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Analyst Blog

On Nov 14, 2013, we reaffirmed our Neutral recommendation on retail real estate investment trust (REIT) Kimco Realty Corporation (KIM - Analyst Report). The decision was based on its progress in portfolio restructuring, easy access to capital, improved guidance and dividend hike.  Yet, the near-term diluting effect from portfolio pruning and short-term headwinds for occupancy amid an unsettled economic environment remain our concerns.   

Why Neutral?

Kimco’s third-quarter 2013 earnings came in at 33 cents per share, in line with Zacks Consensus Estimate. However, results surpassed the prior-year quarter figure by a 6.5%. Quarterly results were driven by decent performance of its operating portfolio supported by improved leasing activity and strategic portfolio repositioning measures.

Kimco also raised the lower end of its previously issued full-year 2013 adjusted FFO per share guidance. It now expects FFO in the range of $1.32–$1.33 (prior range being $1.31–$1.33). Further, the company announced a quarterly cash dividend of 22.5 cents per share on its common stock, reflecting a 7.1% hike from the prior quarter.

For Kimco, over the last 30 days, the Zacks Consensus Estimate for 2013 remained unchanged at $1.33 and for 2014 it advanced 0.72% to $1.34. Therefore, the stock currently carries a Zacks Rank #3 (Hold).

With premium properties in high-income, high-growth areas, Kimco is a one of the leading publicly traded owner and operator of neighborhood and community shopping centers in the U.S.  Moreover, the company has achieved significant diversification through geographic distribution of its properties, avoiding dependence on any single property, and a large tenant base.

Currently, Kimco intends to concentrate its future investments on the neighborhood and community shopping center segment, primarily focusing on the North American market. It is well on track to improve its business operations and is shedding its non-retail assets and investments as well as non-strategic retail assets.

In recent times, the company has aggressively pruned its Latin American portfolio and redeployed the proceeds to acquire high quality U.S. shopping center assets in its key markets, with demographics and household income levels higher than the national average.

Nevertheless, we notice that though the economy is reviving, the pace is slow. Therefore, we anticipate only a modest rate of growth of market rent, occupancy levels and leasing spreads. Moreover, though the sale of non-retail and non-strategic retail assets is expected to help increase Kimco’s long-term profitability, the move is likely to adversely affect its earnings in the near term. Further, a rise in internet sales tends to lessen the demand for retail space.

Other Stocks to Consider

Better placed REITs in Equity Trust – Retail include American Assets Trust, Inc. (AAT - Snapshot Report), Cedar Realty Trust, Inc. (CDR - Snapshot Report) and General Growth Properties, Inc (GGP - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).

Note: Funds from operations, a widely accepted and reported measure of REITs performance, are derived by adding depreciation, amortization and other non-cash expenses to net income.

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