Photo by Andrew Kist

Milton Cooper, chairman and chief executive officer of Kimco Realty Corporation

By Steve Bergsman

Editor's Note: Periodically, Portfolio will sit down with a prominent real estate leader who has helped “pave the way” for the growth of the publicly traded real estate industry. These visionaries will provide their unique take on where the industry has been, where it is now and, most importantly, where it is going.

In his nearly 50 years in the business, Milton Cooper has taken an active role in shaping the publicly traded real estate industry and helped jumpstart the modern REIT era

As a child, things weren't always easy in the Cooper household. Milton Cooper's father was a plumber on the Lower East Side of New York and the family scraped through the Great Depression. Despite hard times, Milton Cooper was bright, ambitious and college bound. He attended City College in New York and then after graduation took night classes at Brooklyn Law School. After earning his law degree, Cooper became an associate at a law firm in Manhttan that handled a number of real estate clients, one of whom was Martin Kimmel, a developer of garden apartments on Long Island. Kimmel had been very successful, but when Cooper met him he was considering retiring from the real estate industry. Events would intervene to prevent that from happening and also help change the face of the publicly traded real estate industry. In 1958, another of the law firm's clients had a contract to build a Zayre store in Miami for a private company based in New England. There were complications with the deal so Cooper got together with Kimmel to develop the shopping center at Coral Way and 87th Street in Miami. It was a successful venture so the two men quickly capitalized on the next opportunity that arose, a Winn Dixie shopping center, also in Florida. To Cooper and Kimmel, it became obvious this was a business marriage made in heaven, and the company they formed eventually became Kimco Realty Corporation (NYSE: KIM), which is now the largest shopping center REIT in the country, valued at $5.3 billion, almost $2 billion more than its nearest competitor. In the annals of reit history, which is just a little over four decades, Kimco is well known for one other significant event: the company's successful 1991 initial public offering (IPO) signaled the beginning of the modern REIT era. In 1991, conventional capital for real estate was nowhere to be found. There was, however, liquidity in the securities market and Kimco turned to Merrill Lynch & Co., which took it public at $20 a share (equivalent to $8.88 today, after two 3:2 stock splits). The deal eventually unleashed an abundance of REIT IPOs through the 1990s; almost all of today's major REITs went public during that decade, like Kimco, turning to the public markets to recapitalize balance sheets. Kimco's consistent growth has come about mainly through the opportunistic acquisition of individual centers and portfolios and some select development projects. There have been several corporate acquisitions in the company's history, including one major consolidation, the 1998 merger with Price REIT of San Diego, which expanded Kimco's geographic reach as Price's core properties were located throughout the West. Cooper's original partner, Martin Kimmel, at age 88, is chairman emeritus of the board of directors and one of the company's largest shareholders. Cooper, still a prominent force in the REIT industry at age 75, continues to hold down the titles of chairman and chief executive officer. Cooper's professionalism, business acumen, longevity and positive attitude have earned him the respect of his peers and all those involved with the REIT industry. Cooper received the 1999 NAREIT Industry Leadership Award for his significant and lasting contribution to the industry. Through his work at Kimco and as a former NAREIT chair, Cooper helped paved the way for the escalation of the publicly traded real estate industry and established a standard for other real estate executives to achieve.

There was a Zayre in your original shopping center. That company has since closed its doors as have so many other retailers you have dealt with over the years. How do you stay ahead of retailer failures?
Our first experience with a troubled retailer was not Zayre but was W.T. Grant, followed by so many others, including Bradlees, Service Merchandise, Korvettes, Uptons, The Wiz, Drug Emporium, Grand Union, Lechters, Just for Feet, Montgomery Ward, Venture Stores, Ames, etc., etc., etc.

It is impossible to be in the shopping center business and not have exposure to retail failures. One must recognize that leases that are above market involve credit risk. However, the risk is much different from the risk of an unsecured creditor of a retailer in that the exposure to tenant lease risk is limited to the difference between the lease rent and the market rent.

