Kimco takes a risk, secures bid for Montgomery Ward locations

Kimco Realty Corp., a New Hyde, N.Y.-based neighborhood shopping center real estate investment trust (REIT), mixes a conservative image with an uncanny willingness to take risks. In another opportunistic move, Kimco secured the winning bid in an auction for the asset designation rights for 315 Montgomery Ward locations. With the asset designation rights, Kimco is responsible for the ultimate disposition of the fee or leasehold positions held by the bankrupt estate.

Kimco possesses a 50% stake in this deal, unlike previous transactions in which the company secured a 100% stake, according to Michael Mueller, director of equity research at CIBC World Markets, a New York-based investment-banking firm.

The rest of the deal will be shared among the Simon Property Group, an Indianapolis-based shopping center REIT; the Schottenstein Group, a Great Neck, N.Y.-based retail investment group; and the Montgomery Ward bankrupt estate. This partnership doesn't mean Kimco isn't in the deal for the profits, according to Mueller. After performing a detailed scenario analysis, CIBC estimates the net profits for the partnership will be $30 to $40 million. Kimco isn't revealing how these potential profits will be divided.

“The catch here is that Kimco needs to get those things done [the property needs to be fully leased and renovated where necessary] pretty quickly,” Mueller explained. The need for haste is that CIBC estimates the operating costs to be $80 million per year, which would quickly eat into the potential profits.

Also, Montgomery Ward properties make up 10% of Simon Property Group's property portfolio. “The company [Simon] really wanted a seat at the table to insure its properties are looked out for,” Mueller explained.

Making the right moves

Kimco's core focus is on managing and expanding its neighborhood shopping center portfolio. The company started out in 1991 with 120 properties totaling 15.6 million sq. ft. in 23 states. During the past 10 years, it has built up the core portfolio to include 495 properties, totaling 65 million sq. ft. in 41 states.

Kimco can also boast a good credit rating from Standard & Poor's. “We have a fairly secure balance sheet, which affords us the opportunity to go after situations,” said Scott Onufrey, director of investor relations at Kimco. “We have money in our pockets to go forward with deals.”

Mueller agreed that with Kimco's high credit rating and conservative capital structure, the company is poised to go forward with opportunistic ventures. “When something happens, these guys usually manage to be around the corner ready to pick up the pieces,” Mueller said. “They consistently step in to do these deals unscathed.”

Kimco at a glance
• Kimco Realty Corp. is a neighborhood shopping center REIT based in New Hyde, N.Y., with 495 properties in 41 states.
• NYSE symbol: KIM
• Price as of 3/26/01: $42.45
• 52-Week High: $45.13
• 52-Week Low: $36.13

Two prior deals provided profits and left Kimco thirsting for more. “We think we have the potential to maximize the value of the Montgomery Ward properties with our expertise and previous success doing these type of transactions,” Onufrey said.

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. 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 said. 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.

If Kimco does move fast enough, Mueller said that this deal should boost 2001 and 2002 earnings estimates and the company's growth rates. “Neighborhood shopping centers feature internal growth rates of around 2.5% per year,” he said. “Kimco has found ways to grow beyond that.”

Don't expect this to be the last opportunistic play made by Kimco. Onufrey said that the leadership of the company is always on the lookout for the next deal.

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