Dear Friends and Associates:
In their letter that follows mine, Dave Henry and his senior leadership team have set forth, in a thorough and thoughtful manner, our 2010 accomplishments and our strategy for the future.
So permit me, in this letter, to share with you a bit of nostalgia and some random thoughts concerning our business.
This coming November will mark the 20th anniversary of our IPO. Oh, what a difference 20 years can make! At the close of 1991, the Dow Jones industrial average was at 3,168. This was the first time it broke the 3,000 barrier. Yet interest rates were quite high; LIBOR was 7.4% and the Federal Reserve interest rate was 6.5%. Commercial real estate was horribly out of favor, and many investors viewed our asset class as the cause of the meltdown of the entire savings and loan industry.
Despite the challenges, we at Kimco desired to become a public company and we thus embarked upon a two-and-a-half week “road show” to seek investor support for our IPO. Richard Saltzman, a current Director of Kimco and the former head of Merrill Lynch’s Real Estate Banking unit, spearheaded our effort to raise $128 million. It was a very challenging two and a half weeks. (The comparison to our $346 million “overnight” equity offering in December 2009 is striking.)
The investor refrain was, “Why buy an IPO? They all trade down.” We just squeezed through; to paraphrase Wellington at Waterloo, it was a close thing. Management and friends bought approximately 5% of the offering. Our shares were priced at $20 a share, a very low multiple of our projected 1992 FFO. The dividend yield was 8.6% and, yes, the shares did trade down for a few days. But our earnings estimates were conservative, and by the end of 1992, we had far exceeded our guidance. That may have been the origin of Kimco’s mantra, “underpromise and overperform.”
From that modest start, we have established a wonderful franchise in owning and operating neighborhood and community shopping centers. Retailing is a difficult business, and represents a prime example of Schumpeter’s “creative destruction.” We can list scores of oncethriving retailers that no longer exist. The distinction and difference for us is that we are retail real estate owners, focused on intrinsic real estate values and always prepared for the shifting fortunes of the retail tenant.
We have had so many retailers enter and exit our centers over the years. By way of illustration, in our Bridgehampton Center, located in Bridgehampton, N.Y., the original tenant was W.T. Grant, followed by the Woolco division of the F.W. Woolworth Company, followed by Caldor, and then by Kmart—but each paid higher rent than its predecessor. This outcome can be credited to a good retail location, strong relationships with retailers and our focus on underlying real estate values.
Martin S. Kimmel, my partner of many years, and I have always shared the conviction that our shopping centers should provide space to tenants, including off-price retailers and discounters, that sell everyday necessities, and that these centers are superb investments. The proportion of land value to total property value (required by the need to have four times more parking area than building area) ranks high compared with most other forms of real estate. Rents from our tenants provide us with the cash flow that, in effect, allows us to earn a return while the underlying land increases in value due to population growth and increasing density. Well-located land in the U.S. has, historically and over time, been a very good investment.
When, as now, we are experiencing low core inflation and low interest rates and bond yields, I do believe that a safe cash flow from quality shopping centers in good locations warrants a valuation cap rate of something less than 6%. On a risk-adjusted basis, the spread between the bond yields of the credit tenants occupying these shopping centers and a cap rate above 6% is too wide.
In their letter that follows mine, Dave Henry and his senior leadership team have set forth, in a thorough and thoughtful manner, our 2010 accomplishments and our strategy for the future.
So permit me, in this letter, to share with you a bit of nostalgia and some random thoughts concerning our business.
This coming November will mark the 20th anniversary of our IPO. Oh, what a difference 20 years can make! At the close of 1991, the Dow Jones industrial average was at 3,168. This was the first time it broke the 3,000 barrier. Yet interest rates were quite high; LIBOR was 7.4% and the Federal Reserve interest rate was 6.5%. Commercial real estate was horribly out of favor, and many investors viewed our asset class as the cause of the meltdown of the entire savings and loan industry.
Despite the challenges, we at Kimco desired to become a public company and we thus embarked upon a two-and-a-half week “road show” to seek investor support for our IPO. Richard Saltzman, a current Director of Kimco and the former head of Merrill Lynch’s Real Estate Banking unit, spearheaded our effort to raise $128 million. It was a very challenging two and a half weeks. (The comparison to our $346 million “overnight” equity offering in December 2009 is striking.)
The investor refrain was, “Why buy an IPO? They all trade down.” We just squeezed through; to paraphrase Wellington at Waterloo, it was a close thing. Management and friends bought approximately 5% of the offering. Our shares were priced at $20 a share, a very low multiple of our projected 1992 FFO. The dividend yield was 8.6% and, yes, the shares did trade down for a few days. But our earnings estimates were conservative, and by the end of 1992, we had far exceeded our guidance. That may have been the origin of Kimco’s mantra, “underpromise and overperform.”
From that modest start, we have established a wonderful franchise in owning and operating neighborhood and community shopping centers. Retailing is a difficult business, and represents a prime example of Schumpeter’s “creative destruction.” We can list scores of oncethriving retailers that no longer exist. The distinction and difference for us is that we are retail real estate owners, focused on intrinsic real estate values and always prepared for the shifting fortunes of the retail tenant.
We have had so many retailers enter and exit our centers over the years. By way of illustration, in our Bridgehampton Center, located in Bridgehampton, N.Y., the original tenant was W.T. Grant, followed by the Woolco division of the F.W. Woolworth Company, followed by Caldor, and then by Kmart—but each paid higher rent than its predecessor. This outcome can be credited to a good retail location, strong relationships with retailers and our focus on underlying real estate values.
