When it comes to REITs focused on grocery-anchored centers, industry pioneer Kimco Realty Corp KIM is the largest, and has been trading near its 52-week high for much of the summer.
That doesn't mean it has been resting on its laurels, though. Kimco finds itself right in the middle of a red-hot retail center REIT sector, despite its relentless focus on portfolio transformation. Kimco peers include: Regency Centers, DDR Corp., Federal Realty Trust and the recent Blackstone Group-sponsored IPO, Brixmor Property Group.
Kimco has methodically liquidated its Latin America portfolio, upgraded its North American assets and managed a 121 million square foot portfolio, all while steadily growing its funds from operations (FFO).
What Kimco Thinks Investors Need to Know
On September 8, Kimco presented at the Barclays Global Financial Services Conference, in New York. Some key investor takeaways are:
1. Kimco is leveraging opportunities for organic growth in its legacy portfolio of 840 properties, despite pruning it at the same time. (All while maintaining its BBB+ investment grade rating.)
The company is also refocusing on 15 top tier U.S. markets.
2. Higher household incomes and population densities in these MSA's are the engines that help drive higher occupancy and rent per square foot.
3. The huge disparity in rent per square foot between Tier 1 and Tier 2 Kimco shopping centers, combined with lower occupancies, illustrates both the challenges and rewards driving this portfolio transformation.
On the other hand, there is also a tremendous opportunity built into Kimco's portfolio when legacy anchor tenant and ground leases come up for renewal or become available by other means. Ground leases account for 11 percent of ABR at only $9.89 per square foot, while vintage anchor lease ABR is $10.71 per SF and represents 14 percent of ABR.
5. Kimco's long retail history stretches back all the way back to its legacy company roots in 1958. When economic times get tough, or when a particular tenant hits a rough patch, Kimco has historically been able to take advantage of its industry relationships, a strong balance sheet, and local market knowledge to create value for shareholders.
6. Kimco's strong balance sheet has enabled the company to take advantage of the recent low interest rate environment to lower its weighted average cost of capital.
The combination of increased NOI from higher rent per square foot, mixed with a lower cost of capital has the potential to increase the spread resulting in FFO growth.
7. Although there's no guarantee, steady and predictable growth of FFO and AFFO could result in increased returns to shareholders, both from dividend increases and rising share prices driven by increased Price-to-FFO multiples in the future.
Investor Takeaway
When factoring in the run up in Kimco shares year-to-date, the company appears to be fully valued, trading at an expected Price-to-FFO multiple of about 17. For long-term investors, this is a company built for distance, not for speed.
Disclosure: At the time of this writing, the author had no position in the equities mentioned in this report.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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