P. O. Box C
Kimco Realty Corporation is one of the largest owners and operators of neighborhood and community shopping centers in the world. With 153 properties in 24 states in 1994, the company's growth was facilitated by its construction of new shopping centers as well as its acquisitions of established shopping centers, often with the use of innovative financing vehicles.
The Kimco Development Corporation was founded in 1966, when a group of real estate investors and shopping center owners combined their properties into a single entity with the intent of fusing their resources to build and manage new shopping centers. Among Kimco's founders was Martin S. Kimmel, who would remain chairperson of Kimco's board until the early 1990s. Another founder, Milton Cooper, would serve as president of Kimco during its steady growth in the 1970s, 1980s, and early 1990s.
Immediately after its inception, Kimco began building new shopping centers across the United States. In 1967, in fact, it erected facilities in Florida, Indiana, Ohio, and Utah. Throughout the late 1960s and early 1970s, Kimco focused on the construction of several shopping centers in Florida, while also adding several new centers in Pennsylvania, Illinois, New York, Ohio, Texas, and Virginia. By the mid-1970s, Kimco owned and operated about 50 shopping centers, most of which were located in Florida and the Midwest. Kimco funded most of its developments by borrowing, or through joint ventures with other investors or real estate developers.
Most of the shopping centers that Kimco built were relatively small in comparison to the regional malls that would become popular in the 1970s and 1980s. Kimco's projects were classified as neighborhood and community shopping centers and were designed to attract local customers seeking day-to-day necessities, rather than high-priced luxury items. Such centers were typically anchored by supermarkets, large drugstores, or discount department stores, including Winn-Dixie, Poston's World, Payday's Orlando, Save-A-Lot, and Hills Department Stores.
During this time, Kimco's development strategy was regarded as unique in the industry. Many development companies employed the services of real estate companies to serve specific functions in the development process, such as overseeing construction and financing or finding tenants to lease the property. Often, a development company would simply employ a property management and leasing company to handle the day-to-day operations of the property. Kimco, however, sought to profit by managing the entire process in-house, including construction, financing, legal and accounting functions, leasing, and maintenance. Cooper believed that total control of its holdings would allow the company to reduce costs, achieve higher quality projects, and build long-term wealth.
Throughout the 1970s, Kimco continued to add new projects to its list of holdings. While Florida remained a target market, Kimco also expanded into different northeastern, mid-atlantic, and midwestern states and engaged in a few projects in the West. Toward the end of the decade, however, the U.S. commercial real estate industry experienced a cyclical downturn, causing Kimco's development activity to continue at a much slower pace. Nevertheless, Kimco did generate a few new projects and, by 1981, the company owned and operated 77 shopping centers. Its total portfolio of properties would provide an important base of assets and cash flow that would contribute to Kimco's rapid growth during the next decade.
Real estate industry woes that lingered into the early 1980s prompted Cooper to shift Kimco's development strategy for the 1980s. For the past 15 years, Kimco had built most of its projects from the ground up; in 1981, only nine of its centers had been purchased after construction. However, Cooper found that ground-up construction had become too risky for developers seeking long-term profitability. "The theory was that if you developed anything new, you had to buy land, pay for construction, and have market rents," Cooper explained in the May 1992 issue of Chain Store Age Executive, adding that "The safety depended on the credit of the tenant." In addition, Kimco's executives thought that existing, undervalued properties were available for acquisition.
Bucking commercial real estate industry trends, Kimco embarked on a program of growth founded almost entirely on acquisitions. As the U.S. real estate development industry recovered and boomed in the mid- and late 1980s, office buildings and shopping centers were erected at a feverish pace as billions of investment dollars became available for new construction. Favorable tax laws, foreign investment, and deregulation of U.S. financial markets all contributed to the hot market for new projects. Nevertheless, Kimco stuck to its acquisition strategy, building less than five percent of the properties it would add to its portfolio throughout the decade.
Kimco's expansion activity remained low-key in the early 1980s. The company added a few shopping centers in New Orleans and Pennsylvania to its portfolio in 1983 and purchased a few undervalued centers in New York, New Jersey, Ohio, and West Virginia during 1984 and 1985. However, the following year, Kimco launched an aggressive growth initiative, prompted by strong capital markets and the boom in the real estate industry. Shifting its focus away from Florida, Kimco purchased a string of properties in Pennsylvania during 1986 and then began to focus on Ohio, where it would eventually amass about 30 properties. At the same time, Kimco continued to acquire new shopping centers throughout the eastern half of the country. By the late 1980s, Kimco had accumulated more than 150 properties and was generating annual sales of nearly $60 million. While about 90 percent of its revenues came from its core of community and neighborhood shopping centers, Kimco was also operating two regional malls.
