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Understand Kimco Realty Before Passing Judgment

Joshua Mou profile picture
Joshua Mou


  • Market sentiment is negative on KIM despite a resilient business.
  • Capital Expenditures is now focused on redevelopment.
  • Understanding the business will help determine if profits will continue to grow.


Kimco Realty Corporation (NYSE:KIM) is a Real Estate Investment Trust or “REIT” that focuses on owning and operating open-air shopping centers. It has been operating for over 50 years and has ownership interests in 507 centers. The market is bearish on the stock, but sentiment does not match operating performance.

The Business

Kimco buys land to develop open-air shopping centers, the type with multiple external storefronts that shoppers can access from large parking areas. Or, it purchases and refurbishes existing shopping centers. Retailers lease units in those shopping centers and pay Kimco rent. The average lease has 10 years remaining for anchor tenants and 5 years for smaller retail spaces. Therefore, rental revenue is steady and predictable. The leases lock in an annual base rent (NYSE:ABR) with contracted annual rent increases, and some of the leases also include small additional payments based on tenant sales. Kimco also makes money by selling shopping centers for more than they initially invested. There are typically one or more large anchor tenants that draw people to the shopping center. Their anchor tenants include grocers, discount retailers, home improvement, fitness, warehouse clubs, medical services, restaurants, and beauty salons.

Anchor stores do not command high rent-per-square foot—$7-$12 per square foot annually. But they are very important to the success of a shopping center. A popular anchor store can draw people to the property, which will then attract smaller retailers to rent adjacent storefronts. Those small-store spaces rent for an average of $26.70 per square foot, because anchor stores created high-value real estate.

Kimco's Real Estate Portfolio

Figure 1: Source, KIM 3Q17 Presentation, pg 15

As Figure 1 shows, their rent is spread evenly among many retail categories. No category accounts for more than 14% of annual base rent.

One trendy opinion in the investment community

This article was written by

Joshua Mou profile picture
I started investing in individual stocks in 2008. My investment activities have been exclusively for my personal portfolio. Investment Method:My focus is on companies with predictable profits that sell at prices that allow above average long-term returns. I value companies based on their earnings power. In particular, I value stable earnings and growing earnings for the simple reason that they require less monitoring. As a result, most of my research time is spent trying to predict future earnings. While predictions are always a guess, good companies tend to have a good track record of good earnings, competitive advantages, good managerial execution, and good capital management. Investment research is not hard, but it is tedious. Note that certain industries use certain terms that better measure companies' earnings power in their unique environments--i.e. Funds From Operations for REITs, or Net Investment Income for BDCs.US Stocks provide an inherent advantage to investors. The overall strength of the US economy propels US companies toward increasing earnings growth. As a result, the average investor has a baseline chance of mirroring economic growth. In gambling, the house wins over the long-term due to certain statistical advantages against gamblers. In investing, investors have the long-term advantage of a growing US economy. This advantage is the primary reason that I consider stocks to be a good vehicle for wealth creation. Even the laziest investor has historically performed well just by buying a broad-based US index fund.Certain factors can cause investors to deviate positively or negatively from expected investment returns. Taking unnecessary risk in companies with unclear or unproven earnings is the primary danger that I see. To me, risk comes from the unknown. While risk is unavoidable, I feel that controlling risk is the best way to achieve reasonable investment returns. Investment risk comes from anything that decreases earnings, such as poor capital management, competition, and changes within industry.Many consider stock price fluctuations (beta) to be an element of risk. However, most savvy investors see those fluctuations as opportunity for above-average investment return. Stock prices often deviate drastically from a company's earnings trend, and when stock prices drop they can give investors a chance to purchase very profitable companies at bargain prices. Valuation must always be considered prior to any investment purchase. Paying too much for even a great company will result in mediocre returns. I also measure every potential investment against what I already own. I start with the safest possible investment--US treasury bonds. If I consider any investment that carries more risk, it must have the potential for higher returns than a US treasury bond. Are the earnings as stable as my other investments? Does the price allow a reasonable return and a margin of safety if I am inaccurate in my projections?Dividends are not a primary factor in my decision to purchase an investment. However, dividends, when reinvested, can provide an additional boost to investment returns. Compounded earnings growth is the primary engine for investment returns; dividends add a second engine for additional investment returns. While earnings are the most direct measure of a company's profitability, dividend history is also a good proxy of profitability. Another important attribute of dividends is that an investor can harvest cash without sacrificing assets. A dividend-paying company can continue to pay dividends until its earnings cannot support the dividend. Many strong companies raise their dividends annually, thereby providing protection against inflation.My investing record is not long enough to show if I have superior investing skill. In fact, I have and will make substantial mistakes. However, I have had significant overall gains. Plus, I am constantly amazed at the efforts and ingenuity of business both small and large. The SA community has been tremendously helpful in my investment education. I share my own research through the few articles that I have written for SA in the hopes that others can benefit from my many hours of study. Best wishes to all! Current Long Stock Positions:AAPL-AppleAMT-American TowerARE-Alexandria Real EstateBRK.B-Berkshire HathawayCLDT-Chatham Lodging TrustCCI-Crown CapitalCI-Cigna DIS-DisneyETN-Eaton FRT-Federal RealtyGMRE-Global Medical REITHON-Honeywell HTGC-Hercules Technology Growth Capital KIM-Kimco Realty LUV-Southwest Airlines MAIN-Main Street Capital MPW-Medical Properties Trust NEWT-Newtek Business ServicesSBRA-Sabra Health Care SKT-Tanger Factory Outlets STAG-STAG IndustrialUNP-Union PacificWFC-Wells Fargo

