COLUMBUS, Ohio - The State Teachers Retirement System of Ohio has been racking up more losses than bargains at Kmart Corp. lately.
The $50 billion system owns 14 buildings occupied by Kmart stores, but last week the U.S. Bankruptcy Court approved Kmart's plan to close six of those stores. The closure is part of the discount retail chain's strategy to shutter 284 underperforming stores nationwide.
"We have $6 billion invested in real estate, and our total exposure to Kmart is relatively insignificant," said Herbert Dyer, executive director of the Ohio fund. "We will lose around $6 million as a result of the closings, because we won't be able to collect rent on the stores." (Once a bankruptcy court judge approves a retailer's petition to close stores, the retailer no longer is responsible for the rent.)
The local management companies retained by the system to manage the properties will look for new tenants, but it could take time. Fred Carr, principal at Penobscot Group Inc., Boston, a real estate research firm, said buildings in the best locations will be re-leased in six to 12 months. For stores in poorer locations, it could take as long as 18 months.
At one time, Ohio STRS owned properties housing more than 40 Kmart stores, which it bought during the real estate boom in the 1980s, Mr. Dyer said. "We bought them, mainly in the South, when we wanted to increase our exposure to real estate significantly." The system sold them one by one in the early '90s to diversify its real estate program. Now it's invested in 270 properties in all the major sectors, all around the country.
"We made money on most (Kmarts) that we sold, but we lost on some, and now we're losing on these. We never expected them to file for bankruptcy," he said.
The system also is exposed to Kmart through its real estate investment trust portfolio, which owned 400,000 shares of Kimco Realty Corp. as of Dec. 31, according to First Call Share Watch, Boston. Kimco, a New Hyde Park, N.Y., REIT, owns 75 properties in which Kmart is the anchor tenant. So far, Kmart announced plans to close 30 of those stores. Some analysts have predicted Kmart might close as many as 500 stores by year's end.
Other pension funds also are big investors in Kimco, according to First Call. They include the $138 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands, which owned 8.6 million shares of the REIT as of Dec. 31; the $64.6 billion pension fund of General Motors Corp., New York, which owned 728,000 shares; the $88.5 billion State Board of Administration of Florida, Tallahassee, which owned 458,000 shares; and the $26.6 billion State Retirement and Pension System of Maryland, Baltimore, which owned 367,000 shares.
But there is a bright side to the closings, said Penobscot's Mr. Carr.
"A number of those Kmarts were leased for 20 years with 20-year renewal options, renting for as little as $4 a foot. Now the owners will be able raise the rents, so even though there is short-term pain, they will do much better long term."