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Kimco Treads New Ground In Search of Returns

Competition for strip centers keeps driving prices higher, making it harder for REITs in that sector to get the yields they are seeking. Kimco Realty Corp.'s solution: Don't buy those assets.

Instead, the largest owner of strip center properties in the U.S. has been deploying its capital in 2005 in a scattershot approach. It's putting money in car dealer properties in Canada. It invested nearly $100 million in net lease properties in Virginia. And it is buddying up with Vestar Development Co. to complete a $140 million redevelopment of part of Tustin Marine Air Base in California into a lifestyle center.

Kimco Chairman and CEO Milt Cooper said the company isn't shunning its core property type. It just hasn't seen any deals recently where the math made sense.

"We want to buy right," Cooper said at the National Association of Real Estate Investment Trusts conference in New York last week. "Risk can consist of price if you overpay. In this quarter we are not finding returns [on shopping centers] which we can sleep well at night."

Cap rates for strip centers are below 6 percent. But Kimco estimates that the Canada auto deal -- a joint venture with Capital Automotive REIT -- will generate returns between 8.5 percent and 9.25 percent. The joint venture has closed two deals so far and three more should close by the end of the second quarter.

In Virginia, Kimco paid $85.3 million for a portfolio of 45 net-leased properties in Fredericksburg, Stafford and Richmond. The portfolio contains 311,000 square feet of space and tenants include CVS, Circuit City, McDonalds, Wachovia and Outback Steakhouse. Kimco estimates the investment will generate a 6 percent yield.

With Vestar, Kimco is set to purchase 59 acres of land in Tustin, Calif., within the former Tustin Marine Air Base. The new development, the District at Tustin Legacy, will include 1.1 million square feet of retail. Target, Loew's, Costco, Whole Foods and TJ Maxx have already committed to the project.

Cooper added that the company, like many other developers, is also exploring mixed-use development on some of its projects.

"We're not starting with the premise that what we have has to be retail," Cooper said. In one case, Cooper said the company is contemplating a high-rise condo development in Florida.

As for its core business, the company is pursuing three new development projects. Two of those are in Mexico. In Saltillo, Kimco has acquired 26 acres of land for a 352,000-square-foot center that will be anchored by an H-E-B grocer. In Pachuca it acquired 11 acres to develop a 146,000-square-foot Wal-Mart anchored property. The other development in its pipeline is a 460,000-square-foot development in Knightdale, N.C., as part of a joint venture with Wakefield Associates.

Kimco has a history of looking in innovative places in search of returns. It has a preferred equity business that has placed $180 million in investments with retailers and other developers. It has a merchant building business that has built 7.2 million square feet of space. And it has provided finance to troubled and bankrupt retailers and also helped dispose of bankrupt retailer real estate.

-- David Bodamer

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