In an opportunistic move, Kimco Realty Corp. secured the winning bid in an auction for the asset designation rights for 315 Montgomery Ward locations. With the coup, the New Hyde Park, N.Y.-based REIT is responsible for the ultimate disposition of the fee or leasehold positions held by the bankrupt estate.
Kimco possesses a 50% stake in the deal, according to Michael Mueller, director of equity research at CIBC World Markets, a New York-based investment-banking firm. The other 50% will be shared among Simon Property Group, an Indianapolis-based shopping center REIT; Schottenstein Group, a Great Neck, N.Y.-based investment group; and the Montgomery Ward bankrupt estate. After performing a “detailed scenario analysis,” CIBC estimates the net profits for the partnership will be $30- to $40-million.
Making the right moves
Kimco's core focus is on managing and expanding its neighborhood shopping center portfolio. The company began in 1991 with 120 properties totaling 15.6 million sq. ft. in 23 states. During the past 10 years, it has expanded its core portfolio to include 495 properties, totaling 65 million sq. ft. in 41 states.
Kimco also boasts a good credit rating from Standard & Poor's. “We have a fairly secure balance sheet, which affords us the opportunity to go after situations,” says Scott Onufrey, director of investor relations at Kimco. “We have money in our pockets to go forward with deals.”
In 1998, Kimco tested the waters in a deal involving 96 Venture discount store locations. When Venture declared bankruptcy, the stores vacated 10 million sq. ft. of space. Kimco came in and assumed the costs, and within 18 months leased all of the available space. The key is to come in to re-establish the properties at market rates, since the properties are often renting under market rates, according to Mueller.
After its initial success, Kimco stepped in to take the property reins for another bankrupt retailer in 1999 — Hechinger and Builders Square, a national chain of home improvement stores. Within 12 months Kimco was able to find tenants and owners for the vacated properties. “We think that was a successful transaction,” Onufrey says. In this particular deal, Kimco also acquired some of the space for the company's core portfolio.
With the Montgomery Ward deal, Kimco doesn't plan on keeping any of the properties, as the company doesn't operate traditional shopping center properties. The rents being fetched by Montgomery Ward, $2.50 per sq. ft., aren't at market value, Mueller says. If Kimco is able to lease these buildings in a short period at the market value of $4 per sq. ft., the company will reap the cash benefits.
Don't expect this move to be the last play made by Kimco. Onufrey says the leadership of the company is always on the lookout for the next deal.
Based in New York City, Cristina Gair is an Associate Editor at National Real Estate Investor magazine, a sister publication of Shopping Center World.