Kimco: Bonds Are Cheap, Except The 2017s

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 |  About: Kimco Realty Corporation (KIM), Includes: REG, SPG
by: Rubicon Associates

Kimco (NYSE:KIM) historically has been a "go to" retail REIT, one of the longest operators in the sector, with well regarded management and a focus on quality properties. That having been said, look at the levels at which their debt trades relative to other retail REITs:

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Why is Kimco so cheap compared to Regency Centers (NYSE:REG) and Simon Property Group (NYSE:SPG)? Is it the credit metrics? Let's look:

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From the above snapshot, it doesn't appear to be the credit metrics. I would, however, venture a guess that it is that Kimco is in the process of disposing of some non-core properties and had a rough couple of years. That said, I don't think it warrants being that cheap compared to Regency Centers or Simon Property Group. This leads me to conclude the name is cheap.

Now, that addresses the first part of the title - Bonds are Cheap. What about the second part of the title - Except the 2017s?

Referring back to the first table showing bond comps, I would note the following: Obviously Kimco will be cheap compared to Simon Property Group as Simon Property Group is THE retail REIT benchmark, but I included Simon Property Group to show that the curve from 2017 to 2018 is worth 5bps. Regency has a 3 year credit curve where 2017 to 2020 is worth 5bps (too flat in my opinion) and Kimco 2017s to 2018s are 5bps while their 2018 to 2019 credit curve is 20bps (too steep in my opinion).

I know what you might be thinking: based on the credit curve, the Kimco 2017s seem in line with where they should be - on the surface. But being your typical bond geek, the surface is never enough, we have to dig deeper. Let's dig into the prospectus.

KIM 4.30% due 2/1/2018
Here is the prospectus.

Covenants:

Limitations on Incurrence of Debt. We will not permit any of our subsidiaries to, incur any Debt, if, immediately after giving effect to the incurrence of such additional Debt, the aggregate principal amount of all outstanding Debt of ours and of our subsidiaries on a consolidated basis determined in accordance with generally accepted accounting principles is greater than 65% of our Total Assets.

Limitations on Secured Debt. In addition to the foregoing limitation on the incurrence of Debt, we will not, and will not permit any of our subsidiaries to, incur any Debt secured by any mortgage, lien, charge, pledge, encumbrance or security interest of any kind upon any of our property or the property of any of our subsidiaries, whether owned at the date hereof or hereafter acquired, if, immediately after giving effect to the incurrence of that additional Debt, the aggregate principal amount of all of our outstanding Debt and the outstanding Debt of our subsidiaries which is secured by any mortgage, lien, charge, pledge, encumbrance or security interest on our property or the property of any of our subsidiaries is greater than 40% of our Total Assets.

Debt Service Coverage. In addition to the foregoing limitations on the incurrence of Debt, we will not, and will not permit any of our subsidiaries to, incur any Debt if Consolidated Income Available for Debt Service for any 12 consecutive calendar months within the 15 calendar months immediately preceding the date on which that additional Debt is to be incurred shall have been less than 1.5 times the Maximum Annual Service Charge on our Debt and the Debt of all of our subsidiaries to be outstanding immediately after incurring that additional Debt.

Maintenance of Unencumbered Total Asset Value. We will at all times maintain an Unencumbered Total Asset Value in an amount of not less than one hundred fifty percent (150%) of the aggregate principal amount of all our outstanding Debt and the outstanding Debt of our subsidiaries that is unsecured.

Standard REIT covenants, right? Yes, yes they are. So far, so good. Let's continue.

KIM 5.70% due 5/1/2017
Here is the prospectus.

Covenants:

Coupon Step-ups. Up to a 200bp step-up if downgraded to B1/B+.

Change of Control. If a Change of Control Triggering Event (as defined herein) occurs, we will be required to offer to purchase the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest.

Consolidation, merger, sale of assets. We may consolidate with, or sell, lease or convey all or substantially all of our assets to, or merge with or into, any other corporation, provided that:

either we shall be the continuing corporation, or the successor corporation (if other than us) formed by or resulting from that consolidation or merger or which shall have received the transfer of our assets shall be a U.S. entity that expressly assumes payment of the principal of (and premium, if any) and interest on all of the notes and the due and punctual performance and observance of all of the covenants and conditions contained in the indenture;

immediately after giving effect to that transaction and treating any indebtedness which becomes an obligation of ours or of any of our subsidiaries as a result thereof as having been incurred by us or that subsidiary at the time of that transaction, no event of default under the indenture, and no event which, after notice or the lapse of time, or both, would become an event of default, shall have occurred and be continuing; and

an officer's certificate and legal opinion covering the above conditions shall be delivered to the trustee.

That's it folks. No other restrictions. No other covenants.

I understand that while other longer dated debt with traditional REIT covenants are outstanding, the 2017s are defacto covered by those covenants, but I have been around long enough to have seen more than one multiple standard deviation event occur.

Let's look at the following scenario: Within the next five years, Kimco needs a modification or waiver of their REIT covenants. I have, at times, been associated with a group of investors known as the "REIT mafia" and I can assure you that modifications and waivers don't come cheap. There are consent fees determined by meetings and discussions between investors and the company. If you own the 2017s, you do not get a seat at that table - you don't have those covenants.

Is it likely that Kimco will need a modification or waiver? No, I don't think it is, but that doesn't mean it cannot happen. As bonds have an assymetric payoff (some upside, lots of downside), any disadvantage relative to other bonds within a company's complex or relative to other debt of similar companies has to be compensated for. The 2017s do not offer the additional compensation that should be required. Hence my statement that the 2017s are not cheap.

We could also look at it from a time series/fitted line basis:

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Looking at the Kimco 2017s versus the Kimco 2018s, the 2017s are rich.

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Also, looking at the Kimco 2017s versus the Kimco 2019s, we can see the bonds are rich.

Conclusion: Kimco bonds are cheap relative to their peers in the retail REIT sector, but the 2017s should be cheaper.

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