The retail real estate business has been arguably the worst real estate sector over the past several years. Changing consumer behavior was already altering the retail real estate landscape. Now, the economic fallout of the novel coronavirus pandemic has brought in-store shopping to a grinding halt. This one-two punch has hit the real estate investment trust (REIT) Kimco Realty (NYSE: KIM) hard over the years.
Kimco’s management has been making moves to transform the company's portfolio, but the market has made that transformation an uphill battle. Kimco has already suspended its dividend for the time being, and its stock has dropped over 57% on a total return basis -- that’s price appreciation and dividends -- over the past five years.
But is the market overreacting to recent events, and could Kimco’s cheap stock price make it a compelling long-term investment? Let’s take a look at the company’s plans and recent execution to see if Kimco Realty is a buy.
Compelling turnaround strategy for long-term growth
Over the past decade, Kimco Realty has tried to consolidate its portfolio. As a result, it has seen its footprint shrink from 922 properties in the U.S., Canada, and Mexico to 401 properties in the U.S. only. Those properties are predominately in 20 of the nation’s largest metro areas.
This transformation has done a couple of things for the company. One, it significantly helped the company’s financials. From 2014 to today, Kimco lowered its debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio from 8.3 times to 7.2 times (lower is better), and funds from operations have grown 64%.
The downside is that there has been little to no payout growth over the past five years. Its dividend only grew 3.1% annually over that time, and management hadn’t increased its payout since 2018. Some of that has to do with significant changes to its portfolio, but that’s of little comfort for investors looking for returns.
In addition to Kimco’s plan to focus on major metro markets, the company is now also dipping its toes into a new asset: mixed-use development. The flagship investment for this mixed-use push is two buildings totaling 690 apartments next to Amazon (NASDAQ: AMZN) HQ2 in Northern Virginia. According to management, its mixed-use development pipeline includes 1.5 million square feet of retail space, 10,000–15,000 residential units, 820 hotel rooms, and 1.2 million square feet of office space.
Retail is one of the riskier segments of the commercial real estate market, so adding a significant portfolio of residential units to that through mixed-use development is a great way to both diversify the portfolio and add some rent stability over the long haul. If the company can execute this plan well, it could be a pivotal moment where Kimco can start growing again.
Not great historical performance
"Everyone has a plan until they get punched in the mouth." -- Mike Tyson
For Kimco to execute that plan, though, it needs its existing portfolio to hold up well and generate steady income. While it has made efforts to focus on core metropolitan areas in the U.S., and its holdings have become increasingly weighted toward more stable aspects of the retail business (grocery stores and home improvement are two examples), the company still has significant exposure to retail segments that have been absolutely devastated by the downturn.
In its most recent update, Kimco reported that only 60% of its total rents were collected in April. Also, tenants that represent 35% of its annual base rent have requested deferrals. Restaurants, personal services, entertainment, and fitness centers amount to 21% of annual base rent and have been the most affected elements of the portfolio.
Unsurprisingly, Kimco’s management elected to suspend its dividend to evaluate the impacts of COVID-19 on its business. According to the press release, Kimco’s board of directors "will continue to monitor the company’s financial performance and economic outlook on a monthly basis and, at a later date, intends to reinstate the common dividend during 2020 of at least the amount required to maintain compliance with its REIT taxable income distribution requirements."
Suspending dividends will help Kimco preserve some cash coming in the door, and the company is drawing on some short-term loans and credit facilities to bolster its cash position As of its most recent investor presentation, it had $900 million in cash available and $1.3 billion available on its credit lines. After these moves, Kimco’s total debt-to-capital ratio is 54% and it passes its indebtedness covenants with flying colors. So it has the balance sheet to withstand a modest financial downturn.
The bottom line
The good news is that the company appears to be in a decent position to withstand a significant financial blow. The bad news is that being able to withstand that blow may compromise some of its future plans. More debt on the balance sheet now likely means it will have to delay some of its future development plans, which makes its long-term growth pipeline slightly less attractive.
Kimco’s dividend is already suspended, and it sounds like 2020 dividends will be significantly lower than what they were before. The real question for investors is whether management will reinstate a dividend in 2021 at a similar payout to what it is today. Since dividends and return of capital are such an important component of a REIT's return, investors should probably wait until management reinstates its dividend before buying this stock.