Kimco Realty Is A Cheap And Efficient REIT

| About: Kimco Realty (KIM)

Summary

Kimco Realty Corporation is a REIT that typically takes a backseat to Realty Income Corp.

The stock however holds a lot of value, has very little debt, and is well insulated against a downturn.

Kimco Realty Corp. is an excellent diversification play when wanting a stock with similar pricing and model to Realty Income Corp.

Kimco Realty Corporation (NYSE:KIM) is one of many REITs that specializes in open-air shopping centers throughout 38 states in the United States, Puerto Rico, and Canada. As of the end of December 2015, the REIT retained 605 shopping centers. The company originally started as The Kimco Corporation in 1966. Through the years, it evolved until it became Kimco Realty Corporation when they announced their IPO. Shortly afterwards, only a year later, they qualified as a REIT and they have been operating as such since then.

Originally, the business operated relatively inefficiently as they focused mainly on ground up construction of their shopping centers. Since then, they have found value in acquiring existing centers and expanding that focus throughout the United States, Puerto Rico, and Canada. Although the Canada operation has turned out to be a venture that the company seeks to exit, their other holdings in the United States and Puerto Rico are seen as long-term holdings. The company has therefore been attempting to exit their investments in Canada operations since the beginning of 2015.

In a further effort to control their risks, the company has made sure to keep their operations in the US and Puerto Rico diversified. As of December 2015, the company has no shopping center that accounts for more than 1.8% of their annualized base rental avenues. Currently, the largest of their tenants are The Home Depot (NYSE:HD), Bed Bath & Beyond (NASDAQ:BBBY), and Albertsons (NYSE:ABS). These large businesses provide a steady base of payments that should be reliable when the economy takes a bad turn.

Now that we understand their business model, I want to go over the numbers. Currently, Kimco Realty Corporation trades at a share price of $27.89, which is just underneath their 52-week high of $29.11 and quite a bit above the low of $22.07. This comes with their dividend, which is fairly decent if acquired to hold within a tax-deferred portfolio. Kimco Realty Corporation pays a dividend of $1.02 annually, which equates to 3.66% with their share price.

If we look at the company's funds from operation, we can understand that they are very much in the foundation phases of building it up. In 2014, the FFO was only 596. In 2015 however, they gave it a nice enhancement and raised it to 643. Although this is only a small alteration, the REIT does show great potential as the number still shows upward mobility. In addition, the company has a decent net asset value of 12.18. This is 15.71 points off from the current share price.

I personally like to use NAV as a good indicator of intrinsic value of a company. As the NAV represents 44% of the company's current price, I do worry that it may be a little overvalued. However, this is something I have found to be the case in general in the financial REITs. For instance, Realty Income Corporation (NYSE:O) has a NAV of 26.07 and a share price of $59.37. This represents a difference in NAV and price of 33.3, which equates to exactly the same percentage of the price as Kimco Realty Corporation had with theirs, which again is 44%.

On the other hand, Realty Income Corporation has a bit less debt than Kimco Realty Corporation has. Realty Income Corporation only has a debt-to-equity ratio of 0.82 while Kimco Realty Corporation has a slightly larger 1.25. These are still much better than a lot of the other financial REITs however as it seems very common in that sector to carry a high debt load to acquire and fund new operations.

That being said, Kimco Realty Corporation can face the same downturns that most real estate can when times are tough. These can come from changes in climate that affect ability of others to visit their areas, trends of stores getting smaller to accommodate online demand instead of in person, the ability of tenants to pay their rents, and of course, competition from other properties.

If these factors or others affect the business, their income could become more shallow and therefore affect their ability to pay shareholders. This is unfortunately the risk however that any investor faces with any investment, REIT or not. I believe however that this is being well managed by Kimco Realty Corporation through the acquisition of new properties, the closure of properties or sale of those who are not profitable or only minimally so, and the constant supervision of their assets.

Lastly, I would like to review analyst takes on Kimco Realty Corporation. On March 7th, both Research Team and Jaywalk Consensus rated the stock as a hold. Prior to this on February 9th, The Street Ratings rated the stock a buy. This is not surprising as the stock itself has been on an upward trend as of late although the price has not shifted very much. It has gone from a little over $26 per share to a little above $28 in the time that it took for ratings from the analyst to change from buy to hold. I assume this to be the case due to the recent discussions on rate increases. I feel that any time rate increases are talked about, REITs have a horrible habit of either holding flat on a certain price or dropping a little, much in the same manner that the sector did just a few days ago.

In conclusion, I would like to summarize my thoughts on Kimco Realty Corporation. The business itself appears to be very well put together. Their FFO continues to rise through the years, their price is low enough for even passive investors with meager income to buy into, and they offer a fair dividend yield of 3.66%. In addition, in relation to their NAV, their stock is priced equally with that of Realty Income Corporation, which leads me to believe that it offers itself up as an option for investors who already own the stock that wish to diversify by adding Kimco Realty Corporation for around the same intrinsic value.

Although in relation to the NAV, the price is still double that which I would deem a fair price, there is a lot to be said for a REIT that has such little debt-to-equity and a sound business. I would therefore feel more than safe with both a mix of Realty Income Incorporated and Kimco Realty Corporation in my portfolio to diversify my risk in the financial REIT sector.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.