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Ishan Majumdar
Ishan Majumdar
Articles (62) 

Kimco Realty: A Retail Slowdown Might Hit This REIT

This retail-oriented REIT has appreciated greatly due to its diversified portfolio and high occupancy rates

December 06, 2019 | About:

One of the biggest challenges for yield investors is to identify stocks which can provide consistent dividends without depreciating in value and destroying the invested capital. Real estate investment trusts are a common asset class where such problems are relatively low. However, the most critical move for investors is to identify the point when these REIT investments might start facing issues and pull out at the right time. One REIT which is currently going great guns but which might be hit badly is Kimco Realty Corp. (NYSE:KIM).

What does Kimco Realty do?

Kimco Realty is a retail-focused REIT with a majority of its investments going into open-air shopping centers. The New York-based company has invested in over 400 shopping centers spread across the coastal states of the U.S. Kimco has diversified its investments across a wide variety of retail stores such as grocery stores, restaurants, cinemas, discount stores, gyms, spas and other kinds of service providers. While it wasw listed in 1991, the company has been acquiring and managing shopping centers and related retail assets for over 60 years.

Why are investors optimistic about the company?

As per the above chart, the stock price of Kimco Realty has actually gone up by around 25% in the past year. Over and above this, the company has delivered a dividend yield of 5.28% with a 5-year average yield-on-cost of 6.93%. The table below throws some light on the company’s yield:

Year

2014

2015

2016

2017

2018

TTM

Dividend Per Share

0.92

0.98

1.04

1.09

1.12

1.12

Trailing Dividend Yield %

3.64

3.68

4.11

6.01

7.65

5.29

It is important to understand why the price of Kimco Realty went up and why it might not stay so high. Kimco’s revenue per square foot has grown by more than 20% over the past 5 years and the company has delivered increasing occupancy rates and numbers of leases. The company’s leases are diversified across a wide variety of retail sectors ranging from cinema to gyms to grocery stores. The average lease term is 10 years for larger outles and five years for small shops.

A diversified client base means that the concentration risk associated with receiving a large chunk of revenues from a single source is minimal. The company has credit ratings of BBB+ rating from S&P and Baa1 from Moody’s, so it falls well within investment grade. The general diversification of Kimco Realty across different kinds of retailers has led to a general market perception that there is a low inherent risk. While this logic is enough to keep investor optimism high, it might not be enough for the company to sustain its current occupancy levels in the future.

Kimco might be hit by the slowdown

As of the end of the third quarter of fiscal 2019, there is a slowdown in the U.S. manufacturing sector, though consumer spending is still strong. It is only a matter of time before consumption slows, and retail will be the first sector affected. Reducing income for consumers as a result of the industrial slowdown will result in lower consumer spending, causing the sales of shopping centers to drop. Shop owners start canceling their leases when they underperform and are forced to close. This will have a clear impact on the occupancy rates of retail-oriented REITs like Kimco Realty. At that point, the diversification will not help Kimco much, as almost every sector will be hit.

Exit on a high?

Apart from the fact that Kimco Realty has grown by about 25% year to date, it is worth highlighting that the company is trading at a price-earnings ratio of 28.23 and an enterprise value-to-revenue multiple of 12.44, which are certainly on the higher side. Most investors, especially those who have entered in 2019, will be seeing a good amount of green on their screen, particularly after taking into account the dividend yields. The impact of the retail slowdown through reducing occupancies is yet to be seen on the company’s results. Gurus like Ken Heebner (Trades, Portfolio) and Chris Davis (Trades, Portfolio) have quietly exited their positions from the stock, so exiting on the current high may be wise.

Key takeaways

While Kimco Realty is easily one of the most well-diversified REITs with a strong asset base spread across some of the top metropolitan areas of the U.S., the rapid number of store closures taking place in the U.S. is due to a retail slowdown. Kimco has shown fantastic appreciation and given a very good yield, but maybe the time has arrived for investors to follow the gurus and gradually start exiting from their investments.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified chartered accountant with a masters in management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research specializing in research and valuation of listed companies.

I have over six years' experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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