Kimco Realty KIM is well-positioned to benefit from its portfolio of premium properties in top major metro Sunbelt and coastal markets amid healthy retail demand. 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 major concerns.
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, 85% of the annual base rent comes from its top major metro markets. Given the strategic location of its properties, it is likely to witness healthy demand in the upcoming period, boosting leasing activity.
Kimco enjoys a diverse tenant base, led by a healthy mix of essential, necessity-based tenants and omni-channel retailers. Given the strength of its retailers with a developed omnichannel presence, the company will likely be able to generate stable rental revenues.
The grocery component of Kimco's operations has been a major contributor to the company's success during uncertain times. In the second quarter of 2023, 82% of its annual base rent came from grocery-anchored centers. KIM has set a goal to reach 85% of its annual base rent from this segment by 2025. Given the necessity-driven nature of Kimco’s grocery-anchored portfolio, it is likely to continue witnessing healthy leasing activity in the near term and is in a good spot to get through challenging times.
Apart from having a focus on grocery and home-improvement tenants, Kimco focuses on 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. Particularly, the company intends to achieve a rise in net asset value through a selected collection of mixed-used projects, redevelopments and active investment management. Meanwhile, curbside pick-up with click-and-collect options is likely to continue to gain attention. These initiatives are likely to give it a competitive edge.
Additionally, Kimco maintains a solid balance sheet position. It exited the second quarter of 2023 with more than $2.5 billion of immediate liquidity. The company’s consolidated debt maturity profile is 9.3 years. 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.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have gained 2.6% compared with the industry's upside of 4.3%.
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What’s Hurting it?
However, the market is undergoing a transformation of retail shopping from physical stores to Internet sales. Particularly, the expansion of online retailers into the grocery business in recent years have emerged as a concern for Kimco. Also, the likelihood of tenant bankruptcies in the near term could hurt occupancy levels in the near term.
Kimco competes with several REITs and developers who lease retail space to tenants. The properties compete with numerous open-air shopping centers, including mixed-use assets or other retail shopping centers with more convenient locations or better rents. This could limit Kimco's ability to increase rental rates, including renewal rates and fill up vacancies.
Additionally, 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 as of Jun 30, 2023, its total consolidated debt was nearly $7.1 billion. Our estimate for the company’s interest expenses indicates a year-over-year rise of 8.3% in the current year.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Phillips Edison & Company PECO, Essential Properties Realty Trust EPRT and Tanger Factory Outlet Centers SKT, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Phillips Edison’s current-year FFO per share has moved marginally northward over the past 60 days to $2.32.
The Zacks Consensus Estimate for Essential Properties’ 2023 FFO per share has been raised 1.2% over the past week to $1.66.
The Zacks Consensus Estimate for Tanger Factory’s ongoing year’s FFO per share has been raised marginally over the past month to $1.89.
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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