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Can Kimco Realty (KIM) Overcome the Mall Traffic Slump?

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Mall traffic continues to suffer from the rapid shift in customers' shopping preference through online channels. In fact, with e-commerce gaining market share from brick-and-mortar stores, retailers are compelled to reconsider their footprint and eventually opt for store closures in recent years, while others unable to cope with competition have been filing bankruptcies. Such an environment has also led to tenants demanding substantial lease concessions which mall landlords find unjustified.

These have cast a pall on retail REITs like Simon Property Group Inc. (SPG - Free Report) , GGP Inc. (GGP - Free Report) , Kimco Realty Corp. (KIM - Free Report) , Macerich Company (MAC - Free Report) and others, and their share prices have suffered in the past 12 months.

However, not all are equally likely to fall behind. In fact, Kimco is making every effort to unlock the embedded value of its portfolio through development and re-development initiatives. Most recently, the company has achieved more than 75% of preleasing for its $108-million Mill Station Signature Series development project. The shopping center is being constructed on the site of the previous Owings Mills Mall in Baltimore County, MD.

The company is on track with its 2020 Vision that envisages the ownership of high-quality assets, concentrated in major metro markets which offer several growth levers. Particularly, the company is aimed at improving its portfolio mix and experiencing decent demand from high-growth category retailers, including off-price and home improvement.

In fact, amid transformation in the retail landscape, Kimco remains well poised to navigate through mall traffic blues, with focus on service and experiential tenants and omni-channel players who generate 56% and 39% of annual base rent, respectively. Moreover, the company is aiming to expand its small shops’ portfolio. These shops basically comprise service-based industries, such as restaurants, salons and spas, personal fitness and medical practices. The shops enjoy frequent customer traffic and are Internet resistant. Amid limited new supply and favorable demographics, this diversification is likely to help Kimco limit its operating and leasing risks.

Further, Kimco is engaged in the execution of strategic measures to boost its capital structure, and enhance the company’s growth profile and tax efficiency as well. The company maintains a strong liquidity profile, with $2.25-billion unsecured line of credit, and aims at growing its unencumbered asset pool which consists of 75% of its properties.

However, in connection to its strategic efforts, the company is making significant disposition of its assets. The company disposed 21 shopping centers for $219.5 million in the first quarter, with its share of the sales price being $210.2 million. Furthermore, the company expects to be a net seller of properties in 2018 and projects its pro-rata share of dispositions, net of any acquisitions, to be in the range of $700-$900 million. While such efforts are encouraging for the long term, the dilutive effect on earnings from high disposition activity cannot be averted in the near term.

Addition, hike in rate of interest is expected to affect the REIT’s rate-sensitive business. It would restrict the company’s ability to refinance existing debt while increasing the interest cost on new debt. This has the power to adversely impact the company’s financial results and its dividend payout as well. In addition, amid rising interest rates, the common stock buyers demand a higher dividend yield and this may negatively impact the market price of the common stock.

Kimco currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company’s shares have appreciated 12.4% in the past three months compared with its industry’s growth of 3.4%.

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