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Kimco Searches High and Low for Yield

How hungry are real estate investors for yield these days? Take a look at what shopping center REIT Kimco Realty Corp. is doing. The New Hyde Park-based company, with a 116-million-square-foot retail portfolio has turned to net-leased industrial properties in Mexico, its latest divergence from its core business as it tries to maximize returns. The company announced during its third quarter conference call Tuesday that it has formed a joint venture with American Industries, one of the largest owners of industrial property in Mexico. Kimco paid $55 million to acquire a 50 percent interest in 57 net-lease industrial and distribution buildings.

The cap rate for the properties is in the low double digits versus 7 percent for a comparable portfolio in the U.S., Chief Investment Officer David Henry told investors.

"We believe there continues to be an attractive arbitrage opportunity between property yields in Mexico versus the United States for net-lease buildings to strong credit tenants on U.S. dollar net leases," Henry said. For the third quarter, Kimco reported funds from operation of $116.3 million, a 14 percent increase over last year.

Citing what Kimco sees as a downturn in the U.S. real estate cycle, where days of double-digit cap rates are over, CEO Milton Cooper said deals like the Mexican venture are part of the company's strategy to enhance shareholder value. It is also selling under-performing retail properties, although Cooper didn't point to specific centers.

"This cycle requires that we carefully monitor the demographics in our portfolio, the business and financial health of the tenants in the portfolio and this is why you will see the disposition of properties in each quarter," Cooper said during the call. During the third quarter, Kimco sold seven properties for $59.6 million.

While Kimco's core business remains neighborhood shopping centers in the U.S., it has been aggressively diversifying its holdings. It has invested in Canadian car dealerships and is working with Vestar Development Co. to make over the Tustin Marine Air Base in California into a $140 million lifestyle center. It also bought a downtown Houston office building for $14 million.

"You really have to give a tip of the hat to Milt Cooper," says Barry Vinocur, editor of Realty Stock Review. "They were the first guys to go and try different things."

But, he notes, the opportunities to score big yields overseas are growing more rare, too: "There's a lot of cap rate compression because of the fact that global cap rates are now interconnected. So you have to look to add value in unique and different ways."

Cooper said investing in Mexico is part of the company's counter-cyclical strategy. Citing falling consumer confidence and rising interest rates, Kimco is bracing for a slowdown in the U.S. economy. "Now in Mexico, we believe we are finding opportunities with very high-risk adjusted rates of return," he said. Kimco also announced that it has completed two retail projects in Mexico bringing its total strip center portfolio there to six completed assets and five under development.

The industrial properties include 46 U.S. and multinational tenants such as Goodyear Tire & Rubber Co., Federal Mogul and Georgia Pacific. While no specifics were mentioned, Kimco executives said they plan to buy more industrial properties in Mexico through the joint venture.

-- David Koch

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