Aggressive Dispositions to Hurt Kimco (KIM): Time to Sell?

Kimco Realty’s KIM financials are likely to be hurt by decreasing footfall at malls amid the shift of consumers toward online channels, store closures and bankruptcy of retailers. Moreover, the dilutive impact on earnings from the sale of assets cannot be bypassed in near term. Competition from other players in the industry and rate hike pose other challenges to this retail REIT. However, Kimco’s 2020 Vision, which aims ownership of premium assets in strategic locations, will enhance its portfolio.

For fourth-quarter 2017, Kimco reported adjusted funds from operations (FFO) of 38 cents per share, in line with Zacks Consensus Estimate. The company reported the same figure in the year-ago quarter as well. Kimco posted revenues from rental properties of $310.6 million in the reported quarter, which surpassed the Zacks Consensus Estimate of $299.0 million. The figure compared favorably with the year-ago number of $292.9 million. Moreover, the company leased more than 10 million square feet in 2017, denoting the highest leasing volume in past 10 years.

Kimco is focused on simplifying its business structure and thus is making significant disposition of its assets. In fact, Kimco’s disposition activity in 2017 consisted of 25 consolidated operating properties and nine parcels, for an aggregate sales price of $352.2 million. 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.

Further, though upbeat consumer confidence and an improving economy have infused optimism into the retail market, mall traffic continues to suffer amid a rapid shift in customers’ shopping preferences and patterns with online purchases growing by leaps and bounds. These have made retailers reconsider their footprint and eventually opt for store closures. Retailers that are not being able to cope with competition are filing for bankruptcies. This has emerged as a pressing concern, as the trend is curtailing demand for the retail real estate space considerably.

Moreover, the rising rate of interest is likely to hurt 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. 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.

Shares of Kimco have underperformed the industry it belongs to in the past three months. During this time frame, shares of the company declined 21.3% compared with the industry’s descend of 11%.

Nevertheless, Kimco’s 2020 Vision envisages the ownership of premium assets in major metro markets in the United States as well as a reduction in the joint-venture portfolio. Its efforts included the exit from Canada and the exodus from secondary markets. Further, the company is engaged in the execution of strategic measures to boost its capital structure and enhance its growth profile and tax efficiency. These efforts are expected to drive Kimco’s bottom line over the long term.

However, we expect the net effect to be negative in the near-term. Kimco currently holds a Zacks Rank #5 (Strong Sell)

Stocks Worth a Look

Investors interested in the real estate industry can consider top-ranked stocks like HFF, Inc. HF, The RMR Group Inc. RMR and CBRE Group, Inc. CBG. While HFF and RMR sport a Zacks Rank of 1 (Strong Buy), CBRE Group carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

HFF’s earnings per share estimates for 2018 were revised 22.6% upward to $2.88 over the past month. The stock has gained 9.7% during the past three months.

RMR Group’s earnings per share estimates for the current year remained stable at $6.08 in a month’s time. Its shares have gained 20.4% over the past three months.

CBRE Group’s Zacks Consensus Estimate for 2018 earnings per share has been revised 4.1% upward to $3.04 over the past month. The company’s share price has risen 10.2% in three months’ time.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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