2023-04-12 08:10:00 ET
Summary
- Kite Realty Group carries a high-quality portfolio and yet flies under the radar for many investors.
- KRG is seeing respectable NOI growth and strong tenant demand for its properties.
- I highlight the dividend coverage, balance sheet, valuation, and other important points.
Investing for cash flow can be a highly rewarding exercise, especially when it comes to so-called "hard assets" that unlike riskier tech companies, aren't going out of style anytime soon. With the S&P 500 ( SPY ) yielding a paltry 1.6%, it's no wonder that some who are heavily invested in index funds are worried about paying for their kids' education without having to touch their nest egg.
That's why I have a healthy allocation to REITs that generate a steady source of cash flow for me, and this includes undervalued shopping center REITs like Kite Realty Group ( KRG ).
I last covered KRG back at the end of December here , highlighting its balance sheet strength and forward development plans. KRG hasn't budged much over this timeframe, giving just a 0.7% total return. In this article, I highlight why now remains a great time to pick up this durable retail giant.
Why KRG?
Kite Realty Group generally flies under the radar for many investors, considering it operates in a space with bigger names like Federal Realty Trust ( FRT ) and Kimco Realty ( KIM ) getting most of attention. It shouldn't be ignored, however, that KRG is a top 5 shopping center landlord with 183 open-air shopping centers and mixed use properties. Its properties are necessity based and are located in high growth markets across the Sunbelt (two-thirds of annual base rent) and strategic coastal markets (23% of ABR).
KRG is also rather e-commerce resistant, as 75% of its ABR comes from properties with a grocery component. Its strategic focus on high value properties resulted in strong tenant demand. This drove same property net operating income higher by 5% last year, higher than the 2% that management had originally guided.
KRG also has a strong portfolio leased rate of 95%, which is comparable to that of Federal Realty Trust, with anchor and small shop leased rates of 97% and 90%, respectively. Plus, KRG is seeing cash lease spreads of 13% , implying strong tenant demand for its properties.
Near term risks include tenant problems arising from Bed Bath & Beyond ( BBBY ) and Party City, both of which have well-documented issues in the headlines. However, tenant churn is a normal part of the business as KRG has seen plenty of that since becoming public in 2004. Moreover, management seems ready to be able to replace problem tenants from a roster of well-regarded consumer names, as noted during the recent conference call :
Any disruption from those tenants [BBBY and Party City] could impact our lease rate in the near term, but they are not a read-through to the broader retail environment. We continue to see strong demand from a variety of anchor tenants with whom we have recently signed leases, including ALDI, Lidl, Trader Joe's, Total Wine, DICK'S Sporting Goods ( DKS ), HomeGoods ( TJX ), pOpshelf, Ulta Beauty ( ULTA ), and Five Below ( FIVE ), amongst many others.
Successful retailers continue to implement an omnichannel strategy across their fleets, where the physical store is an integral distribution point to deliver products and services to consumers. Supply of high-quality open-air retail space remains low, and demand continues to be strong as demonstrated by our ability to grow rents at compelling returns.
KRG carries a strong BBB rated balance sheet that's prepared to weather the current higher interest rate environment. This includes carrying a respectable net debt to EBITDA ratio of 5.2x and over $1 billion in liquidity comprising of cash on hand and availability on credit facilities. Management is also open to asset disposition this year to address 2023 debt maturities.
Importantly, KRG's 4.7% dividend yield is well-protected by a 48% payout ratio, based on Q4 FFO per share of $0.50. Notably, KRG also raised its dividend every quarter last year. While dividend growth could be muted this year due to management reserving for near-term debt maturities, growth could resume should interest rates stabilize and as rent growth catches up.
Turning to valuation, I see KRG as being solidly in value range at the current price of $20.64 with a forward P/FFO of 10.7. Management estimates a NAV per share in the $25 to $32 range, and analysts have a consensus NAV estimate of $26.70 . Even with the lower consensus price target of $25 , KRG could potentially deliver 20%+ total returns over the next 12 to 18 months.
Investor Takeaway
Kite Realty's strategic focus on high value properties has resulted in strong tenant demand and respectable same property NOI growth. Its balance sheet strength and investment grade rating make KRG well-positioned to weather the current higher interest rate environment. At the same time, the dividend is well-protected by a low payout ratio, even after 4 increases last year. As such, income and total return-minded investors may want to take a look at KRG for potentially strong forward returns from here.
For further details see:
Kite Realty: Fly High With This Undervalued Retail REIT