And then there was Kmart.
Kmart was our largest tenant accounting for approximately 14 percent of our rental income. In 2003, Kmart closed 44 of our 70 stores leased to them. We have been able to re-lease, redevelop, sell and otherwise dispose of all but three of the 44 stores. The value of our rejection claim, which was paid in Kmart shares, became more valuable than anyone had hoped by virtue of the substantial increase in market value of Kmart stock. We did market, jointly with Kmart, over 300 Kmart locations. We also purchased sites from Kmart and re-leased them to other retailers.

Can you foresee when a retailer is not going to make it? When do you start planning for that occurrence?
You try to be proactive when a retailer gets on your "watch list." The threshold questions are whether the retailer's space can be released at or above the lease rent and how essential is that retailer to the viability of the center. If it's a question of viability, sell, sell, sell! If the space is re-leasable, one must start informal marketing as soon as possible.

Kimco was an active developer in its early years, but then began focusing on acquisitions. Now that you have a development arm again, has Kimco gone full circle?
We began in 1958 as developers. Our first development was in Miami, and the rent for the major tenant was $1 per square foot gross. From 1958 to 1980, our primary business was developing. This was a period of inflation and growth in demand for retail space. Almost any project would increase in value as rent inflated.

In the 1980s, we experienced a slowdown and many tenant bankruptcies. It was apparent that properties with below-market rents were a safer bet than those with rents at or above market. Any development project involves market rents, so we shifted our strategy and focused on acquisition of properties with below-market rents.

The REIT Modernization Act permitted REITs to develop properties for sale within a taxable subsidiary. We acquired the Price REIT, which had an active development business, and have continued that business under the leadership of Jerry Friedman, who joined us as part of the Price REIT team.

Kimco's IPO has become a hallmark in the history of the REIT industry. For all practical purposes, that offering marks the beginning of what is now known as the "modern REIT" era. But hindsight is 20-20, and wasn't there the sense that your IPO was swimming upstream all the way?
At the end of the 1980s, the country was in a recession and it was a very difficult time for real estate. Real estate was a dirty word and almost all of the banks would not finance real estate transactions. The market cap on all publicly traded REITs was less than $10 billion. Those companies that were equity REITs performed well, but the mortgage REITs had serious problems. Most of the mortgage REITs that filed for bankruptcy were sponsored by banks and insurance companies. Our IPO received a very cool reception and we barely squeaked through.

At any point did you think the offering wasn't going to be a success, and when did you realize that it was a success? Did you have any notion at the time of what Kimco's offering was about to set off within the industry (the modern REIT era)?
The institutional orders were anemic. At the last moment, one hedge fund came in with an order for 500,000 shares and this put us over the top. The underwriters and Kimco were delighted. It was only at that point that we realized that we were successful.

We certainly did not anticipate that in a few years the REIT market would heat up as it did. The most difficult part of the process was the skepticism on the part of most of the institutional investors that REITs would ever sell at premiums to net asset value.

Why strip centers? What are the dynamics of the shopping center that make it work, especially for a REIT?
Well, we began with strip centers and it became a habit. It's what we do best. Shopping centers work for a REIT or for any other investor because of the essential positive investment ingredients–long-term leases, a high proportion of land value to building value (mandated by parking requirements) and a stable income stream.

What are your thoughts on branding? There are some retail REITs that have been trying to brand shopping centers, what is your view on the effectiveness of this strategy?
Branding is more likely to be successful with malls than non-mall properties. Non-mall properties are usually identified by their major tenant ( i.e., Wal-Mart, Target, Lowe's, etc).

Highlighted by the recent moves made by Westfield, Simon and General Growth, do you think size is important in the retail REIT sector? Will the market continue to consolidate?
Size does help in relationships with tenants, efficiency of scale and information gathering. I am not sure about market consolidation. There is continued consolidation in the corporate world and over time the market should cause further consolidation of REITs. The growing expenses of being public, (e.g., Sarbanes-Oxley) may nudge the consolidation process.

Should mall and shopping center REITs merge?
There are different management skills involved in the management of malls and non-malls so there would have to be a compelling rationale for merging the portfolios.

