Kimco (KIM) is executing on its strategic objectives to strengthen portfolio growth and simplify its business model. KIM’s portfolio fundamentals are healthy, and the REIT is taking advantage of the favorable supply/demand environment to push rents, re-tenant underperforming retailers and grow its redevelopment pipeline.
KIM’s $1.1 billion redevelopment pipeline, along with another potential $2 billion shadow pipeline of redevelopment opportunities, is a significant driver of future growth, in our view. KIM’s healthy portfolio with organic growth opportunities, a robust redevelopment pipeline and the sale of over $3 billion of lower-quality, slower-growing centers are positioning the portfolio to average 3% same-store net operating income (SSNOI) growth through different economic cycles, in our opinion.
We maintain our Buy rating and $29 target price based on a 12% premium to our $26 net asset value (NAV) at a 6% cap rate.
Pro-rata occupancy in the U.S. portfolio increased 10 basis points year-over-year (bps y/y) and 20 bps sequentially to 95.8%. Pro-rata occupancy in the combined portfolio declined 40 bps y/y and was flat sequentially at 95.4%. KIM’s occupancy could fluctuate in the coming quarters as the REIT allows some leases to expire to pursue re-tenanting and redevelopment opportunities.
KIM’s anchor occupancy is 98.2%, and the opportunity to grow portfolio occupancy is through small-shop lease-up.
Small-shop occupancy increased 70 bps y/y and sequentially at 88.7%. KIM’s redevelopment activity should be able to increase small shop occupancy, as new anchors come online, driving small shop leasing activity.
Raymond James & Associates
Guidance: Kimco reiterated 2016 headline funds from operations (FFO) guidance of $1.54-1.62/share and FFO as adjusted guidance of $1.48-1.52/share ([with] only approximately 3% y/y growth at the midpoint) that was announced at its investor day in December.
Consensus expectations for FFO as adjusted stand at $1.51/share, and we are currently in print at $1.50/share. Assumptions in guidance were unchanged and include U.S. portfolio occupancy of 95.7 to 96.2%, SSNOI growth of +2.5% to +3.5%, $450 million to $550 million of acquisitions (Kimco’s share), and $825 million to 975 million (Kimco’s share) of dispositions. Management noted at its investor day that it believes 2016 will be the final year of dilution from its portfolio transformation (a ~$0.06/share drag on FFO this year), and FFO growth is poised to accelerate in 2017.
Investment activity: Kimco previously announced Q4 and recent transaction activity … In particular, though, we would highlight a series of transactions since the end of the fourth quarter that are resulting in Kimco obtaining full ownership of the Owings Mills Mall (Baltimore metropolitan statistical area).
Specifically, the company (1) acquired the remaining 50% interest from General Growth Properties for $11.5 million, (2) purchased the anchor space owned by J.C. Penney for $5.2 million, and (3) is under contract to acquire the space owned by Macy’s for $7.5 million. Also of note, Kimco sold its interest in 23 Canadian shopping centers to RioCan and sold its last remaining shopping center in South America.
Cowen and Company
Kimco Realty (KIM) maintained its 2016 FFO/per share [guidance] of $1.48-$1.52 … vs. our $1.50. The guide assumes U.S. same store net operating income (SSNOI) growth of 2.5% to 3.5% and acquisitions and dispositions in the range of $450 million to $550 million and $825 million to $975 million, respectively.
The 2016 acquisition guide is $125 million below our estimate, indicating that the strength of the Q4 run rate should allow the company to meet our estimate with less capital than we have modeled.
Occupancy ended the quarter at 95.4% leased, down from 95.6% in Q4’14 and flat sequentially. Cash leasing spreads were a healthy 13.1% during the quarter, the highest since 2012.
Kimco was active externally in the fourth quarter. Kimco acquired Christown Spectrum, an 850,000-square-foot power center near Phoenix, for $115.3 million and the remaining 85% ownership interest in Conroe Marketplace for $54.4 million. Conroe Marketplace is a 289,000 square-foot power center near Houston.
