There are some real estate investment trusts (REITs) that simply dominate the sector in which they operate. Kimco Realty (NYSE: KIM) is on its way to being that company in the open-air shopping center space. However, that doesn't mean investors should run out and buy the stock. Up-and-coming names, like much-smaller Kite Realty (NYSE: KRG), have material appeal as well. Here's a look at this pair of retail landlords that come from two different sides of the size spectrum.
1. How big is it?
Kimco currently has a portfolio of around 400 properties. Kite's portfolio is less than a quarter of that, containing just 92 locations. But that's not the full story, because Kimco is actually in the process of buying peer Weingarten Realty, which will add another 159 locations to its total, bringing the property count at the combined entity to 559. So the REIT is big and getting even bigger. In fact, Kimco is expecting to jump from the No. 2 position in its niche, based on market cap, to the No. 1 slot once the deal is consummated.
If you believe bigger is better, Kimco easily wins this point. However, it gets harder to grow a business as it gets bigger, since smaller deals will no longer make a material impact on the top and bottom lines. So Kite's diminutive scale could actually be seen as an advantage to those looking for a more growth-oriented name. Just being smaller doesn't make Kite a growth stock, but the hurdle is lower as it looks to expand.
2. Location, location, location
Kimco's portfolio, almost by necessity given its size, is fairly well spread out across the United States. That said, it has a clear preference for coastal areas and the Sun Belt, which together make up around 82% of rents. Weingarten has a similar footprint and won't materially alter the picture here, though it will add some more properties in the middle of the country.
Kite's business is slightly different, getting 78% of its rents from areas that are "warmer and cheaper." That basically means its portfolio is focused on Southern and Western states. In fact, New York and Indianapolis are the only major markets (18% of rents combined) in which it operates that don't fall into those two categories.
While it would be hard to suggest that Kite is using a rifle and Kimco a shotgun, investors looking to put money to work in areas set to see migration in the years ahead will probably prefer Kite's portfolio. However, investors who like to work as much diversification into their portfolios as possible will definitely prefer Kimco's bigger, more spread-out footprint.
3. Let's talk dividends
Kimco's dividend yield is roughly 3.1%. Kite Realty's yield is also around 3.1%. No clear winner there. Both Kimco and Kite cut their dividends in 2020 in the face of the coronavirus pandemic. Each REIT has since started to increase its dividend again, though the payments at both companies remain below pre-pandemic levels.
Neither name stands out here as a winner. In fact, you could argue that both lose this point, given that industry stalwart Federal Realty (NYSE: FRT) managed to increase its dividend in 2020 despite the headwinds. For reference, Federal Realty's yield is 3.4% today and is backed by over 50 years of annual dividend increases.
That said, Kimco generated funds from operations (FFO) of $0.33 per share in the first quarter and paid a dividend of $0.17 per share, for an FFO payout ratio of roughly 50%. Kite's first-quarter FFO was $0.34 per share, and it also paid $0.15 per share in dividends, for a roughly similar FFO payout ratio. That means that both have ample room to increase the dividend from here if they so choose. Federal Realty's FFO payout ratio was 90% in the first quarter. So dividend growth will be modest, at best, over the near term.
The end result here is that if you're looking for dividend consistency, neither Kimco nor Kite are likely to be great selections (Federal Realty will suit you better). However, they both have ample room to increase their distributions, which could be attractive to dividend growth investors. Both yields, however, are at the low end of their historical ranges, which suggests the stocks are probably fully valued.
Yes, the dividend cuts have something to do with that, but so does the doubling of their stock prices since April 2020. In fact, both stocks are now above where they started out in 2020, before the pandemic-driven bear market, despite the fact that they have yet to fully recover from the hit, specifically noting the dividend cuts.
4. On the balance (sheet)
Both Kimco and Kite have investment-grade-rated balance sheets. That said, Kimco's credit ratings are slightly better, with S&P giving it a BBB+ compared to Kite's BBB-. That likely gives Kimco an edge on the debt financing front, since higher-credit companies generally benefit from lower interest rates. This probably isn't a huge benefit, but it is one that's worth keeping in mind. But, in the end, both look like financially strong names. Still, really conservative investors would probably err on the side of caution and pick Kimco.
There's really no great answer here. First, and most clearly, if you're looking for a company that will pay its dividend through thick and thin, neither Kimco nor Kite will be good options -- go with a REIT like Federal Realty instead.
After that, the "buy or don't buy" question is really more nuanced. Both have similar yields and seem fully valued. However, Kimco is an industry giant with a very diversified portfolio. And it's about to get even bigger. That probably makes it the better option for conservative types. Kite's a bit more focused on areas of the United States likely to see better-than-normal growth in the years ahead. Combined with its small scale, that could lead to a more "growthy" future. That may be enough to tip the scale in Kite's favor for aggressive types.