Martin S. Kimmel, my partner of many years, and I have always shared the conviction that our shopping centers should provide space to tenants, including off-price retailers and discounters, that sell everyday necessities, and that these centers are superb investments. The proportion of land value to total property value (required by the need to have four times more parking area than building area) ranks high compared with most other forms of real estate. Rents from our tenants provide us with the cash flow that, in effect, allows us to earn a return while the underlying land increases in value due to population growth and increasing density. Well-located land in the U.S. has, historically and over time, been a very good investment.
When, as now, we are experiencing low core inflation and low interest rates and bond yields, I do believe that a safe cash flow from quality shopping centers in good locations warrants a valuation cap rate of something less than 6%. On a risk-adjusted basis, the spread between the bond yields of the credit tenants occupying these shopping centers and a cap rate above 6% is too wide.
Cash flows from stable shopping centers, located on major
thoroughfares in thriving markets and enjoying strong tenancies,
are a wonderful investment attribute and safe haven.
We should also keep in mind that there is severe stress on municipal credits, even in such great states as California, Illinois and Michigan. In this environment, secure cash flows will be increasingly attractive to investors, as will the diversification that a large property portfolio such as ours (we have more than 15,000 individual leases) provides. Over time, inflation will return, resulting in higher rents and higher replacement costs, all leading to higher values for our properties.
We are convinced that our business model can withstand the challenges of a slow-growth economy, stubbornly high unemployment and a struggling housing market, and return us to a path of growth. Cash flows from stable shopping centers, located on major thoroughfares in thriving markets and enjoying strong tenancies, are a wonderful investment attribute and safe haven. And, despite the current softness in consumer spending, demand for retail space is increasing because there are very few new developments. Many retailers are experiencing angst as to whether they will be able to meet their expansion plans for 2012 store openings, and bargaining power is slowly becoming more balanced between
owner and tenant.
We are quite proud that, despite the vicissitudes of the market and the disruption wrought by the Great Recession, a purchaser of our shares in November 1991 has enjoyed a total return of 1,063% (including dividends) and a compounded average annual total return of 13.7%; these figures compare well with 391% and 8.7%, respectively, for the S&P 500.
My Kimco partners, Dave Henry, Mike Pappagallo, Glenn Cohen and Barbara Pooley, have contributed immensely to our success. At the January meeting of the Trustees of the International Council of Shopping Centers, we were delighted that Dave was nominated to be the next Chairman of the ICSC. The Trustees gave Dave a standing ovation, which is just further evidence of the respect that he enjoys among his peers. Dave is a great people person and a wonderful leader. Mike has smoothly shifted his responsibilities for Kimco from Chief Financial Officer to Chief Operating Officer without missing a beat. Our Regional Presidents have all told me how enthused they are about working with him. Glenn, who joined our company in 1995, transitioned very comfortably from Treasurer to CFO. He is well-respected as the “ombudsman of our balance sheet.” Barbara has been a driver of change in so many areas of the company. She has brought clarity and transparency of our business to the investment community. Her industry-wide recognition is further highlighted by being named Institutional Investor magazine’s top-ranked IR professional for two straight years, based upon the votes of REIT investors.
Our job continues as it always has: to achieve favorable returns for our shareholders, as well as for all the constituencies that rely on us. Kimco’s portfolio, guided by our investment and property management professionals, should provide, over time, steady increases in recurring cash flow and the dividends that so many of our investors desire. Additionally, we continue to pursue avenues that enable us to profit from the perturbations in the retail real estate markets, while using our capital wisely. We are grateful to our associates, investors, retailer friends and others who help us to accomplish these goals.
We are convinced that our business model can withstand the challenges of a slow-growth economy, stubbornly high unemployment and a struggling housing market, and return us to a path of growth. Cash flows from stable shopping centers, located on major thoroughfares in thriving markets and enjoying strong tenancies, are a wonderful investment attribute and safe haven. And, despite the current softness in consumer spending, demand for retail space is increasing because there are very few new developments. Many retailers are experiencing angst as to whether they will be able to meet their expansion plans for 2012 store openings, and bargaining power is slowly becoming more balanced between
owner and tenant.
We are quite proud that, despite the vicissitudes of the market and the disruption wrought by the Great Recession, a purchaser of our shares in November 1991 has enjoyed a total return of 1,063% (including dividends) and a compounded average annual total return of 13.7%; these figures compare well with 391% and 8.7%, respectively, for the S&P 500.
My Kimco partners, Dave Henry, Mike Pappagallo, Glenn Cohen and Barbara Pooley, have contributed immensely to our success. At the January meeting of the Trustees of the International Council of Shopping Centers, we were delighted that Dave was nominated to be the next Chairman of the ICSC. The Trustees gave Dave a standing ovation, which is just further evidence of the respect that he enjoys among his peers. Dave is a great people person and a wonderful leader. Mike has smoothly shifted his responsibilities for Kimco from Chief Financial Officer to Chief Operating Officer without missing a beat. Our Regional Presidents have all told me how enthused they are about working with him. Glenn, who joined our company in 1995, transitioned very comfortably from Treasurer to CFO. He is well-respected as the “ombudsman of our balance sheet.” Barbara has been a driver of change in so many areas of the company. She has brought clarity and transparency of our business to the investment community. Her industry-wide recognition is further highlighted by being named Institutional Investor magazine’s top-ranked IR professional for two straight years, based upon the votes of REIT investors.
Our job continues as it always has: to achieve favorable returns for our shareholders, as well as for all the constituencies that rely on us. Kimco’s portfolio, guided by our investment and property management professionals, should provide, over time, steady increases in recurring cash flow and the dividends that so many of our investors desire. Additionally, we continue to pursue avenues that enable us to profit from the perturbations in the retail real estate markets, while using our capital wisely. We are grateful to our associates, investors, retailer friends and others who help us to accomplish these goals.