Kimco Realty Corporation (NYSE:KIM) is a North American Real Estate Investment Trust (REIT) worth watching. Although its market value has remained flat since the turn of the year, the vehicle has been the subject of numerous material events, including an acquisition, a changing REITs market, and a recent earnings beat. As such, I decided to dial in on Kimco Realty Corporation’s prospects.
Without further ado, herewith are my key findings.
Overview
Although it has mixed-use investments, Kimco is primarily a retail REIT, operating a key anchor-based model spanning more than 560 shopping centers. Moreover, the REIT’s primary exposure is to grocery stores and restaurants, allowing it to recognize key synergies.
Click on Image to Enlarge (KIMCO)
Furthermore, the REIT primarily focuses on strip malls, with particular emphasis on the Sun Belt. Its goal is to tap into undervalued properties in regions with robust job growth.
Another element of the REIT is its financing segment, which allows diversified returns through high-yield debt solutions like bridge financing, mezzanine financing, and re-tenanting.
KIMCO
Lastly, as mentioned, Kimco has delved into the mixed-use arena to diversify and potentially elevate its economic returns. The firm believes multifamily acquisitions will add mark-to-market benefits, meaning shorter lease terms will readjust to inflation faster than retail contracts. Moreover, Kimco thinks multifamily acquisitions will draw customers to its shopping centers, which is hard to argue against.
Key Talking Points
The Retail Property Environment
Retail REITs might experience economic pressure in the following quarters, which is why I wanted to start this analysis from a top-down perspective.
As shown below, retail REITs (especially strip retail) have shed significant value since the sub-asset class’ latest peak. This isn’t surprising, as elevated interest rates have absorbed buying power. Moreover, consumer spending has been inconsistent, concurrently diminishing strip mall owners’ confidence.
Change in Commercial Property Values (Green Street)
Although buying low and selling high is one of the primary rules of investing, I fear that commercial real estate might shed additional value. My basis is that inflation has stagnated, consumer confidence is volatile, and unemployment is rising. Moreover, the U.S. yield curve has dropped considerably in past months; if an interest rate pivot occurred, we might see a spike in the credit cycle, where spreads risk, causing risky assets to depreciate.
Lastly, net operating income must be considered. I fear that the abovementioned factors might drag NOI down, resulting in capitalization rates dropping with property valuations.
Implied Cap Rates (S&P Global)
Metrics
Occupancy and Growth
I collected data from peers to place Kimco Realty’s occupancy rate into context. Although each of its peers has idiosyncratic differences, I believe much can be garnered from a face-value observation.
Unfortunately, Kimco’s occupancy doesn’t sparkle if compared to some of its peers. Moreover, I have concerns regarding its portfolio-specific risk; a discussion follows.
Source/s: Respective Company Websites & Investing.com (Links Embedded In Diagram)
About 47% of Kimco’s tenants are small shops. I think the fund can use its core anchor strategy to charge premium rents to smaller tenants. However, a series of economic headwinds can have a contra effect, as many small tenants are vulnerable to economic cycles.
Kimco’s small shop occupancy is around 91.5%, which shows that the lower end of its portfolio has embedded concerns. The fund’s key anchors are respectable companies. Nevertheless, I maintain that I am concerned by its smaller shop exposure in the current economic climate.
Concentration Risk
On a more positive note, I like the look of Kimco’s portfolio concentration. None of its tenants exceed 4% of its base rent. Additionally, Kimco is geographically diversified across the Sun Belt, providing it with long-term diversification benefits (think about systematic migration).
KIMCO
The following diagram illustrates a national representation of Kimco’s portfolio.
National Representation (KIMCO)
Financials
A deeper dive into Kimco’s recent financials shows that the REIT swung into an accounting loss during its previous quarter, primarily due to depreciation and merger charges. The latter was mainly due to the firm’s RPT Realty acquisition, and, therefore, I consider it a non-core/non-recurring charge. Moreover, although depreciation must be considered, it is an accounting adjustment and not necessarily an economic reality.
Income Statement (KIMCO)
The following diagram shows Kimco’s funds from operations after depreciation, losses on marketable securities, and impairments were added back. Kimco‘s FFO increased year-over-year; however, its FFO per share remained level at 39 cents (versus the previous year’s Q1), suggesting the higher FFO didn’t result in accretive per-share returns (keep in mind that REITs issue securities on a regular basis to fund new acquisitions).
FFO (KIMCO)
It is debatable whether Kimco’s FFO-per-share will increase in the following quarters. Considering the economic reasons I mentioned earlier, I think the firm will struggle to scale its net operating income. Nonetheless, I’m unsure whether its input costs will follow the same trajectory.
The fund’s balance sheet should be considered with a pinch of salt because it purchased RPT Realty for $1 billion in an all-share deal in Q1, therefore enhancing its asset base without recognizing a contra liability.
Balance Sheet (KIMCO)
You might’ve noticed that I’m skeptical about Kimco’s financial progress. I have the same view of its liability level. Although I think its long-duration debt structure is positive, the fund has a net debt-to-EBITDA ratio of 5.6x; I would prefer seeing a ratio of 3x or below.
Debt Maturity Schedule (KIMCO)
Recent Acquisitions and Dispositions
I mentioned RPT earlier, but let’s dial into the deal for a second.
RPT Realty was a REIT that owned and operated open-air shopping centers. Kimco spent $1 billion on RPT but sold about $248 million worth of its assets in Q1. Additionally, Kimco stated that RPT might introduce $35 million in cost synergies.
I think RPT seems like a strategic buy, where Kimco spotted an absolute value opportunity. I don’t know enough about RPT to provide a granular opinion. However, the acquisition of RPT reduced Kimco’s occupancy by 14 basis points in Q1, which, combined with the $248 million in dispositions, shows that we could be looking at a turnaround story instead of a growth-by-acquisition tactic.
Below is a chart illustrating figures of RPT and other acquisitions/dispositions. Note the intense CapEx estimate.
KIMCO
Valuation and Dividends
I had a look at Kimco’s valuation multiples and can’t say that I’m impressed.
For example, the REIT thinks it will achieve an FFO between $1.56 and $1.6 for fiscal 2024. At the upper end of that guidance, the fund has a forward price-to-FFO ratio of 13.34x, which doesn’t signal relative or absolute value. Furthermore, Kimco’s price-to-adjusted funds from operations ratio is about 15% above its five-year average, which I disliked, as it suggests the REIT is overvalued on a cyclical basis.
Aside: I used Kimco‘s intra-day price on July 29th to calculate the forward P/FFO.
Metric | Value |
P/FFO | 13.5x |
P/AFFO | 17.66x |
Forward P/FFO | 13.34x |
Kimco’s dividend profile is reasonable. However, its forward yield of 4.53% lags Realty Income’s, Alpine’s, and NNN REIT’s. As such, I think there are better income-based opportunities available to investors.
Peer Analysis (Seeking Alpha)
Conclusion
After assessing Kimco Realty, I failed to discover enough positive catalysts. In fact, the REIT could face headwinds from a fragile retail asset market, below-peer occupancy rates, a questionable valuation, and elevated debt versus earnings.
Considering the above, I think Kimco Realty is a Hold.
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