Why You Should Add Kimco (KIM) Stock to Your Portfolio Now
Amid healthy demand for retail real estate, Kimco Realty KIM is well-poised to benefit from its portfolio of premium retail properties in top major metro Sunbelt and coastal markets. Its focus on grocery-anchored shopping centers, mixed-use assets and a solid balance sheet position bode well for long-term growth. However, a rise in e-commerce adoption and an elevated interest rate environment are headwinds.
What’s Aiding it?
Kimco’s properties are located in the drivable first-ring suburbs of its top major metropolitan Sunbelt and coastal markets, which offer several growth levers like high employment and strong spending power. Particularly, 86% of the annual base rent (”ABR”) comes from its top major metro markets. Given the strategic location of its properties, it is likely to witness healthy demand in the near term, boosting leasing activity.
Kimco enjoys a diverse tenant base, led by a healthy mix of essential, necessity-based tenants and omnichannel retailers. Given the strength of its retailers with a developed omnichannel presence, the company is likely to be able to generate stable cash flows.
During uncertain times, the grocery component saved the grace of the retail REITs. Encouragingly, in the third quarter of 2023, 82% of Kimco’s ABR came from grocery-anchored centers. KIM has set a target to reach 85% of its ABR from this segment by 2025.
From 2018 to the third quarter of 2023, Kimco witnessed 51 consecutive quarters of positive leasing spreads, indicating solid pricing power across its high-quality portfolio. Also, retention rates for the grocery portfolio remain higher compared with the non-grocery portfolio. Given the necessity-driven nature of Kimco’s grocery-anchored portfolio, it is likely to continue witnessing healthy leasing activity in the upcoming period and remains well-positioned to tide over challenging times.
Apart from having a focus on grocery and home-improvement tenants, the company emphasizes mixed-use assets clustered in strong economic metropolitan statistical areas. The mixed-use assets category is benefiting from the recovery in both the apartment and retail sectors. Mixed-used assets contributed 13% to Kimco’s ABR in the third quarter of 2023. The company targets to achieve 15% of its ABR from mixed-use assets by 2025.
Kimco has been following an opportunistic investment policy to enhance its overall portfolio quality. This includes divesting its joint venture assets and using the proceeds to fund acquisitions and development and redevelopment projects. In January 2023, Kimco acquired RPT Realty in an all-stock transaction, inclusive of the assumption of debt and preferred stock. The buyout added to its portfolio 56 open-air shopping centers encompassing 13.3 million square feet of gross leasable area to its existing portfolio of 527 properties.
Moreover, Kimco maintains a solid balance sheet position. It exited the third quarter of 2023 with more than $2.4 billion of immediate liquidity. Its consolidated debt maturity profile is 8.8 years. The company’s unencumbered properties represent around 91% of its properties and 92% of its total net operating income. It also enjoys investment-grade ratings of BBB+ from S&P and Baa1 from Moody’s, rendering it favorable access to the debt market. With a healthy financial footing, KIM is well-positioned to capitalize on long-term growth opportunities.
What’s Hurting It?
However, the market is witnessing a shift in retail shopping from brick-and-mortar stores to Internet sales. Particularly, the efforts of online retailers in recent years to go deeper into the grocery business have emerged as a concern for Kimco.
Also, tenant bankruptcies related to Bed Bath & Beyond are likely to hurt occupancy levels in the near term and affect the company’s profitability. In the third quarter of 2023, pro-rata portfolio occupancy of 95.5% was down 30 basis points (bps) sequentially due to a 37-bps impact pertaining to vacating the last remaining leases with Bed Bath & Beyond.
A high interest rate environment may lead to high borrowing costs for the company, affecting its ability to purchase or develop real estate. KIM has a substantial debt burden, and its total consolidated debt as of Sep 30, 2023, was around $7.1 billion. For 2023, we project a year-over-year rise of 7.6% in the company’s interest expenses.
Over the past month, shares of this Zacks Rank #2 (Buy) company have declined 3.4% compared with the industry's fall of 1.7%. Although the stock has underperformed, it might offer a good entry point for investors.
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Other Stocks to Consider
Some other top-ranked stocks from the retail REIT sector are Realty Income O and Tanger Inc. SKT, each carrying a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for O’s 2023 funds from operations (FFO) per share is pegged at $4.02, suggesting year-over-year growth of 2.6%.
The Zacks Consensus Estimate for SKT’s 2023 FFO per share stands at $1.94, indicating an increase of 6% from the year-ago reported figure.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.
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Kimco Realty Corporation (KIM) : Free Stock Analysis Report
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