The Freemont Hub in Freemont, Calif. comprises of more than 504,780 square feet.

Kimco Realty Corporation steps outside the box to adapt and grow

By Lorna Pappas

One of the most consequential companies in REIT history started with a handshake between two friends. In 1958, Milton Cooper and partner Martin Kimmel teamed to buy their first shopping center in southern Florida and lay the foundation for what would become Kimco Realty Corporation (NYSE: KIM). The firm held its initial public offering 33 years later in November 1991, a move that is identified as the beginning of the modern REIT era. Kimco has been known through the years for acquiring properties with below market rate leases, maintaining a strong balance sheet and leveraging opportunities.

		People Make a Winning Company Milton Cooper says that while access to capital is key to succeeding in real estate, it’s “people, people, people” and a company’s attitude towards employees that really separates it from others. Upside-Downside Samplings of what analysts are saying about Kimco Realty Corporation.

As Chairman and CEO of Kimco, North America’s largest publicly traded owner and operator of neighborhood and community shopping centers, Cooper is unusually modest. “I don’t like to say we’re different,” he says. “There are many companies similar to us who are performing well. However, we are successful because of our people, our foresight and ability to grasp opportunity, and our sheer magnitude.” That is shown in Kimco’s portfolio. As of January 2007, the company had 1,337 properties totaling 174.7 million square feet of leaseable space in 45 states as well as Canada, Mexico and Puerto Rico.

After more than 15 years as a public company, Kimco reported at year-end 2006 that funds from operations had grown at an average annual rate of 10.7 percent. Stock prices grew from the 1991 IPO by more than 940 percent, and Kimco’s 2,272 percent total return substantially exceeded the 928 percent total return of the FTSE NAREIT All REIT Index over that time period.

Kimco Realty Corporation 3333 New Hyde Park Road New Hyde Park, NY 11042 Phone: (516) 869-9000 Web site: www.kimcorealty.com Management: Milton Cooper, president and CEO; Michael J. Flynn, vice chairman and chief operating officer; David B. Henry, vice chairman and chief investment officer; Michael V. Pappagallo, chief financial officer and executive vice president Ticker Symbol: KIM, listed on the New York Stock Exchange •52-Week High: $47.13 •52-Week Low: $32.02

According to Scott Crowe, head of global real estate for UBS Investment Research, “Kimco is one of the leaders of the REIT evolution to operate ‘above the asset level’ and leverage intellectual property by sourcing, acquiring, developing and managing assets. This has allowed Kimco to post robust and consistent earnings growth.”

Ross Smotrich, senior managing director of Bear Stearns & Co., also remarked on Kimco’s growth. “Kimco’s track record since going public is reflective of the company’s core competency in the shopping center business, combined with its strategic acuity. The company consistently grows through variouscycles, while at the same time, manages both operating and financial risk.”

Strategic Partnerships

Even with outstanding growth, Kimco has learned that nothing is for certain in the industry. “Since that first handshake, the only constant in this company has been change. To adapt, we had to be innovative and constantly seek new opportunities,” Cooper says.

He adds that Kimco has adapted to change by using a dynamic business model that leverages the company’s core portfolio and adds operating businesses for development, 1031 exchanges, preferred equity and distressed lending. “We also adapt by continually looking into different sectors and expandinginternationally.”

Cooper says that in 1999, it was difficult to get adequate returns because the real estate market became heated and prices skyrocketed. As a result, Kimco began to purchase properties with other companies.

That led to the birth of the company’s first joint venture with institutional investors, Kimco Income REIT (KIR). From 1999 to date, KIR has grown to more than $1.7 billion in assets and is one of the largest privately held REITs in existence. At the end of 2006, KIP managed a portfolio of $12.3 billion for nationally recognized institutional funds.

“The KIR endeavor was a combination of management fees and return on investment, which resulted in a total return that exceeded our cost of capital,” Cooper says.

Kimco made a number of key transactions in 2006 with other investment groups such as the October 2006 acquisition with Prudential Real Estate Investors (PREI) of Pan Pacific Retail Properties, Inc., for approximately $4.1 billion. Another transaction was with GE Real Estate for Crow Holdings’ fund, Crow Holdings Realty Partners III, L.P., which Kimco acquired for a total of approximately $920 million. (For more information on these transactions, please see “2006 Kimco Joint Ventures” chart).

In terms of growth and adapting to change, Kimco also embraces other market sectors, such as self-storage and office space. “If we find the right joint venture partner with knowledge and success in a particular sector, we are willing to reach out of shopping centers,” Cooper says. “With our size, the strength of our balance sheet and our ability to take on new business enterprises, we can’t be limited to one specialty niche—we just don’t want to restrict ourselves.”