By 1989, however, the real estate business was spiraling into a deep recession. Besides general U.S. economic malaise, most sources of lending for acquisitions and new construction had dried up, and the profitability of many existing projects was rapidly declining. Importantly, the Tax Reform Act of 1986 had dealt a deathly blow to the industry. That Act essentially wiped out many of the important tax advantages granted to investors in commercial real estate, including companies like Kimco. A result, Kimco and its industry peers had difficulty funding growth. Furthermore, the value, liquidity, and profitability of their existing properties was diminished.
Although Kimco's revenues climbed 11 percent in 1991, to $66 million, the company experienced a disappointing net loss of $15 million, which reached $16 million the following year. Despite setbacks, Kimco's problems were minor compared to those of most other developers, many of whom had relied on tax breaks and extreme financial leverage to achieve profits. Kimco's properties were relatively well managed, and the company had positioned itself for long-term growth and stable cash flow. As many other developers grappled for cash to meet their debt obligations, Kimco survived the downturn. It did suffer from an excessive debt load, however, which had swelled past a staggering $400 million by early 1991.
In an effort to diminish its burdensome liabilities and to generate cash for continued expansion, Cooper again bucked convention and pioneered a new growth strategy. Noting the plethora of vastly undervalued shopping centers on the market in the early 1990s, and the dearth of capitalized investors, he took Kimco public in 1991. A Real Estate Investment Trust (REIT) was created, containing most of Kimco's properties, and the sale of shares in that trust raised about $150 million. Kimco used most of this money to reduce its debt, which declined to about $290 million after the public offering. "Traditional real estate financing was over ...," Cooper recalled in the Chain Store Age Executive article, noting that "We saw that in order to have the kind of growth we wanted ... we would have to become public, and have a permanent base of equity."
Kimco's move to a REIT was unique and influential. As a financing technique, the REIT was generally regarded as risky and had never been used on such a large scale to securitize shopping centers. Nevertheless, the REIT provided an important advantage in that its shares could easily be liquidated by sale on the stock market. In addition, REIT owners enjoyed tax advantages not available in other forms of real estate investing. Encouraged by Kimco's success, about 35 other developers created REITs during the next two years. "Before that, people thought it would be impossible to sell real estate stock," Cooper recollected in the September 27, 1993, issue of Newsday.
A corollary of Kimco's move to a REIT was the formation of KC Holdings, Inc. Kimco formed KC Holdings before the public offering and moved 45 of its 178 properties into that corporation's subsidiaries. The holdings consisted primarily of poorly performing shopping centers, projects that were joint ventures, and miscellaneous properties, such as a bowling alley. By removing those assets from under the Kimco umbrella, the company was able to offer a higher quality, lower risk REIT. The stock of the newly formed KC Holdings remained in the hands of Cooper and other Kimco stockholders prior to the public offering.
Pleased with their first stock sale, Kimco's management sold more shares in 1992 and 1993; the two offerings brought an additional $161 million to Kimco, most of which was used for new acquisitions. In fact, Kimco picked up 30 more properties during 1992 and 1993, raising its total asset base from about $400 million in 1991 to $450 million in 1992, and then to $650 million by the end of 1993. These gains were regarded as impressive, particularly since the company's total debt load remained below $300 million.
Kimco's savvy financing strategies during the early 1990s were lauded by industry analysts. Investors, too, were pleased, as Kimco's REIT shares rocketed more than 100 percent between 1991 and 1993. However, it was Kimco's continuing commitment to quality management and long-term growth that allowed it to survive the commercial real estate shake out of the early 1990s and then to prosper going into the mid-1990s. Indeed, as Kimco financiers jockeyed in financial markets, its operations team was busy streamlining the organization for improved efficiency and profitability in a changing real estate and retail environment. "The key to successful real estate investing is no longer 'location, location, location,' but 'management, management, management'," Cooper observed in Kimco's 1993 annual report.
Kimco's strengths were also reflected in its long-time commitment to sophisticated information systems, which were used to track and manage its properties and investment activities. Such integrated systems allowed small leasing staffs to easily access and track the entire portfolio of Kimco holdings. In addition, Kimco sustained its legacy of vertical integration, handling its leasing, acquisition, property management, accounting, architecture, and other functions in-house. Kimco accomplished those varied tasks with a small, highly efficient work force; about 80 people in its headquarters and 52 workers stationed at several of its larger properties managed the entire multimillion-dollar operation.
As Kimco bolstered its profit margins and increased its holdings, the U.S. economy began to recover. Kimco's revenues grew to $79 million in 1992, and it posted its first positive income figure, $19 million, since the late 1980s. In 1993, moreover, Kimco gleaned $35 million in profits from nearly $100 million in receipts and invested a record $164 million in new properties. Kimco continued to post solid gains early in 1994, raising an additional $150 million through two stock offerings, most of which was used to further pare its slimming debt load. The company also bought several more shopping centers, boosting its holdings to over 150 properties with about 20 million square feet of retail space in 24 states, figures which did not include the properties held by KC Holdings, Inc. Going into the mid-1990s, the company looked forward to what management believed would be the fastest period of expansion in the company's history.