KIM - Kimco Realty: Grocery-Anchored Quality On Sale

2023-05-12 08:05:00 ET

Summary

• Kimco Realty is a high quality REIT with very high exposure to grocery-anchored properties.
• It has material growth drivers in developing valuable land for mixed use centers.
• The stock is now trading well in value territory near its 52-week low and pays a well-covered dividend.

The stock market can be a daunting place for those who frequently trade in and out of positions, hoping to capture capital gains here and there.

What often gets ignored are capital gains taxes, which can bite an investor come tax time, especially if 100% of those taxable gains were reinvested into another stock that's now trading at a loss.

That's why investing in dividend-generating REITs ( VNQ ) may be a far better idea for more passive style investors who like recurring income. Such I find the case to be with Kimco Realty ( KIM ), which I last covered here back in April.

The stock price has dipped by 8% since my last bullish take, and in this article, I highlight recent developments and why now may be an excellent time to pick up this quality income stock.

Why KIM?

Kimco Realty is the largest publicly traded shopping center REIT in North America, with focus on high barrier to entry coastal markets and the growing Sunbelt region of the U.S. It's also a member of the S&P 500 ( SPY ) and at present, owns 529 shopping centers covering 90 million gross leasable square feet.

KIM has done a great job of transitioning its property portfolio away from non-core centers in less desirable markets towards grocery anchored and mixed use properties. It now gets 85% of its annual base rent from grocery-anchored centers, and this is one of the highest in the shopping center space.

As shown below, KIM's top tenants include a sturdy collection of retailers like TJX Companies ( TJX ), Home Depot ( HD ), Whole Foods ( AMZN ), Kroger ( KR ), and Walmart ( WMT ). Moreover, it's benefitting from tenant expansion from the likes of Costco ( COST ), Target ( TGT ), AT&T ( T ), and Verizon ( VZ ).

Meanwhile, KIM has recently demonstrated strong first-quarter results amidst a tough macroeconomic backdrop. This includes increasing occupancy by 110 basis points YoY to 95.8%. Importantly, this was driven by healthy growth in small shops, on which KIM is able to charge rent per square foot compared to anchor tenants. Small shop occupancy grew by 70 bps YoY to 90.7%, which sits well above the 85% range that is generally considered to be healthy.

Moreover, KIM is seeing strong tenant demand, as cash rent lease spreads were 44%, representing the highest level in the past 5 year period. As shown below, KIM's occupancy is now approaching its pre-pandemic level, and all the while, KIM has been able to grow its rent per square foot every year since 2018.

Headline risks include the ever-present notion of a "retail apocalypse", driven by the likes of e-commerce giants like Amazon. However, consumer shopping will continue to necessitate high quality centers as in the ones that KIM possesses.

Moreover, higher interest rates have pushed new supply way down and store closures are at the lowest levels since 2009. While the closure of Bed Bath and Beyond may be scary for some, the truth is that retailers have come and gone throughout history due to mismanagement or changing consumer tastes, only to be replaced by new and more vibrant tenants over time.

KIM also maintains plenty of capital to fund its mixed use developments, with $2.3 billion of liquidity, comprised of cash on hand and available capacity on its revolving credit facilities. While its net debt to EBITDA ratio is slightly high at 6.2x, it's reasonable considering the level of mixed use development management is trying to accomplish. Ratings agencies don't appear to be concerned, as KIM has a BBB+ credit rating from S&P.

Management highlighted the favorable dynamics that are playing out as it relates to it valuable land development for mixed-use purposes during the recent earnings call :

Further enhancing the value of our first-ring suburbs locations, is the increased demand for industrial and residential assets. This competition for land or conversions makes the cost of new retail development even more prohibited, which will further reduce supply for potential new retail.

And when you combine the rising rents in the residential sectors with the competitive redevelopment advantages at our existing locations in the first-ring suburbs, the opportunity to add more mixed use density provides us the long-term opportunity to drive further growth and value creation.

Importantly for income investors, the 5.1% dividend yield is well-protected by a 59% payout ratio, based on Q1 FFO per share of $0.39. Notably, management grew the dividend 3 times last year. Short-term macroeconomic concerns and higher interest rates may pause growth in the near-term, but I would expect for dividend growth to resume with more clarity on the direction of interest rates.

Lastly, KIM is trading in value territory at the current price of $18.00 with a forward P/FFO of 11.5, sitting well under its normal P/FFO of 14.8. Sell side analysts who follow the company have a consensus Buy rating with an average price target of $23.11, which represents a potential 28% upside based on price appreciation alone.

Investor Takeaway

KIM is a high quality retail REIT that should be able to weather macroeconomic turbulence in the near-term. Its solid tenant demand, growth plans for mixed use development, and attractive dividend yield make it an appealing investment for income investors who are looking for some exposure to the retail sector. The share price is now trading well below its near term high of $23 from as recently as February, giving value investors a good opportunity to layer into the stock for potential long-term income and growth.

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