Speaking of portfolios, the Kimco Income REIT (KIR) owns 69 shopping centers managed by Kimco. Why create a private REIT to hold Kimco properties? Are you expanding it?
In 1998, when KIR was formed, the return on fully leased properties with decent credits became less than our average cost of capital, based on our capital structure, which was 70 percent equity. KIR was created with a capital structure consisting of 75 percent non-recourse debt and 25 percent equity. The expectations of the investors in non-recourse debt are to earn a modest spread over Treasuries, which was substantially less than the expectation of our equity investors, so it made good business sense to create a capital structure with a lower cost of capital. It is a solid, safe investment that contributes to our cash flow, but we are not expanding KIR in the current environment.

So your strategy changed? Let's look back to your IPO year. What was your strategy for expansion and development then and has it changed in the 12 years since?
When we went public, there was a shortage of capital coupled with a very large supply of investment opportunities. So, in the early years, we were able to invest capital at wonderful spreads to our cost of capital. With the passage of time and the flood of capital into REITs, the demand for shopping centers increased. Consequently, the prices increased and we shifted our strategy to being an investor and manager so that we could have yields that would include the profit on the management fee. When you combine the investment return and management fee, you have a return in excess of the cost of capital.

The REIT Modernization Act enabled us to enter into new activities, including development for sale, owning more than 10 percent of the stock of non-REITs (e.g., Big Boulder/Blue Ridge) through taxable REIT subsidiaries and other activities. Any successful business must change its strategy as times change.

We certainly did not anticipate that in a few years the reit market would heat up as it did. the most difficult part of the process was the skepticism on the part of most of the institutional investors that reits would ever sell at premiums to net asset value.

Do you think now is the time for REITs to undertake international expansion?
REITs should seize every opportunity to create value, domestically or internationally. On the international scene, it is vital to have knowledgeable, honest and reliable local partners. It is also important that the staff include associates knowledgeable in a local market.

You've mentioned the financial importance of the REIT Modernization Act in allowing REITs to establish taxable REIT subsidiaries and engage in businesses formerly not permissible under REIT rules. That seemed to be a great opening for you and other REITs to try new things.
The REIT Modernization Act gave REITs the blank canvas to create profitable opportunities that were previously prohibited, subject only to the payment of corporate income taxes required of any other corporation. It remains a superb opportunity and the success will depend on the ability to execute successfully in the activities of the taxable subsidiary.

Good chief executives should always be looking to the future. What do you see for the REIT industry over the next 12 months?
On a relative basis, real estate should fare better than other investments. Over the past few years, large amounts of capital have been attracted to publicly traded real estate. This has made the purchase of assets much more competitive, but it also has brought attention to the intrinsic positive attributes of REITs. It has been a mixed blessing. On one hand, it has become tougher to acquire assets, but capital has become much more available. In the long term, I am optimistic about REITs. It is a solid business. By and large, most REITs are managed by people who have a stake in the company, work hard and are very astute business people.

Some pundits have cautioned that rising interest rates will negatively impact REIT performance. What impact do you think the changing rate environment will have on REITs?
Historically, interest rates have affected the prices of all common stocks. When interest rates rise, bonds become an attractive alternative to common stock. Having said that, I am not certain that the economy will be buoyant enough to cause a substantial increase in rates. You may have noticed that the recent increase in interest rates did not cause a corresponding increase in cap rates. Furthermore, unlike bonds, real estate owners can often offset much of the negative effects of rises in interest rates with stronger performance of their properties due to greater tenant demand.

You were present at the creation of the modern REIT industry. Where do you think the industry is today in its evolution?
We will see a continued, dramatic increase in the application of the REIT model to every form of real estate. The REIT industry is just beginning; it will grow dramatically.

If the Harvard Business School decided to teach the Milton Cooper methodology of business strategy what would it entail?
In order to consummate any business strategy, it is essential that the company have a talented group of entrepreneurial team players that enjoy what they do, enjoy the accomplishments of other team members, and enjoy mentoring and motivating others to reach their potential. It is all about the right people and motivating them.