Super Cooper: Kimco’s Scion on Family and Staying Lean in a Bloated Retail Atmosphere

The family proved those doubters wrong over the next 20 years, as the REIT, from its New Hyde Park, N.Y., headquarters on Long Island, expanded to own a vast portfolio of strip malls throughout the country. At its high-water mark in 2006, its balance sheet topped 1,000 properties, and its shares on the New York Stock Exchange were worth north of $52. Today, Kimco’s New York area holdings include dozens of outdoor shopping centers in the five boroughs and on Long Island, including Greenridge Plaza on Staten Island, Concourse Plaza in the Bronx and Bridgehampton Commons on Long Island.

But the years since the financial crisis have brought new challenges. As Amazon has knocked perennial retail giants like Sears and J.C. Penney to the brink of extinction, market forces have required Cooper—alongside CEO Connor Flynn—to systematically rethink Kimco’s approach. The REIT has wound its portfolio down to about 475 assets, and watched wincingly as its stock price fell to below $7 during the financial crisis. That valuation improved significantly during the recovery, but concerns about e-commerce have bumped the company back down to a $6 billion market cap, 50 percent below its apex two years ago.

Even so, Cooper, a 35-year-old married father of three children under the age of 7 who lives on Long Island, is optimistic that Kimco will make it through today’s choppy waters and experience a new birth of revenue diversity. Strong relationships with lenders, a balance sheet that Cooper called “fortress-like” and a new foray into mixed-use assets since the financial crisis—have you ever thought of living above a shopping mall?—have the Kimco president looking forward to proving the skeptics wrong again.

Commercial Observer: How did Kimco come to be?
Ross Cooper: My grandfather and [his partner] Marty Kimmel started the company in 1958, and their partnership was started on a handshake, with no formal documents and no joint-venture agreement. It was just two friends that had an idea to start this real estate company. They were looking at where the growth in the U.S. was: As the story goes, they would follow utility companies’ trucks to see where they were doing work as a way to understand where the population growth would be. They ended up buying a piece of property down in Miami, building a store for a Zayre’s department store. It’s actually an asset that we still own today at Kimco. Clearly, it’s not a Zayre’s any longer, but it sort of goes to prove that that strong infill real estate [that is, real estate in dense areas with high barriers to entry] can continue to evolve and be successful close to 60 years later.

How many other Coopers followed your grandfather into the business?
Milton has four sons. His first three children all entered into different industries. My father, the second son, is a physician. His older brother was a physician. And the third is living in California and working in the movie production industry. The youngest, my uncle Todd [Cooper], joined Kimco prior to our days as a public company, when we were a much smaller privately held organization. As he started to grow in his career, he went off and started his own real estate company called Ripco—they do a lot of landlord and tenant representation work as a brokerage firm. As of right now, it’s my younger brother [Brett Cooper, the vice president of asset management] and I who are at the company.

How did growing up around the industry influence your interests?
We had Friday night dinners in the family, which always morphed into real estate discussions. By default, I was always around it, hearing about it, learning about it. I always assumed when I was younger that I would follow my uncle’s footsteps into Ripco—I interned a few summers there. I thought at the time that it was more my personality to be on the brokerage side. I tend to have a pretty strong comfort level with forging relationships and deal making. But as I continued to explore what I wanted to do longer term, I continued to gravitate towards learning from my grandfather. So I ended up going towards Kimco.

Your grandfather is still the executive chairman.
Milton is in the office every day—he and I are the first two in the office. I’m not a coffee drinker, but usually the first meeting of the day is at his desk, or in his office, with my bottle of water and his cup of coffee, strategizing and thinking about ways to create value and improve the company.

What was the REIT landscape like when Milton took Kimco public in 1991?
As you may have read, Milton is known as the founder of the modern REIT era. Prior to that, and in the early 1990s, real estate was a dirty word. No one thought it was possible to raise money from the public for real estate. It was really a revolutionary concept when he had the wherewithal to go and say, “There’s a place in this market for public real estate ownership.” At that point in time, it was a much smaller firm with far fewer assets, but Milton, Marty and Mike Flynn, who is the father of our current CEO, Connor [Flynn], had such a strong bond and great relationships that they were able to build the company into where we are today. I’m trying to do my part to continue to add to that legacy and keep creating value for shareholders longer term.

Does Kimco still feel like a family firm?
It certainly still has its elements of a family atmosphere. We pride ourselves on being entrepreneurial and thinking outside the box. But obviously, as a public company with substantial amount of institutional shareholders, we’re always ensuring that we do what we need to do to keep our investors happy so that there are as few surprises for our investors as possible.

You have dozens of offices all over the country. Is that sort of on-the-ground presence unusual for a REIT?
We actually have shrunk pretty significantly in the last five to six years. Historically, we were always a property aggregator. We’ve acquired five other public companies and merged them into Kimco over the last couple decades. That being said, we came to the conclusion in the last five to seven years that bigger wasn’t necessarily better. The major metro market is where we think there’s going to be longer-term value and upside, particularly in a retail environment that’s evolving. We think it’s important to have boots on the ground in those major markets. At our peak, in 2010 and 2011, we had close to 1,000 shopping centers. Today, it’s in the 400s. We don’t necessarily think bigger is better. We think infill density is what’s going to win in an environment where retail’s changing pretty rapidly.

