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What's in the Offing for Kimco (KIM) This Earnings Season?

Zacks Equity Research

Kimco Realty Corporation KIM is slated to report second-quarter 2019 results on Jul 25, before the market opens.

In the last reported quarter, this New Hyde Park, NY-based retail real estate investment trust (REIT) delivered a positive performance of 2.78% in terms of funds from operations (FFO) per share. Particularly, the company registered new leasing spreads of 17.4%, which marked the 21st straight quarter in which spreads on new leases were up more than 10%. It also indicated the highest quarterly increase since third-quarter 2017.

Over the trailing four quarters, Kimco beat estimates on two occasions and posted in-line results in the other two, recording an average beat of 1.39%. The graph below depicts this surprise history:

Kimco Realty Corporation Price and EPS Surprise

Kimco Realty Corporation Price and EPS Surprise

Kimco Realty Corporation price-eps-surprise | Kimco Realty Corporation Quote

Let’s see how things are shaping up for this announcement.

Factors at Play

The recent data from Reis shows that the vacancy rate of neighborhood and community shopping center fell 10 basis points sequentially to 10.1% in the second quarter, denoting its first decline since the first quarter of 2016. The Regional Mall vacancy rate was flat in the second quarter at 9.3%. Store closures continue to affect Regional Mall vacancy. Nonetheless, both, national average asking rent and effective rent, which nets out landlord concessions, inched up 0.4% in the quarter and 1.7% from the year-ago quarter.

The retail real estate market continues to be affected by store closures and is in fact, undergoing structural changes. However, the latest stability in the vacancy rate and rent levels reflect that the sector has been able to weather such challenges to some extent.

Amid this, Kimco is on track with its 2020 Vision that envisages the ownership of high-quality assets concentrated in major metro markets, which offer several growth levers. In fact, despite transformation in the retail landscape, the company remains well poised to navigate through mall traffic blues, with focus on service and experiential tenants and omni-channel players.

Moreover, the company is focused on expanding its small shops’ portfolio. These shops basically comprise service-based industries, such as restaurants, salons and spas, personal fitness and medical practices. The shops enjoy frequent customer traffic and are Internet resistant. Amid limited new supply and favorable demographics, this diversification is likely to help Kimco limit operating and leasing risks.

Simultaneously, the company is making significant disposition of assets. In fact, as part of its efforts to fine tune the company’s portfolio, Kimco announced second-quarter 2019 disposition of three properties and one land parcel, aggregating 875,000 square feet for $103.7 million. The company’s share of these sales amounted to $65.8 million.

It disposed 12 properties and one land parcel, so far this year, for a gross price of $226.1 million, which aggregated 1.9 million square feet of space. Further, with $145.3 million worth of properties currently under contract, Kimco is well on track with its planned dispositions for the year. The company’s share of the sales would be worth $86.6 million.

In addition, with a decent strength in the job market and still resilient consumer sentiment, the company may experience high occupancy and healthy leasing spreads in the to-be-reported quarter. Also, the company is expected to maintain a strong balance sheet on the back of its strategic measures to boost the capital structure. It also remains focused on growing its unencumbered asset pool, which is encouraging.

Nonetheless, despite all these efforts, the choppy retail real estate environment might curb its growth momentum to some extent. This is because secular industry headwinds, including retailer downsizing and tenant bankruptcies keep dampening industry fundamentals. Moreover, though disposition efforts are encouraging for the long term, these will likely have a dilutive impact on its near-term earnings.

Amid these, the Zacks Consensus Estimate for second-quarter revenues of Kimco is currently pinned at $282.5 million — reflecting a 2.4% estimated decline from the prior-year period. The Zacks Consensus Estimate of FFO per share of 36 cents for the quarter also indicates a year-over-year drop of 2.7%.

In addition to the above, Kimco’s activities during the April-June quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for FFO per share of 36 cents for the quarter under review remained unchanged over the past month.

Here is what our quantitative model predicts:

Kimco Realty has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for Kimco Realty is +2.49%.

Zacks Rank: Kimco Realty carries a Zacks Rank #3, currently.

A positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. This, when combined with a favorable Zacks rank, makes us reasonably confident of a positive surprise.

Stocks That Warrant a Look

Here are a few stocks in the retail REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Pennsylvania Real Estate Investment Trust PEI, set to report quarterly results on Jul 30, has an Earnings ESP of +3.70% and carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Federal Realty Investment Trust FRT, scheduled to release earnings on Aug 1, has an Earnings ESP of +0.57% and currently carries a Zacks Rank of 3.

Realty Income Corporation O, slated to report second-quarter results on Aug 5, has an Earnings ESP of +0.78% and holds a Zacks Rank of 3.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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