KIMCO REALTY (KIM)
Investment Research Report
Fundamentals and Company Overview
Kimco Realty is an industry leading real estate investment trust specializing in outdoor shopping centers and strip malls. The company has 710 shopping centers in its portfolio in 39 states, making it one of the most geographically diversified retail landlords in America. The company has top-tier tenants, including large firms and recognizable brands like Whole Foods, Trader Joe’s, The Gap and Darden Restaurants (Olive Garden, etc.)
Going public in 1991, Kimco Realty has seen explosive growth both in operations and in share price. The company is still about 50% off of its mid-2000s highs, but the company’s strong and reliable management and strong financial metrics make it a worthy and low-risk addition to an income portfolio.
Price and Income Performance
After improving slightly at the beginning of 2016 from reaching a 52-week low at the end of last year, Kimco is still flat excluding dividends from a year ago. We saw a dividend rate hike in December, which marks the sixth consecutive year of dividend rate hikes, and is a 325% increase of the company’s dividend since 2009.
We believe that Kimco will be able to continue to grow dividends now and into the future, since the company’s fundamentals have remained strong and the company’s strategic expansion has meant income growth is likely to continue for a long time.
Dividend Sustainability
Kimco’s funds from operations (FFO) has trended slightly upwards within a tight range in the last four years. Additionally, 2015’s FFO was up 8% from the prior year thanks to a 6 cent per share increase in recurring FFO thanks to the company’s ability to increase rents on its tenants and expand operations to serve new tenants. The company also anticipates FFO of $1.54-$1.62 in 2016, up from $1.56 in 2015, which was at the high end of the company’s guidance. If they hit the middle of their guidance next year, only 65% of the company’s income will be used for dividend payouts. This means the company will have plenty of room to hike dividends later in the year, just as it has done in the last six years.
Growth Prospects
On top of Kimco’s improving income stream, the company’s strategic positioning shows an ability to find where growth and higher margins are. Kimco is exiting Canada, where it owns 35 properties, as a result of that country’s weaker economic conditions due to cheap oil, high housing costs, and pressured Canadian consumers. While exiting a weak market, Kimco is still making a profit on the liquidation, as Executive Chairman Ross Cooper explained on the company’s last earning call:
"In Canada, as of right now, we have 25 assets out of the 35 that are under contract to be sold. We expect that to happen in the next two to three months depending on the outcome of some of the due diligence that’s still remaining... So we still feel really good about the pace which things are going – the pricing is very consistent with what we see in other assets.”
In weak markets where it is retaining a presence, as in Puerto Rico, the company has a firm understanding of how to go into a market where tenants can sustain that country’s weaker economic situation. Management has made the observation that parking lots are filled with people shopping. They have found that it is a very deep underground economy there and the people just shop. So the properties are very successful.
In its main cash cow, the United States, Kimco is maintaining a very high occupancy rate, up to 96% at the end of 2015 as the company saw smaller shops continuing to take up long-term leases at their properties. Additionally, U.S. base rents are up 5% on a y/y basis. The company’s California properties, which comprise a large portion of the firm’s operating income, has seen “staggering cap rates,” as CEO Conor Flynn put it. That puts Kimco in a very strong position to sell any of its 90 California properties in order to invest in markets with higher returns, or to simply hold as the income stream in California continues to rise.
BMR TAKE
The high quality of Kimco’s tenants and the geographical diversity of its operations make it an attractive low-risk addition to The Bull Market Report High Yield portfolio. Its relative price weakness in the last year has also meant an attractive opportunity to build a position at depressed prices when the market irrationally sells off income-producing assets in anticipation of the Federal Reserve’s interest rate hikes. However, the rate hikes are now in the rear view mirror and well priced in; but many income-producing assets, including Kimco, have only begun to recover.
With timing on our side, buying Kimco and becoming a partial landlord of America’s best retail spaces is a simple decision to make. With the company’s strong FFO trends and rising dividend, there is good reason to believe Kimco will offer a rising income stream to shareholders for years to come.
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