Do you think the challenges facing retail are the most intimidating that the sector has ever faced?
The facts have certainly changed, but that’s not new. The death of retail and the traditional supermarket was expected to happen with the rise of service merchandise and the big-box category killers. Walmart was going to take out everybody. When you look at the retailers that were our top 10 tenants when we went public in 1991, none of them are in our top-10 retail tenant list today. Our investment strategy was always to have strong real estate with very low rents so that when retailers change, you’ll be able to replace them at a higher rent. The population growth in the U.S. continues at a pace of 3-plus million a year, so there’ll always be growth and a built in shopper base for these locations.

What’s the main story that’s driven the challenges retailers face today?
Along the way, the country became oversupplied with retail. Now, you’re seeing that supply-demand dynamic start to come back in line with where it should be on a per-capita basis as retail gets redeveloped and in some cases demolished. Add in another dynamic of online shopping and e-commerce. All those things that have come together over the years caused us to take a look in the mirror around 2010 or 2011 and say that we really need to have a more refined strategy, rather than just owning and aggregating as much property as we possibly can.

Give me an example of a tenant that used to be a major force for you that has since fallen by the wayside.
Kmart, even going back to only 2001, was about 14 percent of our annual rent. And when they filed for bankruptcy in 2002, overnight our occupancy went down into the low 80s. From that point forward, we wanted to make sure we always maintained a very diverse tenant base. Today, TJX [Companies] and all their concepts combined are our largest retailer, and they’re just over 3.5 percent of our annual rent. We’re very cognizant of the fact that we don’t want to have any significant exposure to any one retailer. Things change.

What kinds of properties maintain the best immunity to the challenges from e-commerce?
We want to make sure that we own today locations that are adaptable, because the rate of change is so significant. You will have autonomous vehicles, driverless cars that are changing parking ratios. You have a population in millennials that in some cases is starting to move away from the urban areas and starting to build a family. But they still want access to all the things that the urban life provides. So that mixed-use infill redevelopment is really a calling card for us. Creating some non-retail components within our shopping centers is something we have looked at lately. We’re really moving away from that commodity-based, big-box power-center location, and focusing more on locations where we can redevelop and create value by transforming the existing property.

How has your portfolio changed as the retail market has evolved?
We have sold over $6 billion of real estate in the last six years. A lot of that has been exiting the Midwest. We’ve sold other locations, as I mentioned, where you have just a bunch of box stores that are paying market rent and are probably at the highest value that they’re likely ever to be. And we’re looking very intently at mixed-use. In Arlington, Va., across from the Pentagon, we’re adding a 440-unit multifamily building above our shopping center. In [the] Center City [area of] Philadelphia, we’re building a mixed-use project where we have Target, PetSmart and other tenants on the ground and second floor, but we’re building 322 multifamily units above. Those are the projects that we see as the future of the company.

Is that mixed-use enterprise a new idea at Kimco?
In the past, we had made some investments with a preferred equity structure on non-retail. We had investments in office, hotel, self-storage and some other assets classes as well. The difference between then and today is that in the past, we were really capital allocators. We didn’t control our own destiny. Today we want to make sure that we’re making the decisions, that we’re running the process and that we have control over what we’re building.

A few minutes ago, you mentioned demographics issues before even e-commerce. Do you think e-commerce concerns are overplayed?
There’s no doubt that ecommerce has been a disrupter for us and some of our retailers. But what a lot of people miss, particularly in New York, where we are so accustomed to having access to things at our fingertips at all times, is that e-commerce has become an integral part of the retail shopping experience. It’s not the end all be all—people will continue to shop in bricks-and-mortar retail. The challenge for a lot of retailers today is having the financial wherewithal to have that full omnichannel approach for the customer. That way, they can order online, pick up in store and return in store, which oftentimes leads to more purchases. The name of the game is creating an environment for the shopper that gives them a reason to go outside. We all know that anyone can sit on their couch, order online and have something delivered to them. But I truly believe that people are social animals, and if given a reason and a compelling atmosphere, they’re happy to go in and touch and feel things.

What’s your view of the role that experiential retail has to play?
Experiential is probably a term that’s overused. It doesn’t have to mean just entertainment and services and restaurants. It can be a traditional retailer that provides something more inviting than what you have today. Retail is not going away, but I think boring, dull, unexciting, unappealing retail is going away. The retailers that don’t have the financial flexibility to create an inviting atmosphere are the ones that are really falling behind.

That sounds like what happened with Toys “R” Us.
It’s a shame because they had such an iconic brand. And they really were the only true large-format toy retailer. There’s no reason they can’t exist. The problem became that they didn’t have the financial flexibility to reinvest in the store. It got dated and tired. All you needed to do was create an area for birthday parties, or an area where the kids could come and open up the boxes and play with the toys before they actually went and bought them. That would give a compelling reason to go to the store versus buying online. But Toys “R” Us didn’t have the financial flexibility to do that, and they fell behind.