According to Crowe, “Kimco continues to follow a model of leveraging its intellectual capital, which includes incremental investments into other sectors on an opportunistic basis,” he says. “One of Kimco’s strengths is its relationships, which is a key corporate asset, and one that it is able to leverage to find opportunities in niches where many others aren’t operating.”

2006 Kimco Joint Ventures
JOINT ACQUIRER: Prudential Real Estate Investors (PREI)	TARGET: Pan Pacific Retail Properties, Inc.)	TOTAL ACQUISITION Approximately $4.1 billion 140 properties 3.6 million square feet	MAJOR MARKETS New York, San Francisco and Washington, D.C.
GE Real Estate	Crow Holdings’ fund Crow Holdings Realty Partners III	Approximately $920 million 19 properties 19.9 million square feet	Northern California, Southern California, the Pacific Northwest and the Mountain Region

International Ventures

In the last six years, Kimco has ventured beyond U.S. borders, and now approximately 10 percent of the company’s FFO comes from Canada and Mexico. “The primary driver has been the search for higher yields in markets that are less competitive for acquisitions and perhaps less efficient than those found at home,” Crowe says.

“Expanding internationally was a logical step for Kimco,” says Scott Onufrey, vice president of investor relations for Kimco. “We started in Canada in 2001, then moved into Mexico, which has markets with strong fundamentals for retail real estate.”

Kimco penetrated Canada because cap rates are higher, interest rates are lower, the economy is stable and there are fewer square feet of retail per capita than in the United States, notes Onufrey. Today, the company has interests in 133 Canadian properties comprising more than 16.9 million square feet. In 2006, Kimco funded a $45.1 million preferred equity interest in a $183 million development project consisting of 1.2 million square feet. Kimco is also co-redeveloping the former General Motors plant in Montreal with anchor retailers to include Costco, Sobey’s, Zellers and Home Outfitters.

Kimco then moved into Mexico in 2002, “because Mexico has a growing middle class, there’s an enormous shortage of retail and a huge demand for space by U.S. retailers,” Cooper says. In 2006, Kimco closed on three new development projects in Mexico, with a total cost of $87 million. Its Mexico portfolio now includes interests in 11 stabilized shopping centers totaling 2 million square feet, with 11 shopping center projects under development that, upon completion, will total 4.3 million square feet.

“Kimco’s expansion into both Canada and Mexico was done intelligently, profitably and prudently, with very strong local partners,” Bear Stearns’ Smotrich says.

In addition to Canada and Mexico, Kimco moved into the U.S. territories in 2006. The company acquired interests in seven shopping centers in Puerto Rico with an aggregate property value of approximately $448 million. The portfolio is approximately 98 percent occupied and includes anchor tenants such as Home Depot, Sam’s Club, JC Penney and other high quality retailers.

Without unveiling details, Kimco reports that it will continue to look at other international opportunities.

Pursuing a Dream

Today, Kimco is pursuing what it calls its “Dream Portfolio,” focusing on growth markets located in the United States and abroad with high barriers-to-entry, while disposing of properties in areas that lack these characteristics. These desired properties are located in densely populated markets, have significant supply constraints that limit competition, are anchored by productive stores in the top 25 percent of the retailer’s chain and possess redevelopment and expansion potential.

The Safeway in the Westlake Shopping Center in Daly City, Calif.

“We have taken steps over the past three years to improve our portfolio quality and diversification by acquiring properties in the best markets, selling properties in weaker markets and by redeveloping well-located properties where we could create additional value,” Onufrey says.

One 2006 transaction that exemplifies its “Dream Portfolio” is Hylan Plaza shopping center in Staten Island, N.Y., a 358,155 square foot shopping center anchored by Kmart, Pathmark and Toys ‘R’ Us that was acquired for approximately $82 million from Atlantic Realty Trust. Most of this shopping center’s tenants have leases with below market rent and short remaining lease terms, which allows Kimco to grow rental income from the property substantially. Hylan Plaza is also located in a densely populated market with an above average income level.

David AuBuchon, vice president at A.G. Edwards & Sons, Inc., thinks the REIT’s approach is right on target. “Kimco’s focus on improving the overall quality of the core portfolio will produce same store property income growth over the next several years at the upper end of the company’s recent historical range of 3 percent to 5 percent. In addition, we feel these acquisitions will produce more than 10 percent FFO per share growth over that same time period.”

To best protect investors as it pursues its “Dream Portfolio,” Kimco is careful to ensure that no one tenant accounts for more than 4 percent of base rent. “Analysts and investors can anticipate that rental revenue from our properties will remain consistent over time, without potential interruption or decline because of a single struggling tenant or retailer, or a weak market,” Onufrey says.

With almost 50 years at Kimco, Cooper says he has watched many business cycles and learned some primary lessons. “First, the only constant in the business is change. Second, always keep a strong balance sheet with low debt. Finally, at all times, maintain a culture of people with high integrity that can seize the wonderful opportunities created by change.”