RPT - Kimco Realty: 4.8% Yield Strong Dividend Coverage And A Catalyst

2023-09-19 03:28:29 ET

Summary

• Kimco Realty announced the acquisition of RPT Realty, which is expected to boost funds from operations growth.
• The transaction will add to Kimco Realty's FFO right away and may result in a dividend raise.
• The deal is transformative for KIM, expanding its footprint in core metro areas and driving FFO growth.

Kimco Realty Corporation ( KIM ) is a well-managed open-air shopping center-focused real estate investment trust that not only covers its dividend comfortably with funds from operations, but the trust also saw a substantial occupancy and NOI recovery following the pandemic (a core reason for me to recommend Kimco Realty in the last two years).

Kimco Realty, at the end of August, announced the acquisition of another trust, RPT Realty (RPT). The transaction is anticipated to add incrementally to Kimco Realty's funds from operations, and there is strategic overlap in the transaction in terms of geographic asset locations.

I think the deal is strategically favorable for Kimco Realty and is set to boost funds from operations growth, and I consider the stock of Kimco Realty to still be undervalued.

My Rating History

Kimco Realty, since I last covered the REIT in March , has seen a sideways stock movement. With that said, however, I consider the trust to be a strong passive income choice for investors, particularly after the trust announced the acquisition of another REIT and said that the transaction wouldn't affect the dividend payout policy.

Since the stock is still cheap and the trust expects acquisition-driven FFO growth to materialize following the RPT Realty transaction, Kimco Realty deserves a Strong Buy classification.

RPT Transaction

Kimco Realty is focused on grocery-anchored open-air shopping centers and is mostly active in major metro markets, from which the trust generates 85% of its annual rental revenues.

At the end of August, Kimco Realty announced the acquisition of RPT Realty for which the trust paid $2 billion in an all-stock deal. RPT Realty itself owns 56 properties and the trust also has a core focus on grocery-anchored shopping centers (like Kimco Realty): 72% of annual base rent comes from such centers. The portfolio occupancy was almost 95%, indicating a well-managed and well-leased property portfolio.

What is great about the transaction, in my view, is that it is expected to add to Kimco Realty's FFO right away. If Kimco Realty can incrementally add FFO following the close of the transaction, which is expected for the beginning of 2024, Kimco Realty might reward passive income investors with a dividend raise (speculation on my part).

The deal is transformative for Kimco Realty because approximately 70% of RPT Realty's properties are located in Kimco Realty's core markets, and the transaction will immediately grow the trust's footprint in core metro areas such as Miami, Atlanta, or Tampa, with the biggest growth occurring in the Boston market.

In addition, Kimco Realty expects to harvest $34 million in synergies, which, at least partially, are going to drive the trust's FFO growth.

The Dividend Remained Well-Covered With FFO As It Is

Kimco Realty continues to exhibit strong dividend payout metrics in the first half of the 2023 financial year: Kimco Realty earned $0.39 per share in FFO in the second quarter as well as in the first quarter and held its dividend steady at $0.23 per share. This implies a dividend payout ratio of less than 60% in the first half of the year as well as in the last twelve months.

With such a low dividend payout ratio, Kimco Realty has room to grow its dividend despite pulling off a major transaction with RPT Realty.

Leverage And Rating Neutral Transaction

The transaction is expected to not affect the leverage ratio or investment grade rating of Kimco Realty. The present leverage ratio (based on net debt to EBITDA) is 5.5x which is expected to persist after the transaction has been approved and completed.

Raised Guidance And FFO Valuation Multiple

In the second quarter, Kimco Realty slightly increased its guidance for 2023 FFO: The trust now plans with $1.55 to $1.57 in FFO per share, an increase of $0.01 per share at the lower end compared to the previous guidance.

Based on a stock price of $19.06, Kimco Realty sells for a 12.2x FFO multiple.

For comparison, Realty Income (O), a heavyweight in the REIT sector, is selling at 13.4x FFO. In both cases, I consider the trusts to be undervalued. Here is my latest Realty Income thesis .

Why Kimco Realty Could See A Higher Or Lower Valuation

Kimco Realty suffered an occupancy decline and a NOI contraction during the pandemic, but the trust has seen a rather consistent recovery after 2020, which I pointed out multiple times in my past articles.

As a shopping center-focused REIT, I think Kimco Realty could be deeply affected by a recession, particularly if it cools off consumer spending and results in slowing retail sales growth.

If the RPT Realty transaction falls through, for whatever reason, Kimco Realty's stock may also suffer a setback.

My Conclusion

I think the RPT Realty transaction is a strong move on the part of Kimco Realty because there is substantial strategic overlap in terms of core markets, and the transaction is expected to add incrementally to Kimco Realty's FFO.

Since Kimco Realty also explicitly stated that the transaction is not expected to affect the trust's dividend policy, and taking into account that Kimco Realty pays out less than 60% of its FFO, I think the dividend remains very safe for passive income investors, and the stock has a catalyst as well.

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