Kimco Making the Right Moves

First quarter funds from operation (FFO) came in $0.05 per share below our estimates and $0.01 per share above consensus. The miss was due to lower fee income and higher expenses than we modeled. Despite the miss, operating results were still good in Kimco Realty Corporation's (KIM - Analyst Report) core portfolio. Portfolio occupancy remains high at 96%, and we expect rate increases on rollovers to remain positive over the next few quarters.

The company is ramping up development in Latin America as the U.S. economy falters. We expect consumer spending to continue its downward trend and would stick to the larger, well capitalized retail real estate investment trusts (REITs) who are best able to weather the U.S. economic downturn.

On a P/FFO basis, KIM currently trades in-line with strip center sector averages of 15x 2008 FFO. Shares have somewhat recovered after a sell-off beginning in late 2007. We think KIM is better positioned than smaller peers as the company has a large diversified national and international development pipeline and a strong balance sheet.

The company is a better defensive play in a sector that could trend downward as more negative consumer spending data come out. In this type of retail environment, we would stick with the larger, better capitalized companies that could take advantage of distressed asset sales.

We also think the company's international operations, particularly in Mexico, will continue to show outsized returns and will become a more meaningful contribution to earnings in the coming year. We are setting our six-month target price at 17x our 2008 FFO estimates or $47 per share.

Read the full analyst report on KIM.