Analyst’s Disclosure: I am/we are long KIM. 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.

This article is not a recommendation to buy or sell, but rather a starting point for investment research and discussion. I am also long SKT and WPC.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (122)

Doesn’t KIMCO run those many SAMS clubs those huge stores of which about 20 or so got closed ?
Those Sam's club will be used as fulfillment center for their online business. Not being closed totally. Just the functionality will change.
Joshua Mou profile picture
I had no idea that Sam's clubs were being converted to fulfillment centers. Thanks for letting us all know!
Market not done destroying this sector.. SKT can out with a slightly negative ER and now these REITs are going to get punished severely..
Arbywon profile picture
Thank's Joshua! I look forward to more from you.
SierraWater profile picture
Brixmor just released.. beat on rev and ffo.. good report. Should be a good sign for KIM given similar retail model..
SierraWater profile picture
From Brixmor:
"Same property NOI for the three months ended December 31, 2017 increased 3.6% from the comparable 2016 period."
Joshua Mou profile picture
Good info! Brixmor is another that I considered a while back. Ill have to look at it again. KIM guided their Same Property NOI down during the last quarter, and I don't think they saw any reason for that to change in Q4. So they probably won't have as good a report as Brixmor. But they should have improved growth in 2018 due to several big redevelopments coming online, plus insurance reimbursement for lost rent during the Puerto Rico hurricanes.
tyler.freeborn profile picture
BRX kills, but in terms of dividend security and future growth, I'd rate them pretty close. KIM has yielded higher during this last market tantrum.
Really enjoyed your article and the excellent discussion in the comments.
Joshua Mou profile picture
spike5, we are fortunate to have great commenters. Thanks for reading!
Hi, thanks for the article, I appreciate the point of view.

I recently established a position in KIM; I'm 'in' at $14.65. I've never really done much with REITS; even though, I'm retired, and capital preservation and income are my goals. Essentially, I never trusted myself to discern 'value' in the space. However, I think KIM, at its current price and AFFO multiple, forgives a lot of errors one may make in valuing the name. At a yoc of ~7.6%, I'm happy.
Joshua Mou profile picture
chicagotim1, a good business forgives a lot of errors, too!

"I never trusted myself to discern 'value' in the space."

I'm sure you've made more complex investment decisions in other sectors. It can't be difficult for you to learn the few nuances of the REIT space. I think you will find good candidates for your investment goals in the REIT sector. Ignoring the tax advantages of real estate investing, owning assets that appreciate in income and market value is a huge advantage over other investments. Thanks for reading and commenting. Best wishes on KIM!
Hi, Joshua, I appreciate your response. No kidding, though, with interest rates just lifting off of historic lows, what with the US as "over-retailed", and the "Amazon effect" at play, I was very content to sit on the sidelines re REITS. O has been the subject of discussion here on SA recently; is it a good bargain ~$48? You'll get spirited answers either way. Is OHI a bargain ~$26? Obviously, a very different name than O, but, again, you'll get a debate either way. In any case, having researched KIM, my take is that it's been beaten up enough that it should be a good value. I may not have bought the lows, but I think it's a quality name that is built to last.

Best of luck.
Brad Thomas profile picture
Well done!

"No other tenant accounts for more than 1.3% of ABR. So, there do not appear to be any big time bombs in the portfolio."

