KIR acquisitions” this year and “modest” income growth from the core portfolio with revenues from its “distressed-retailer and merchant building businesses as well as its $65 million portfolio of marketable securities.” The analysts said they “also anticipate the announcement of several new initiatives in the second half of the year, which could have positive implications over the long haul.” Indeed, Kimco recently announced a strategic alliance with RioCan, a Canadian REIT (see “Kimco Forms JV With RioCan” on page 8).
To be sure, the multiple-business approach can complicate analysis of Kimco. Income generated by the Retailer Services unit and the merchant building operation is of “lower quality” than earnings stemming from the core business, owning and leasing shopping centers.
Green Street’s Kirby notes that as recently as 1998, such noncore income accounted for just 4.1 percent of Kimco’s FFO. Last year it accounted for 8.7 percent of FFO. “Last year’s increase in other income added $0.14 per share, making the line item a significant driver of FFO growth,” said Kirby, adding that the number is likely to grow further, if Cooper has his way. On balance, and despite the complications, Kirby views the trend as a positive.
Passing the Baton
In a recent interview, Cooper confessed that he’s flattered by all of the attention he gets, but he was quick to add that he gets more credit than he deserves for the company’s successes. “We have a very deep bench.”
That bench, by his own admission, has kept Cooper from stumbling. He cites the company’s foray into “technology”—the Internet—as a time when, if he had followed his “gut,” Kimco would have been worse off. Mike Flynn, the company’s president and chief operating officer, Cooper says, kept the company’s investment to only $250,000—“far less than I approved.”
David Henry recognizes the legend that he will be replacing. But he’s quick to emphasize that he expects Cooper to play an active role in Kimco for many years to come. Cooper points out that Henry’s experience at GE running a $20 billion portfolio of equity, debt, and joint-venture real estate investments, as well as what Cooper calls Henry’s strong “people skills,” make Henry the right person to succeed him. “Look at what I said when we named Dave to be my successor back in March.” Back then, Cooper said:
“Finding a person to entrust the future of my life’s work was not easy, but I have known Dave for over 15 years and I believe he is perfectly suited to lead Kimco. His impressive background and vast industry relationships will help Kimco expand its business platform and operating capabilities and lead our company to the next level. With Dave coming on board, Mike and I will be free to be even more active doing what we love, making deals.”
Which sounds as though Milt Cooper will, indeed, be around ’til he’s 103.
Mike Kirby and Jon Fosheim are co-founders (1985) and principals of Newport Beach, California-based Green Street Advisors, a buy-side research boutique specializing in property-linked stocks. Warner Griswold, a senior analyst, joined the firm in 1996.
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