We are maintaining our HOLD rating on Kimco Realty Corp. (NYSE: KIM). Although we have a favorable view of Kimco’s transformation into a pure-play U.S. retail REIT and its focus on high-quality shopping centers, we see limited upside for KIM in the near term, as upcoming lease expirations and COVID-19 will weigh on operating results.
Online shopping has experienced decades of growth at the expense of brick-and-mortar retailers, and COVID-19 has accelerated this trend. In this environment, we believe that investors should limit their exposure to traditional retailers and look to purchase best-of-breed retail REITs, such as Simon Property Group, that are investing in e-commerce customer engagement platforms.
Kimco has created a portfolio of mostly open-air shopping centers that are anchored by large grocery chains; these large grocery stores have supported foot traffic at the company’s retail sites. At the same time, impending lease expirations in Kimco’s pipeline are slightly higher than those of peers. For 2021 and 2022, lease expirations constitute 10% and 13%, respectively, of Kimco’s annual base revenue, compared to 9% and 11% for peers.
We believe that the relatively low valuation is appropriate given the company’s current challenges. We would feel more comfortable reinstating a BUY rating once the operating environment improves.
KIM shares have outperformed the S&P 500 over the last three months, rising 26% compared to a 12% gain for the index. The shares have underperformed over the past year, declining 29% versus a 15% gain for the S&P. The beta on KIM shares is 1.18. KIM recently reported FFO for 3Q20 that narrowly missed consensus. Kimco reported 3Q20 FFO of $106.7 million, down 27% from 3Q19 due to lower same-property NOI. FFO per share declined 29% to $0.25 due to lower revenue and lower same-property NOI from higher rent abatements, along with a higher share count. FFO per share lagged the consensus estimate of $0.26.
Total revenue for 3Q20 came to $259.8 million, down 8% as the company collected 89% of base rents. Revenue topped the consensus estimate of $248 million. Same property NOI declined 9.1% to $194.4 million, reflecting higher abatements and a charge for potentially uncollectible accounts. The net loss was $37.4 million, down from net income of $85.5 million in 3Q19. In 3Q20, Kimco recognized a $77 million loss on marketable securities, mainly due to the revaluation of Albertsons’ shares following the IPO. In 2Q20, Kimco’s net income spiked to $742 million, as the company recognized $717 million in gains related to the June 2020 Albertsons IPO. Due to the coronavirus, management has withdrawn its guidance. Prior to the pandemic, it projected 2020 FFO of $1.46-$1.50 per share. It also expected full-year property dispositions of $200-$300 million and same-property NOI growth of 1.5%-2.0%.
EARNINGS & GROWTH ANALYSIS
Key 3Q20 operating metrics for Kimco are summarized below. Portfolio occupancy for 3Q20 was 94.6%, down sequentially from 95.6% in 2Q20. Anchor-tenant occupancy ended the quarter at 97.4%. Small-shop occupancy remains much lower, at 86.7% as of the end of 3Q20 versus 88.0% at the end of 2Q and 89.9% a year earlier. Kimco signed 233 new leases, renewals, and options, for a total of 1.5 million square feet. Lease renewals represented 75% of all leases executed during the third quarter, for 1.2 million square feet, up from 1.1 million square feet a year earlier. Property leasing spreads were higher on most lease renewals. Acquisition and Disposition activity has slowed significantly during the pandemic. Management stated that the biggest impediment to deal volume is the continued pullback in the market from traditional lending sources.
We expect the repositioning toward high-quality assets in major U.S. cities to benefit Kimco over time. Over the past five years, Kimco has upgraded its portfolio from 64% grocery-anchored to 77% grocery-anchored, with a goal of reaching 85%-90% over the next five years. We are lowering our 2020 FFO estimate to $1.13 per share from $1.15 due to the continued impact of the pandemic on the retail market.
We are also lowering our 2021 FFO estimate to $1.23 per share from $1.33. Our long-term annualized FFO per share growth rate estimate is 2%.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating on KIM is Medium, the midpoint on our five-point scale; the company’s financial strength metrics are in line with peers. Management is working to raise the company’s S&P credit rating from BBB+ to A. Moody’s rates KIM’s debt at Baa1. At the end of the third quarter, KIM had $5.1 billion in debt, up from $4.9 billion at the end of 2019, and $324 million in cash, up from $124 million. The company had $2.0 billion outstanding on its revolving credit facility. KIM’s total debt/cap ratio was 47% at the end of 3Q20, below the peer average of 52%. EBITDA covered interest expense by a factor of 3.1, below the peer average of 3.5.
In September 2020, the company reinstated its dividend after suspending it in May. Prior to the pandemic, KIM shares paid a quarterly dividend of $0.28 per share, or $1.12 annually. Over the past five years, the company has raised its dividend at an average annual rate of 1.2%.
Kimco paid a $0.16 dividend on 12/23/20 to shareholders of record as of 12/9/20. That was up from $0.10 in 3Q20. Our dividend estimates are $0.82 for 2020, raised from $0.76, and $0.64 for 2021, raised from $0.40.
MANAGEMENT & RISKS
Conor Flynn became CEO in 2016 after serving as the company’s president and chief investment officer since 2014. Glenn Cohen is the CFO. Kimco’s top tenants are TJX Companies (4% of annualized base rent), followed by Home Depot (3%), Ahold Delhaize (a Dutch food retailer), Albertson’s, and Ross Stores (2% each). The company’s diversification is a strength, as tenant bankruptcy is a risk in a weak economy.
Leases will expire on 10% of square footage in 2021. Theaverage in-place minimum rent for tenants with leases expiring in 2020 and 2021 is $19.64 and 16.20, respectively, per square foot.
Kimco is a real estate investment trust (REIT), specializing in the acquisition, development, and management of open-air shopping centers anchored by grocery tenants.
KIM shares are trading at 13.1-times our 2020 FFO estimate, below the peer average of 12 and near the midpoint of the five-year range of 5.5-21.6; we believe that the relatively low valuation is appropriate given the company’s near-term challenges, including greater-than-average lease expirations. For 2021 and 2022, lease expirations constitute 10% and 13%, respectively, of Kimco’s annual base revenue, compared to 9% and 11% for peers. Our rating remains HOLD. We would feel more comfortable reinstating a BUY rating once the operating environment improves. On January 4 at midday, HOLD-rated KIM traded at $14.41, down $0.60.