2023-06-23 13:57:02 ET
Summary
- Kite Realty is currently paying out a 4.6% dividend yield to its shareholders.
- The retail REIT is swapping hands at a double-digit discount to its peer group median.
- FFO per share for its fiscal 2023 first quarter formed a 47% payout ratio against its last declared quarterly dividend payout.
Kite Realty ( KRG ) last declared a quarterly cash dividend of $0.24 per share , in line with its prior payment and for a 4.6% forward annualized yield. The Indianapolis-based retail REIT has seen its common shares stay comparatively resilient over a period that's been marked by the Fed funds rate being hiked ten consecutive times to its highest level since 2008, the March banking panic, and against a lingering specter of a US recession. Kite Realty is up 18.7% over the last year, buckling the wider market trend that's seen REITs shed value overall, on the back of the currently abnormal macroeconomic environment. Are the shares still a buy at their current level? It depends.
The REIT is currently swapping hands at a price to trailing 12-month funds from operations ("FFO") of 10.61x , versus a peer group median of 12.36x. Hence, bulls have argued here that the 14% discount to its peer group comp represents an upside to be captured by shareholders. The REIT also has in view the recovery of its quarterly dividend back to its pre-pandemic averages. The quarterly payout has grown by 21.33% over the last year, outperforming its peer group's median growth rate of 4.84%.
Bears, who form the 3.26% short interest, would be right to state the bulk of the tickers in Kite's peer group did not institute deep cuts during the pandemic, so their growth has been from a larger baseline. For example, Retail REITs Agree Realty ( ADC ) and Spirit Realty ( SRC ) both maintained their dividends through the pandemic.
Strong First Quarter Results Support Rally
$4.6 billion market cap Kite held a portfolio with 181 operating retail properties spread across a 29 million square foot gross leasable area as of the end of its fiscal 2023 first quarter. Around 67% of annualized base rent is geographically located in the Sun Belt, with 76% of its assets also having a grocery component. Critically, the portfolio was 94.8% leased as of the end of the first quarter. This drove total revenue of $206.75 million , up 6.4% over the year-ago comp and a beat by $6.91 million on consensus estimates as rental income grew by $12.17 million year-over-year.
This came as total expenses fell by $12.6 million year-over-year to $175.95 million during the first quarter, driving operating income to increase by 240% to $30.8 million. Operating wins during the first quarter came against the continued warnings about the health of US commercial real estate and broad expectations of the US falling into a recession. Same property NOI increased by 6.5% year-over-year, with the REIT also executing 144 new and renewal leases covering roughly 831,000 square feet during the first quarter.
A Covered Dividend Yield
Cash leasing spreads of 38% were realized on 17 comparable new leases, with spreads of 10% on 77 comparable renewals for a blended cash spread of 13%. The REIT generated an FFO of $0.51 per share during its first quarter, up 10.87% over the year-ago comp of $0.46 and a beat of $0.04 cents on consensus estimates. This meant a 47% payout ratio against the current quarterly dividend payout. Hence, not only is there essentially near-zero risk to the current payouts, the REIT has the capacity to hike its payout to its pre-pandemic level in the medium term. Indeed, the REIT has raised its fiscal 2023 FFO guidance to $1.92 to $1.98 from an earlier guidance of $1.89 to $1.95.
However, there are headwinds. Bed Bath & Beyond's ( BBBYQ ) Chapter 11 bankruptcy filing in April has thrown in some uncertainty around 582,000 square feet occupied across 22 locations and $7.8 million of annualized base rent as of the end of the first quarter. The REIT indicated during its first quarter earnings call that they're experiencing strong demand for their Bed Bath & Beyond boxes and that they expect to re-let these spaces at healthy re-leasing spreads. These currently occupy prime spots within their centers, and management stated that they're poised to swiftly address the backfill potential for these boxes.
Whether or not to buy the commons will depend on your perceived outlook on the direction of inflation and interest rates for the second half of the year. The REIT's current discount to peers could be closed on an increase in stock market optimism if the FOMC continues to pause interest rates at its current 5% to 5.25% level and if the headline rate of inflation continues to trend toward the Fed's 2% target. That the REIT didn't really participate in the broad selloff of equity REITs over the last year is likely reflective of its relative discount to peers as the prospect of healthy future dividend growth. There could also be another dividend raise in 2023 if the Bed Bath & Beyond headwinds are quickly remedied.
For further details see:
Kite Realty's 4.6% Dividend Yield Is Safe As Bed Bath & Beyond Ceases Trading