Kimco Stock: Good Market Dynamics But Fairly Valued (NYSE:KIM)

buzbuzzer Kimco Realty Corporation (NYSE:KIM), incorporated in 1958 and headquartered in Jericho, NY, is a self-administered REIT that primarily owns, acquires, redevelops, and manages grocery-anchored shopping centers in markets all over the country. The market dynamics are interesting and provide value investors with a good hunting ground for opportunities, but Kimco Realty doesn’t seem like one. Though its investment-grade balance sheet, strong liquidity, and relatively good recent performance are attractive, its dividend yield is low and its shares appear to be fairly valued. Portfolio and Outlook The REIT’s portfolio consists of 567 shopping centers that aggregate 100.6 million square feet and are spread across 30 states. 10-K The portfolio is well-diversified with 11.7% of gross annual rent coming from New York in which it has the largest exposure: 10-K However, it appears that most of the REIT’s top markets have above-average unemployment rates: Data by YCharts But Kimco’s portfolio should also be judged by looking at its well-diversified tenant base. As of the year end 2023, no center accounted for more than 1.3% of the REIT’s ABR. Per the last investor presentation, its largest tenant was TJX which represented 3.8% of ABR; its top 10 tenants represented 18% of ABR. Investor Presentation Now, ever since the alternative of full e-commerce became available to retailers, demand for retail space suffered in general. But maybe things aren’t as bad for retail REITs as many think because e-commerce mostly allows small retailers to run more efficiently until they grow to a point where physical presence is justified. Large ones understand that a blend of physical space and an online presence is very important and they have the resources to operate in that manner. I think it’s not controversial to state that retail real estate is not dead but has simply changed. In its last investor presentation, Kimco stated that almost half of retailers intend to expand their physical presence in the next 5 years. Stable demand is also reflected in the store closings in the last couple of years which are near historic lows and in store openings outpacing closings recently. Additionally, supply is low as reflected in the decreasing vacancies across various retail property types in the last 3 years: Statista Moreover, construction starts and completions have been decreasing: CBRE Completions may be forecast to increase and that’s reasonable given the rising rent rates for retail space, but supply is going to take a while to catch up with demand. Based on Kimco’s last investor presentation, rents would have to increase by about 65% on average in the top 50 markets to make sense for investors to flood the sector with new space from a return-on-cost perspective. Performance First, it’s important to note that KIM’s price performance has been underwhelming in the past two decades, underperforming most of its peers: Data by YCharts On a total return basis, however, the performance for shareholders has been impressive since its IPO three decades ago: Data by YCharts Let’s now take a look at more recent results to understand if the market dynamics are expressed in Kimco’s bottom line. First, its average rent per sqft was 3.01% higher in 2023 than in the previous year; renewals and options were the biggest contributors here, as rent for new leases decreased YoY. However, occupancy increased by 60 bps to 96.1% in 2023. Same-store NOI increased by 2.4% and FFO slightly decreased from $1.58 per share in 2022 to $1.57 in 2023. In the last quarter, average rent per sqft increased by 5.05% and, this time, renewals also contributed to the spread. Moreover, occupancy for the second quarter of this year was reported at 96.2%, 10 bps higher than it was at year-end 2023. Same-store NOI increased by 3.03% and FFO per share reached $0.41 in the last quarter (versus $0.39 in the same quarter last year). It appears that rent growth has been accelerating and occupancy is increasing, reflecting the stable demand and constrained supply. FFO also seems stable and is expected to be $1.61 in 2024 based on the mid-point guidance in the last earnings call, which represents a decent potential YoY growth. Leverage & Liquidity Kimco’s investment grade credit ratings (BBB+ from S&P and Baa1 by Moody’s) are justified as only 42.31% of its assets are funded by long-term debt, consisting of notes, mortgages, and preferred shares. Only 4% of the debt is secured and 97% is fixed-rate (a weighted average interest rate of 3.75%). It also has very strong liquidity, as reflected in its Debt/EBITDAre ratio of 6.68x and interest coverage of 4.21x. Additionally, the upcoming maturities are well-laddered and each one of them is a relatively small portion of the debt: Investor Presentation Dividend & Valuation KIM currently pays a quarterly dividend of $0.24 per share, resulting in a forward yield of 4.15%. With a payout ratio of 59.62% and a pretty consistent dividend track record after ignoring the setback caused by the pandemic, I think that the dividend profile is good overall. Seeking Alpha What I don’t like is the low dividend yield, which is even lower than the sector median of 4.33%. That makes sense because the dividend was lowered after the pandemic and though the price experienced a lot of pressure after the Fed started increasing the policy interest rate, the current price reflects an almost full recovery. TrendSpider On a peer-relative basis, the stock seems to be fairly valued, as its FFO multiple is only slightly below the average: Click to enlarge Fair valuation is also supported by its implied cap rate of 6.85% because it is very close to the cap rate of 6.9% which is forecast for retail asset transactions to average in 2024. Statista Risks Retail REITs may have relatively stable cash flows, but Kimco operates in markets with high unemployment rates, which together with high-interest rates affect consumer spending, which in turn can impact the company’s tenant base. For this reason, income investors should understand that even if the dividend yield is high enough for them, dividend payments are in greater danger than dividends paid by other REITs. There’s also an opportunity risk here because retail REITs may seem cheap in general compared to other property sectors, but KIM is fairly valued. Verdict I think that the risks outweigh the prospects. The yield is too low, and the valuation is fair, representing no opportunity for income and value investors. Therefore, I am rating KIM a hold. What do you think? Do you own this stock, or do you favor some other REIT? I’d love to know. Also, please leave a comment if you found this post useful; it means a lot. Thank you for reading.

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