While updating our website REIT page we came across Kimco Realty (ticker: [[KIM]]) which we have mildly followed for years (and in fact we own some of their preferreds). Our thoughts were actually--is it a good time to buy Kimco?
You have heard that the REIT sector has done great--at least if you watch the talking heads on TV---they shout out 'doubled and more since early 2009'--and you have 'missed out on these great investments'.
So what are the real facts here--are there opportunities or are all the gains behind us? Let's take a closer look at Kimco--and determine if we think it has future potential for us.
Kimco Realty has been around for a long time (1960), as REITs go, and is a very large Retail REIT with over 900 properties which are wholly owned and an equal amount which they have positions in via joint ventures and equity investments.
As you might expect, the Retail REIT sector (including Kimco) got hit hard in late 2008 and early 2009 when the financial crisis hit--and the sector spent the better part of 6 months of 2009 regaining its footing and then moving higher.
Here is a chart (click to enlarge) covering Kimco performance over the last 24 months--from its absolute bottom to today.
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Now let's look at a 5 year chart on Kimco (click to enlarge):
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This shows what we kind of expected to find---if you bought right at the bottom you would have nearly a 200% capital gain---of course if you would have bought 6 months before the absolute bottom you would still be nursing a 50% loss. You would have received some modest dividends (payout for the current quarter is 18 cents--equaling 3.9% annually)--but you would still be down considerable amounts.
What does this tell us? First off, that the traditional financial press always puts the best spin on a situation to protect their vested interest Secondly, it tells us that if you timed things fairly perfectly you could have had a great gain---but it is seldom that we have been fortunate enough to 'time' our purchases and sales this well.
This is history---what does the future hold? Can we safely invest, collect our 3.9% yield and with some level of certainty count on a future capital gain? Annual returns of 3.9% will not be satisfactory for us---we have to project a capital gain to get the total return up to at least 10%.
We seldom approach these questions in a vacuum. The nature of REITs requires that we have our own belief on the future of the U.S. economy in general. Our very general economic forecast has been that we'll see slowly improving employment, little to no improvement in housing (such was the case in 2010), very meager GDP growth and a similar meager improvement in consumer confidence.
Looking at Kimco's recent history of 2010 and 2009 we see the company had Recurring Funds From Operations (recurring FFO is a 'normalized' number --removing one off's) of $1.13 and $.82 per share respectively---so this is moving in the right direction. The per share FFO would have been much higher in 2010 except the company sold substantial numbers of shares in late 2009. Occupancy in the companies properties in 2010 was just a hair above (10 basis points) 2009--certainly preferred to a drop--but not all that encouraging. This says to us that the 'recovery' is almost non existent at this point in this sector and any bump in the road (such as $4/gallon gasoline) could derail this recovery.
Further in our research (actually in the middle of it) we found that Kimco has given guidance already for 2011 and forecasts recurring FFO of $1.13 to $1.22---this only equals 2010 (on a per share basis)---this is disappointing--at times you come across something in your research that says 'enough'. There is a large universe of REITs out there from which to choose and maybe Kimco is not the one to buy at this point in time. The shares have traded up from $6 to over $18, and maybe that is it for now--more risk than reward.
At this point we need to go no further. Given what we believe will be a very tepid economy going forward---and a company FFO forecast that is little (if any) better for 2011 we don't believe that Kimco would likely provide us with an adequate reward for the risk we would be taking. Of course the economy (and thus the company) could explode into high growth mode (we won't hold our breath waiting for that to happen), and the company could provide huge returns. But more likely we think that there are likely better suited REITs out there and we will stick to only owning Kimco's preferred shares.
Disclosure: We (or a family member) currently hold a position in Kimco Realty Preferred Stock