And that seems like an example of a broader trend.
Some retailers have done very well at finding a fit. Look at Ross Dress for Less and T.J. Maxx. They’ve mastered the treasure hunt. It’s a combination of having a very strong buying department that merchandises well and getting the customer excited about going to the store. It’s an experience in itself.

How have conversations with your shareholders been going? Your stock has been down quite a bit of late.
It’s been challenging for shareholders over the last few years. There’s no doubt—the stock has not performed as we’d have liked. But part of that is out of our control. We focus on what we can execute on, and positioning ourselves for the future. There’s a narrative surrounding retail that is very negative. Some of it is warranted, some of it is overblown. We’re lucky that we have a significant amount of assets that can be worked over and improved over time. In some cases, it involves a lot of patience. It’s our job to make sure these projects are home runs and people can look at Kimco as a long-term value creator.

When you have vacancies, how do you decide which retailers will make good tenants?
We have a watch list of retailers that we’re concerned about, either with their financial wherewithal or their recent performance. We do what we can to reduce exposure to those retailers we’re concerned about. But we can’t transform a property overnight. You make decisions on a case-by-case basis whether it makes sense to work with a retailer to keep them alive for a period of time, or whether you take the opportunity to reinvest in that asset and bring in a stronger tenant.

What’s your acquisition outlook?
Today, in 2018, we’re not looking to acquire new shopping centers. As I mentioned, we have a large-scale redevelopment pipeline. In 2018 alone, we’re investing over a half a billion dollars in those projects that we currently own. The performance of the stock does have a direct impact on our cost of capital. Values on the private market for major retail locations that we would want to own and redevelop are still at all-time high valuations, whereas our stock valuation has been hit relatively hard. For us, it’s very difficult to invest our capital accretively in these external opportunities with where we’re trading today. So we’re focused on selling out of the non-core assets we don’t want to own long term and redeploying that capital in redevelopments that will create long-term shareholder value. We’re also continuing to improve our balance sheet, paying down debt, making sure we’re a fortress. We have significant access to liquidity, and we’ve extended our debt maturity profile to north of 10 years, which is one of the longest in the entire REIT universe.

How are your competitors faring?
We and our REIT peers only own a bit over 10 percent of the outdoor shopping centers in the country. On the other hand, the [indoor] mall REITs own about 85 percent of the malls in the country. If you’re looking at the macro trends, chances are what’s impacting malls is impacting mall REITs. But when you look at the open-air shopping centers, we and our peers own higher-quality assets, on average, than the typical outdoor shopping center. For that reason, a lot of the trends that you hear about with the retail apocalypse don’t necessarily apply to a lot of the centers that we and our peers own. I think that gets lost a bit in the narrative. We own some of the best open-air shopping centers in the country. But it’s only a small percentage of the overall shopping center experience.

How is your relationship with lenders, given the fact that your stock has suffered?
We have a significant access to the unsecured credit markets. Fixed-income investors have been very supportive of our strategy and consistent buyers of our bonds. We’re one of the few REITs that has access to 30-year bond markets. In this low-rate environment, that’s very attractive paper. We’ve also done perpetual preferred offerings at some of the lowest all-time coupons. So I think that while we have not really performed on the equity side, the fixed-income side has been as strong as it’s ever been.

Your stock has declined yet you maintain a solid BBB+ credit rating. Why do equity and debt investors differ so much in their assessment of you?
I think that’s up for discussion. Someone is clearly missing the mark. We think that there’s been overreaction from the equity investor. When you look at the amount of [debt] coverage we have and the overall low leverage, the bond investor is very comfortable investing in our paper and knowing that they’re going to be repaid.

What’s your theory for why your equity investors have, as you said, overreacted?
I think there’s definitely a fear factor today. It’s been a challenging couple years from that perspective, but we believe if we continue to execute and do what we’ve said we’ll do, things will turn themselves around.

But your debt market relationships truly haven’t suffered at all?
Fortunately, the relationships that we have have afforded us the opportunity to get creative and access capital when we’ve needed it. Knock on wood, we haven’t seen any pullback. Even in the worst time during the Great Recession, our lenders have been right there with us.

You described some new investments in mixed-use residential properties. Will Kimco still be a retail REIT in 30 years?
As we continue to build up that knowledge base, and continue to grow that expertise, you’ll see us do more and more [mixed-use work]. But every non-retail investment we make has a retail component and a retail rationale for existing. I don’t think you’ll see a scenario where we’re just building or acquiring large apartment buildings.

With all the coverage of the so-called retail apocalypse in the last few years, what stories have reporters missed?
There’s so much coverage of store closures but very little coverage of store openings. Net-net, there are still more stores that are opening and expanding than there are closing. That narrative gets lost in a lot of the articles that you read. Our shopping centers are busy. There are still people going to the stores and shopping.

You have three young kids. Do you think there will be another generation of Coopers in the real estate business?
They’re still a little young to know what path in life they’re going to take. If they’d like to follow in the real estate footsteps, that would be wonderful. If not, I’ll support that as well.