FYI: http://bit.ly/2BSxewz
Joshua Mou profile picture
Brad Thomas, I appreciate your kind words. I have read all your SA Articles, of course. (and, used to be one of your subscribers) Thanks for reading.
Brad Thomas profile picture
Joshua Mou - "used to be a subscriber?" what happened????

seriously, keep up the great work. Brad
Joshua Mou profile picture
Brad Thomas,
Nothing wrong on your part. For several of my favorite authors, I've subscribed to them for 1 year as a token of my appreciation for the free work that you publish on SA. And, you really jump started my REIT education during that year. I just can't keep up with too many subscriptions at one time, so I focus on a few authors from industries I do not know. All the best!
AllStarTrader profile picture
I would like to see the company buying back its own stock at current levels. Why buy property with declining sentiment, wait by purchasing shares back that have an 8% dividend.. when the market turns buy the real estate cheaper with the shares bought back.. then turn the properties into higher income vehicles like they do... just my thoughts...
Joshua Mou profile picture
allstartrader, good thoughts. I think this would be an ideal strategy, but reality always seems to throw a curve. They are putting a lot of resources into redevelopment, which seems to be getting more expensive. So the question they have to answer is this: can a stock buy back produce more return than a redevelopment project? If they have enough projects in the pipeline, I think that 8-13% initial redevelopment yields could grow into a much better return than buying back stock. With yields going up, capital is going to be more expensive, even for KIM. And they will need that capital, so it is more trouble than it is worth to try to trade their stock. Does that sound logical?
Only kimco really knows how good their properties are we can guess that 20 percent maximum are just ok but need to be recycled read their Citicorp presentation they have off ramps if a redevelopment is not going well that shows us they are not sure themselves buying their own shares increases debt but increases affo. Would be my advice unless they have no brainer project and by the way building apartments great idea but location and zoning are restriction. Their debt seems high but average maturity is 10 years not much coming up for next few years. Grocers seem like great anchors but they are under pressure for sure. They have three locations here in sf Bay Area which are good wish I had list of all their centers showing A or B my guess above 80 percent.
You are missing a bigger picture. They are redeveloping many or the retail centers with multifamily and trying to add traffic. I am in the real estate business and an active stock and bond investor. Several centers in south Florida are going though the repositioning. I am actively invovled in 2.
KIM developing multifamily dwellings?
Joshua Mou profile picture
headway417, I did miss that. A couple others also pointed out the multifamily aspect. Good to have your insight. I will focus my own research into this now. Thanks!
SierraWater profile picture
Yes, part of their "Live, Work, and Play" Signature series developments.. Basically, building multifamily residential and hotel with retail.. Its the trend of the future..

Amazon is beginning to create pop up stores in malls. 100 planned. If this starts a trend you would see smaller, possibly higher rent Amazon stores filling in some of the space they are causing to empty. Business week did a good story on this. Won't help malls today but an encouraging sign??
Joshua Mou profile picture
jimrp3344, I didn't know about Amazon pop up stores. Intriguing. Thanks for pointing this out.
waynor profile picture
Joshua Mou, It is my understanding that AFFO adjusts GAAP based FFO by adjusting for capitalized maintenance, cash rent VS GAAP based average rents, and other GAAP based expenses (i.e.:equity compensation VS cash compensation) to arrive at Cash Available For Distribution.
I hope we don’t need preferrers with common yield where it is that’s a bit bearish. Good idea buy stock but their banks are probably getting nervous a bit but they have some RE free and clear I think?
Joshua Mou profile picture
AFFO calculations can vary a bit between companies. The general idea (which I think you understand) is to come up with a number that describes cash available for distribution, but specifically for normal operations. It excludes transactions.

From the KIM 3Q17 Earnings Supplement, "FFO as adjusted is generally calculated by the Company as FFO excluding
certain transactional income and expenses and non-operating impairments which management believes are not reflective of the results within
the company’s operating real estate portfolio."