The company also acquired the remaining 85% interest in The Shops at District Heights (near Washington) for $24.3 million as well as a 36-acre land parcel directly across from KIM’s Grand Parkway Marketplace (Texas) development project for $13.2 million. The land will be used in a Phase II expansion of this project. Also during the quarter, the company sold 88 wholly and joint venture assets for $1.7 billion ($908.3 million at KIM’s share).
We continue to like the retail-focused triple-net REITs.
The triple-net space (especially the retail-focused names) has traditionally been the go-to subsector for REIT investors seeking high dividend yields with lower operational risk.
In exchange for this lower operational risk, high dividend yields and regular dividend growth, investors have historically been willing to accept moderate (but steady) internal growth and external growth that is highly dependent on the REIT’s cost of and access to capital as well as the ability to source positive spread investments.
Given our expectation that the long-end of the interest rate curve would not materially increase in the near term, we recently launched coverage on the triple-net REITs overall with a Neutral weighting, but have been much more constructive on the retail-focused subsector, [with a buy rating on National Retail Properties (NNN)].
Benign interest rate environment should continue to benefit the stocks. Since we launched coverage … in mid-December, each of the stocks is up roughly 10%, with the triple-nets one of the best performing REIT subsectors over that six-week period.
Looking forward, we believe investors will continue to look for sanctuary in the retail-focused triple-net REITs’ stable cash flow streams, solid (and well-covered) dividend yields, and potential for material external growth in 2016.
We expect these stocks to continue to outperform the MSCI US REIT Index (RMZ) as long as the overall equity markets remain “choppy” and future interest rate hikes appear to be on hold. Accordingly, we are maintaining our Buy rating on … NNN … and raising our fair value estimates …
Simon Yarmak, CFA
We recently hosted meetings with National Retail Properties’ (NNN) management.
Why NNN? NNN’s investment strategy balances risk-adjusted returns with prudent capital allocation. The company has built a highly-diversified, high yielding, non-investment grade retail portfolio, through slow and steady portfolio growth primarily from the company’s relationship with its tenants.
NNN also maintains a strong balance sheet (31.6% net-debt plus preferred-to-enterprise value [EV]) and pays a well-covered and growing 4.2% dividend. This strategy has delivered solid adjusted funds from operations (AFFO) growth.
[It is] outperforming year to date and has consistently outperformed. NNN has been one of the best performing triple-net companies year to date (+5.3% vs. the Morgan Stanley REIT Index [RMS] -5.3%). Over the last 15 years, the company has returned an average of 16.1%, outperforming every major index. Management hopes to achieve high single-digits annual returns for the next few years.
How is NNN differentiated from its peers? NNN believes it differentiates itself from the other net-lease peers in that it focuses strictly on retail [and] is a real estate focused company as opposed to being more of a finance company. The company is more comfortable with non-investment grade tenants than some of its peers. Additionally, management believes it is one of the better capital allocators in the sector.
Management thought it was well-positioned for the current environment. Net-lease retail is holding up well, and so are NNN’s tenants. The net-lease sector, particularly the retail sector, has a very limited exposure to property cycle fundamentals.
As some of the REIT property types experience potential fundamental deceleration this year, investors might shift into the triple-net sector and potentially NNN, as a defensive way to play REITs. 2015 was a pretty good year for the company; 2016 shouldn’t be much different.
Doubling down on small box retail. In the current economic climate, the company has a pre-deposition towards small box retail properties at a corner location. 40% to 50% of the value is in the land. This includes convenience stores, restaurants, and drug stores.
Exposure to convenience stores has ticked down this cycle due to competition from master limited partnerships (MLPs). That group has had its challenges, providing opportunities for the company. Additionally, quick service restaurants are also attractive. Management continues to avoid apparel retailers and is not looking to increase its exposure to theaters, book stores and office supply retailers.