On page x, they take FFO and subtract a single line--transactional income/expense--to get AFFO. I took some short cuts in my explanations for the sake of keeping things simple and straightforward. You are obviously capable of digging past my superficial treatment of the numbers. All the adjustments that you describe reconcile the differences between a net income calculation and the actual cash that a company generates.
Gridbird profile picture
I like preferreds Gold, but Im in your camp here. No need for KIM preferreds. Better value elsewhere in preferred land. I made my bed in the commons on a small position and will have to lay in it. If it drops more I will buy a bit more. Though I would rather see it go up and not buy any more.
I am involved with real estate development for the past 40+ years aa well as with Kimco. I also am an active stock and bond investor and former Wall Streeter. What you need to research is the fact they are repositioning their retail centers with Multifamily which will help traffic. They have the expertise to accomplish this and also use outside sources. I am working on 2 sites in South Florida presently. If you want income I would suggest the preferreds.
So you're saying KIM is building apartments next to their shopping centers? Will KIM take in the rent?
Joshua Mou profile picture
Great to have your expertise on this board! In my community, residents want more shopping centers, but there isn't enough population density. Building multifamily residences along with retail should be quite complementary. I'm glad you pointed this out. I am going to follow their redevelopment projects to see how many have residential structures. It is also good to know that an industry pro thinks that they have the expertise to accomplish their goals.
Sufyan Baray profile picture
Great article Joshua. I have been indecisive about adding more of KIM to my portfolio, because of the change in retail landscape. After going through your analysis (and a number of other write ups), it seems as if there is a lot of upside to KIM.
Joshua Mou profile picture
Sufyan Baray,
There have been several good KIM articles recently, which is great for our community. Thanks for your kind words.
Forgot to add biggie Kimco tenants have their e commerce sites with PayPal very easy to use and better than AMZN in certain ways another moat factor.
I think this is a terrific, and I'm now a follower. Your explanations of how the different numbers work out are excellent and very helpful. Don't know if I'll buy KIM but I'll look at it.
Joshua Mou profile picture
Owen Zuro,
Great! My purpose was not to tell people to buy or sell, but rather to share what I had learned in my own research. Hopefully I gave you a start and you can make a good decision. Thanks for your kind words.
If KIMCO cap rate is 8 percent that would be cheap depending how you are calculating. Here you are getting an actively managed portfolio. It is only fun to manage solid locations and only KIMCO knows their entire portfolio really despite our anecdotals. In weak locations best strategy is sell cheap to local management that can do the heavy lifting if possible. Restaurants are not doing so great by the way the landscape is changing, but keep in mind lowering rent to keep a tenant is much easier than vacancy,finish out, leasing commissions and agony handwringing. With strong center you can be tough in weak locations not. At conference call you hear analysts building their models not guys with deep hands on experience. If Kimco can build apartments great strategy. AMZN is getting a free ride on profit from cheerleader analysts who only want growth. Read Bezos biography 2015 not nice guys they have built a delivery system that is a thing of wonder but shoppers will drive several miles or so for experience in store or necessities. That’s the moat. We have here a long term bond yielding high sevens no growth.
Joshua Mou profile picture
goldinvest, lots of good points. I'm intrigued by their foray in to residential structures. It seems like it would be a great idea to build a community around a shopping center. It would really increase the population density. Glad you chimed in!
Brad Thomas profile picture
Joshua Mou - Take a look at $FRT...All the best. Brad
Joshua Mou profile picture
Brad Thomas,
Will do! Seems like another good one.
nealyohara profile picture
Taking a bath with KIM now but holding on and occasionally picking up a “few” more shares on dips, which have become a regular event.
Joshua Mou profile picture
Nealyohara, I'm in the same boat.
Raleigh Reid profile picture
Joshua, well done. it will be interesting to hear their upcoming 4q conf call. the market seems to expect AMZN to rule retail and a Tbill well above 3 soon.
Joshua Mou profile picture
Raleigh Reid, Thanks for your comment! Their conf calls are very insightful.
Scarlo profile picture
In addition to the fear of Amazon, another gorilla in the room is the fear that the 30-year trend in interest rates is finally turning. In this situation cap rates would rise in sympathy, putting pressure on real estate prices.

My personal feeling is that rates won't rise too far too fast and that with an improving economy we may actually see an improving brick & mortar retail landscape. I know that last part is a bit contrarian but that's my view.

I think these risks are priced in, plus some.
Joshua Mou profile picture
"I know that last part is a bit contrarian but that's my view."

You mean that you don't want to be a sheep?! Just kidding. With how well the business is run, I just can't imagine KIM being lower in 2 years.
It seems to me that KIM is a victim of REIT sector sell-off and with continued erosion in price, people are losing confidence and resolve to hold. It is hard to hold on if your capital is getting annihilated that fast. Upcoming earnings and management commentary there after will set the tone going forward. The new entrants are in the driving seat, especially with enhanced yield.
Joshua Mou profile picture
nkvbradenton, I think all that is true. And, even professional traders will follow the playbook for rising yields. Especially if your capital is getting hit.
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